California NOL Carryback and Suspension: Disaster Loss Exception

California’s net operating loss carryback rules are simple to state and unfavorable to hear: the state does not currently allow NOL carrybacks. The limited two-year carryback that existed for tax years 2013 through 2018 expired, and California never adopted the federal CARES Act carryback that covered 2018–2020 losses. The only backward-looking option that remains is a disaster loss election tied to a governor-proclaimed state of emergency. Every other California NOL has to be carried forward, for up to 20 years, against future income.1California Legislative Information. California Revenue and Taxation Code 17276

The Old Two-Year Carryback Is Gone

California did once permit a limited carryback, and taxpayers who remember using it sometimes assume it is still available. It is not. Under Revenue and Taxation Code 17276(c), losses from tax years 2013 through 2018 could be carried back to the two preceding years, with a phased percentage cap: 50% for 2013 losses, 75% for 2014 losses, and 100% for losses arising in 2015 through 2018.1California Legislative Information. California Revenue and Taxation Code 17276

That window closed permanently after 2018. A loss generated in 2019 or any later year cannot be applied to a prior California return, regardless of how much income you reported in earlier years and regardless of whether you carried the loss back on your federal return.

California Did Not Adopt the Federal CARES Act Carryback

This is the mismatch that catches the most people. At the federal level, the Tax Cuts and Jobs Act of 2017 eliminated most NOL carrybacks going forward, but the CARES Act of 2020 temporarily restored a five-year carryback for losses arising in tax years 2018, 2019, and 2020.2Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions California did not conform.3California Legislative Information. California Revenue and Taxation Code 17276

The practical consequence: a taxpayer who claimed a federal five-year carryback for a 2020 loss and received a federal refund got no corresponding relief from California. The state loss had to be carried forward. If you are amending old returns or reconstructing prior-year positions, do not assume a federal carryback flowed through. It did not.

The One Exception: Disaster Losses

The only situation where California still lets you apply a loss to an earlier tax year involves a disaster loss. If you suffer a loss in an area where the governor has proclaimed a state of emergency, you can elect to deduct that loss on the return for the tax year immediately before the disaster occurred, rather than the year of the loss itself.4Franchise Tax Board. Disaster Loss Deduction The election is made under IRC Section 165(i), which California generally follows for casualty and disaster losses.

How to Make the Election

To claim the loss against the prior year, file an amended return. Individuals use Schedule X, which replaced Form 540X for tax years 2017 and later. The election has to be made by the original or extended due date of the return for the year the disaster occurred. Write the name of the disaster in blue or black ink at the top of the return, and include federal Form 4684 (using California amounts) along with supporting documentation.5Franchise Tax Board. FTB Publication 1034 – Disaster Loss How to Claim a State Tax Deduction

Which Disasters Qualify

The FTB publishes a list of qualifying events with specific disaster codes. Recent 2025 examples include the January 2025 fires and windstorm affecting Los Angeles County (Disaster Code 157) and the late December storms affecting six counties (Disaster Code 175).6Franchise Tax Board. List of California Disasters If any portion of a qualifying disaster loss cannot be used in the year claimed, it carries forward for up to 20 years.

Carryforward Is Your Only Option for Ordinary Losses

Since carryback is off the table for non-disaster losses, the entire mechanism for using a California NOL runs forward. The length of the carryforward depends on when the loss was generated.

  • Losses from 2008 and later: 20-year carryforward.
  • Losses from 2000 through 2007: 10-year carryforward.
  • Losses from 1987 through 1999: 5-year carryforward, with longer periods for new businesses during their first three years of operation.1California Legislative Information. California Revenue and Taxation Code 17276

California does not conform to the federal rule allowing indefinite carryforward of NOLs arising after 2017. A loss generated in 2026 has 20 years of life on your California return even though the federal version never expires. Keep track of the clock, especially for large losses that may take years to absorb.

One area where California is more generous than federal law is the offset percentage. Since 2004, California has allowed taxpayers to deduct 100% of an NOL carryforward against taxable income. Federal law, by contrast, caps post-2020 NOL deductions at 80% of taxable income.1California Legislative Information. California Revenue and Taxation Code 17276 That advantage is largely theoretical during the current suspension for taxpayers above the income threshold, but it returns to relevance once the suspension expires.

Who Actually Takes the Deduction

California distinguishes by entity type. C corporations claim NOL deductions directly on their returns. S corporations do not, because their income and losses pass through to individual shareholders, who then claim the deduction on their personal returns. LLCs follow the same logic depending on their tax classification: those taxed as partnerships or S corporations pass losses through to their members.7Franchise Tax Board. S Corporations Because California does not allow a deduction for state income taxes and treats certain other items differently, your federal and California NOL amounts will rarely match. Track them separately.

Nonresidents and part-year residents have an additional layer. If you earn income both inside and outside California, you apportion your NOL using Schedule R, following Revenue and Taxation Code Sections 25120 through 25141.8Franchise Tax Board. 2025 Instructions for Schedule R – Apportionment and Allocation of Income Only the California-source portion of the loss creates a California carryforward. Losses generated entirely from non-California activities do not carry over on your California return.

The 2024–2026 NOL Suspension

Even if you have a valid carryforward, you may not be able to use it right now. Senate Bill 167 suspended the NOL deduction for tax years 2024 through 2026, blocking most taxpayers from applying accumulated carryforwards during those years. You can still compute and preserve your NOL during the suspension, but you cannot deduct it.9California Legislative Information. California AB-175 Taxation

There is a small-business carve-out based on income. Corporations are not subject to the suspension if their income subject to tax is less than $1 million for the taxable year. Individuals escape the suspension if their net business income is below $1 million or their modified adjusted gross income is below $1 million for the taxable year.9California Legislative Information. California AB-175 Taxation

SB 167 also capped the total reduction in tax from business credits at $5 million per year during the same three-year window. Taxpayers whose credits exceed the cap may make an irrevocable election to receive a refundable credit equal to 20% of the credits that would have been available but for the limitation.9California Legislative Information. California AB-175 Taxation

This is not the first time California has suspended NOL deductions. In 2020, Assembly Bill 85 suspended the deduction for tax years 2020 and 2021 for taxpayers with net business income over $1 million, responding to pandemic-related budget shortfalls. The 2022 portion of that suspension was repealed early.10Franchise Tax Board. Net Operating Loss When California’s budget tightens, NOL deductions are among the first provisions on the chopping block.

Forms You Still Need to File During the Suspension

Even in a suspension year, you have to compute the loss on the correct form and preserve it. Skipping the computation creates problems when the suspension lifts and you try to use the carryforward.

NOL deductions are applied in the order the losses were generated, oldest first. Keep the records supporting each year’s loss for the full carryforward period plus at least four years. The FTB’s normal statute of limitations to issue a Notice of Proposed Assessment is four years from the due date or filing date, but a 20-year carryforward means a loss from year one can still be questioned in year 15.13Franchise Tax Board. Keeping Your Tax Records Without documentation from the original year, defending the deduction is nearly impossible.

The bottom line for anyone hoping to look backward: unless the loss is disaster-related, California will not let you. Compute the NOL, track it on the required form, and plan to use it against future income once the 2024–2026 suspension expires.