California NOL Rules: Suspension, Carryforward, and Apportionment

California NOL rules diverge from federal law in four ways that matter right now: deductions are suspended for the 2024, 2025, and 2026 tax years for taxpayers with income of $1 million or more; carryforwards are capped at 20 years rather than indefinite; carrybacks are not allowed for any loss from a tax year beginning after 2018; and California does not impose the federal 80% of taxable income limitation.¹² Below the $1 million threshold, deductions continue as normal. The details determine whether a given loss is usable, and when.

The 2024 Through 2026 Suspension

Senate Bill 167, enacted June 27, 2024, suspended California NOL deductions for tax years beginning on or after January 1, 2024, and before January 1, 2027. The suspension is codified at Revenue and Taxation Code Sections 17276.24 (personal income tax) and 24416.24 (corporate tax).³ The same legislation capped business tax credits at $5 million per year for the same three-year window. For combined reporting groups, that $5 million cap applies to the entire group rather than to each member.

Who the Suspension Applies To

The $1 million threshold is measured differently depending on filer type:

For individuals, the suspension applies if net business income or modified adjusted gross income reaches $1 million for the tax year. Net business income includes income from a trade or business, rental activity, and farming, whether earned directly or through a partnership or S corporation.³
For corporations, the suspension applies if income subject to California tax is $1 million or more.⁴
Carryovers from Governor-declared disaster losses are not affected by the suspension, regardless of income level.¹

The threshold can catch taxpayers who don’t think of themselves as high earners. A one-time asset sale, a large partnership K-1 distribution, or a strong year on a rental portfolio can push modified adjusted gross income past $1 million in a single year and trigger the suspension for that year alone.

Possible Early Termination in 2025 or 2026

The three-year suspension is not locked in. If, by May 14 of the relevant year, the Director of Finance determines that General Fund revenue is sufficient without the suspension’s revenue impact, and the annual Budget Act includes legislation to waive the suspension, it does not apply for that tax year.³ Watch the May budget revisions each year rather than assuming the full window will run.

Carryover Periods Are Extended, Not Lost

A loss that could not be deducted during a suspended year gets extra time on the back end. The extension depends on when the loss originated:

Losses incurred before January 1, 2024: extended by three years
Losses incurred in 2024: extended by two years
Losses incurred in 2025: extended by one year

The same extension logic applied during the earlier 2020–2021 suspension under Sections 17276.23 and 24416.23, so some taxpayers now carry losses whose expiration dates have been pushed out by both sets of rules.⁵ A 2010 loss with a 20-year carryforward would normally expire after the 2030 tax year, but the combined suspension extensions could push that out by as many as six additional years.

Even during the suspension, you must still compute and carry over the loss. It does not disappear; it simply cannot be deducted yet. Failing to track it properly during the suspension years could mean losing the benefit entirely when the suspension lifts, because you cannot reconstruct a carryover balance you never documented.⁴

Carryforward Period: 20 Years, Not Indefinite

Losses incurred on or after January 1, 2008, carry forward for 20 years in California.² Federal law, by contrast, allows losses arising after 2017 to carry forward indefinitely.⁶ Losses from older California tax years had shorter windows: 10 years for losses incurred from 2000 through 2007, and 5 years for losses before 2000.⁷ Most of those older losses have expired by now unless their carryover periods were extended by the 2020–2021 or 2024–2026 suspensions.

California also does not apply the federal 80% of taxable income cap. For losses incurred on or after January 1, 2004, the full 100% of the loss is eligible for carryover.⁷ That is a taxpayer-favorable difference: in a year when the suspension does not apply and you have California income to absorb the loss, you can offset all of it rather than only 80%.

The 20-year cap still creates real urgency. A business that stays unprofitable in California for a long stretch, or one that generates income in other states but not in California, can watch a large loss expire unused.

No Carrybacks After 2018

California briefly allowed two-year NOL carrybacks for losses incurred in tax years 2013 through 2018. That window is closed. For any loss attributable to a tax year beginning after December 31, 2018, carrybacks are not available in California for any type of loss.¹

Federal law still permits carrybacks for farming losses and certain insurance company losses.⁶ California does not follow. The CARES Act temporarily restored a five-year federal carryback for losses arising in 2018, 2019, and 2020; California never conformed. The practical consequence: if a business has a bad year in California, the only route to tax value from that loss is future California income to use it against.

Special NOL Categories

California recognizes two special NOL types on top of the general category:

New business NOL. A trade or business first started in California on or after January 1, 1994, qualifies. Biopharmaceutical and biotechnology companies, as well as taxpayers that have not yet received FDA regulatory approval for any product, are also included. The full loss carries over, but only up to the net loss from that new business activity; any excess carries over as a general NOL.⁴
Eligible small business NOL. A business with gross receipts, less returns and allowances, under $1 million during the tax year qualifies. The full loss carries over, but only to the extent of the net loss from the eligible small business activity.⁴

For losses incurred on or after January 1, 2008, both categories use the same 20-year carryforward and 100% carryover rate as general NOLs. The distinction mattered more in earlier periods when general NOLs had shorter windows and lower applicable percentages. Categorizing correctly on the FTB forms still matters because tracking and limitations apply separately for each type.

Multi-State Apportionment

Businesses operating in multiple states compute their California NOL using post-apportionment figures. The loss is determined based on the apportionment percentage in the year the NOL is incurred, not the year it is used. Only the portion attributable to California activity applies against California income. If your California apportionment factor shifts significantly between the loss year and the carryforward year, the deduction amount was already locked in.

Forms and Recordkeeping

California requires specific forms to compute and track NOLs:

Individuals, estates, and trusts use Form FTB 3805V, Net Operating Loss Computation and NOL and Disaster Loss Limitations.²
Corporations use Form FTB 3805Q.⁴

Both forms attach to the annual California return: Form 540 for individuals, Form 100 for C corporations, Form 100S for S corporations.⁴ Combined report filers must complete a separate Form FTB 3805Q for each member included in the combined report.

Records supporting a deduction must be kept until the statute of limitations expires for the return on which the deduction is claimed.⁸ For an NOL, that means holding the original loss-year return until the last possible carryforward year, plus the audit window. With a 20-year carryforward, possible suspension extensions, and California’s four-year statute of limitations, that can mean retaining records for 27 years or more from the loss year. Digital copies are fine as long as they are accessible.

Planning During the Suspension

A few points are worth flagging for the 2024 through 2026 window. Taxpayers with income near the $1 million threshold have an incentive to time income recognition and deductions to stay below it in at least some years. Deferring a capital gain or accelerating a deductible expense into a year where income already sits below $1 million can preserve access to the NOL deduction for that year.

The disaster loss carve-out is genuine. If any portion of your NOL carryforward originated from a Governor-declared disaster, that portion remains deductible even during the suspension.¹ Given the frequency of wildfire and flood declarations in California, the exception reaches more taxpayers than expected.

And a boundary worth naming: passive activity losses from rental properties or businesses in which you don’t materially participate are governed by a separate federal regime and are not the same thing as an NOL.⁹ A passive loss released by disposition can generate or increase an NOL in the year of release, but if that NOL lands in a suspension year and your income is at or above $1 million, the suspension still applies. The two restrictions stack.

1
Franchise Tax Board. Net Operating Loss
2
Franchise Tax Board. 2024 Instructions for Form FTB 3805V
3
California Legislative Information. California Revenue and Taxation Code 17276.24
4
Franchise Tax Board. 2024 Instructions for Form FTB 3805Q
5
California Legislative Information. California Revenue and Taxation Code 17276.23
6
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
7
California Legislative Information. California Revenue and Taxation Code 24416
8
Internal Revenue Service. How Long Should I Keep Records
9
Internal Revenue Service. Topic No. 425, Passive Activities – Losses and Credits