California’s new tax law for 2024 through 2026, driven by the recent budget legislation and Senate Bill 711, suspends net operating loss deductions for higher-income filers, caps business tax credit use at $5 million a year, updates the state’s Internal Revenue Code conformity date to January 1, 2025, and extends the pass-through entity elective tax through 2030. Individual brackets and refundable family credits were also adjusted for inflation for the 2025 tax year. Here is what each change does and who it reaches.
Net Operating Loss Deductions Are Suspended Through 2026
For tax years 2024, 2025, and 2026, California will not let higher-income taxpayers deduct net operating loss carryovers.1Franchise Tax Board. Net Operating Loss The suspension applies to individuals with net business income or modified adjusted gross income of $1 million or more, and to corporations with California taxable income of $1 million or more.2Franchise Tax Board. 2024 Instructions for Form FTB 3805Q Net Operating Loss Computation and NOL and Disaster Loss Limitations – Corporations Below those thresholds, NOL deductions work normally.
If your NOL is blocked by the suspension, the carryover period is extended by one year for each year you could not use it. You can keep computing and carrying over new NOLs during the suspension; you just cannot deduct them until it lifts. Disaster loss carryovers are not affected.2Franchise Tax Board. 2024 Instructions for Form FTB 3805Q Net Operating Loss Computation and NOL and Disaster Loss Limitations – Corporations
A $5 Million Cap on Business Tax Credits
Running alongside the NOL suspension for the same three years is a $5 million annual limit on business tax credit use. All business credits combined, including carryovers from prior years, cannot reduce your California tax by more than $5 million in any single year.3California Legislative Information. California Revenue and Taxation Code 17039.3 For corporate groups filing a combined report, the $5 million ceiling applies to the group, not to each member.
Credits you cannot use because of the cap carry forward. The R&D credit and most other business incentive credits fall under the cap. Several credits are specifically excluded, so they still work at full value:3California Legislative Information. California Revenue and Taxation Code 17039.3
- Low-income housing credit
- CalEITC and Young Child Tax Credit
- Renter’s credit
- Personal exemption credits
- Pass-through entity elective tax credit
California Now Conforms to the 2025 Internal Revenue Code
Senate Bill 711 took effect October 1, 2025, and moved California’s general conformity date with the Internal Revenue Code from January 1, 2015, to January 1, 2025.4Franchise Tax Board. e-file for Business California now recognizes many federal provisions it had ignored for a decade. It still decouples from certain federal rules, including the federal 80% cap on net operating loss deductions.
SB 711 also brought California into line with federal e-filing rules. Business entities that prepare returns using tax preparation software are now required to file electronically with the FTB, including exempt organizations filing Form 109.5Franchise Tax Board. 2025 Instructions for Form 109 Exempt Organization Business Income Tax Booklet
Pass-Through Entity Elective Tax Extended Through 2030
California’s pass-through entity elective tax lets qualifying partnerships and S corporations pay state income tax at the entity level, generating a credit that flows through to owners. The election had been set to expire after the 2025 tax year. It has now been extended for an additional five years, covering taxable years beginning on or after January 1, 2026, and before January 1, 2031.6Franchise Tax Board. Tax News August 2025
The election matters because of how it interacts with federal taxes. Under IRS Notice 2020-75, the entity-level state tax payment is deductible by the partnership or S corporation when computing non-separately stated income, and that deduction is not subject to the federal cap on state and local tax deductions.7Internal Revenue Service. Notice 2020-75 Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes Pass-through owners can deduct their full California state income tax on their federal returns by routing the payment through the entity, regardless of the SALT cap. The PTE credit is also excluded from the $5 million business credit cap, so using the election does not eat into your capacity to claim other credits.8Franchise Tax Board. Pass-Through PTE Elective Tax
The Federal SALT Cap Increase and What It Means Here
The federal cap on itemized deductions for state and local taxes directly limits how much California income tax you can deduct on your federal return. Under the One Big Beautiful Bill Act, that cap increased from $10,000 to $40,000 for the 2025 tax year, then to $40,400 for 2026, with half those amounts for married filing separately.9United States House of Representatives. Frequently Asked Questions Tax Changes 2026 and the One Big Beautiful Bill
There is a phase-out for higher earners. If your modified adjusted gross income exceeds $505,000 in 2026, the $40,400 cap shrinks by 30 cents for every dollar above that threshold, with a floor of $10,000.9United States House of Representatives. Frequently Asked Questions Tax Changes 2026 and the One Big Beautiful Bill The higher caps continue through 2029, after which they revert to $10,000. For pass-through business owners, the PTE election is still the stronger tool, since it bypasses the SALT cap rather than working within a larger version of it.
2025 Individual Rates and the Behavioral Health Surcharge
California taxes personal income across nine progressive brackets from 1% to 12.3%. For 2025, single-filer brackets are:10Franchise Tax Board. 2025 California Tax Rate Schedules
- 1%: up to $11,079
- 2%: $11,079 to $26,264
- 4%: $26,264 to $41,452
- 6%: $41,452 to $57,542
- 8%: $57,542 to $72,724
- 9.3%: $72,724 to $371,479
- 10.3%: $371,479 to $445,771
- 11.3%: $445,771 to $742,953
- 12.3%: above $742,953
Married couples filing jointly and heads of household use wider brackets; joint filers reach 12.3% only above $1,485,906.10Franchise Tax Board. 2025 California Tax Rate Schedules
On top of the regular brackets, the California Behavioral Health Services Act adds 1% on all taxable income above $1 million, bringing the effective top marginal rate to 13.3%.11Franchise Tax Board. 2025 Instructions for Form FTB 5805F Underpayment of Estimated Tax by Individuals and Fiduciaries The surcharge applies regardless of filing status, and it is included in the estimated tax calculation, which catches some high-income filers who forget to account for it.
The 2025 standard deduction is $5,706 for single filers and $11,412 for joint filers and heads of household, up from $5,540 and $11,080 for 2024.12Franchise Tax Board. 2025 Instructions for Form 540 California Resident Income Tax Return13Franchise Tax Board. Tax News October 2024
Refundable Credits for Families
California’s CalEITC provides up to $3,644 for taxpayers with three or more qualifying children and earned income up to $31,950, based on 2024 amounts, with smaller credits down to $294 for filers with no qualifying children.14Franchise Tax Board. Eligibility and Credit Information CalEITC You need a valid SSN or ITIN, must live in California more than half the year, and must have at least $1 of earned income.
The Young Child Tax Credit provides up to $1,189 per eligible return for 2025 for families with a qualifying child under six.15Franchise Tax Board. Young Child Tax Credit The Foster Youth Tax Credit provides up to $1,189 per eligible individual for 2025, or up to $2,378 if both spouses qualify.16Franchise Tax Board. Foster Youth Tax Credit All three credits are fully refundable and all three sit outside the $5 million business credit cap.
Business Rates, Minimum Tax, and LLC Fees
C-corporations pay California income tax at a flat 8.84%, and banks and financial institutions pay 10.84%. Those rates did not change.17Franchise Tax Board. Business Tax Rates
Most entities doing business in California owe an annual minimum franchise tax of $800, including corporations, LLCs, limited partnerships, and limited liability partnerships.18Franchise Tax Board. Corporations A corporation that incorporates or qualifies to do business in California through the Secretary of State is exempt from the $800 minimum in its first taxable year, and that exemption still applies to corporations formed in any year.19Franchise Tax Board. 2025 Instructions for Form 100 Corporation Tax Booklet The comparable first-year exemption for LLCs expired on January 1, 2024, so new LLCs now owe the $800 from their first taxable year. That gap matters when choosing an entity type.
LLCs also pay a graduated fee on top of the $800 minimum, tied to total California income (gross receipts, not net profit): $900 at $250,000, $2,500 at $500,000, $6,000 at $1 million, and $11,790 at $5 million or more.20Franchise Tax Board. FTB Publication 3556 Limited Liability Company Filing Information A high-revenue, low-margin LLC can owe $12,590 before the income-based tax calculation begins.
When You Count as Doing Business in California
For 2025, California considers you to be doing business here if California sales exceed $757,070, if California property or payroll exceeds $75,707, or if any of those factors is more than 25% of your total.21Franchise Tax Board. Doing Business in California Crossing any one triggers the minimum franchise tax and filing obligations, even without a physical office in the state.
Businesses whose only California activity is soliciting orders for tangible goods shipped from outside the state may be protected from net income tax under federal Public Law 86-272, but that protection does not cover services, digital products, licensing, or intangible property. A remote employee working from California generally creates enough contact to establish taxable presence, which catches out-of-state employers when workers relocate without notifying tax staff.
Estimated Payments and Disaster Extensions
If you expect to owe $500 or more when you file, you generally need to make quarterly estimated tax payments. You avoid an underpayment penalty if your prior-year tax liability was less than $500 ($250 for married filing separately), or if you had no liability at all for the prior year on a full 12-month return. The penalty can also be waived for casualty, disaster, or other unusual circumstances, or if you retired after age 62 or became disabled during the year.11Franchise Tax Board. 2025 Instructions for Form FTB 5805F Underpayment of Estimated Tax by Individuals and Fiduciaries
State-declared disasters can automatically extend filing and payment deadlines. Taxpayers in Los Angeles County affected by the January 2025 wildfires received an extension to October 15, 2025, for nearly all 2024 and 2025 tax obligations, including individual returns, quarterly estimated payments, business entity returns, LLC annual tax payments, and PTE elective tax payments.22Franchise Tax Board. Los Angeles County Fires23Franchise Tax Board. Disaster Declaration Tax Payments Extensions apply only to taxpayers in the declared disaster area, and the FTB keeps a current list of active declarations on its website.