AB 1105: Personal Income Tax Law: Corporation Tax Law: sale of net operating losses.
- Session Year: 2023-2024
- House: Assembly
- Latest Version Date: 2023-04-17
Current Status:
Failed
(2024-02-01: From committee: Filed with the Chief Clerk pursuant to Joint Rule 56.)
Introduced
In Committee
First Chamber
In Committee
Second Chamber
Enacted
What does this bill do?
The bill lets qualifying California startups sell their net operating losses (NOLs—tax losses that reduce future taxable income) to unrelated buyers under set rules. Sales must be at least 80% of an NOL's value and are capped at $20 million per startup; buyers cannot resell purchased NOLs or deduct the purchase price. Buyers may use purchased NOLs for tax years beginning in 2024 or later, and sellers must certify under penalty of perjury that proceeds fund research payroll, contractor research, or research equipment, with those proceeds excluded from sellers' gross income for specified years.
The summary is provided by generative AI which can make mistakes. For original language, please view the details in the table below.
The Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal income tax laws, allow various deductions in computing the income that is subject to the taxes imposed by those laws, including a deduction for a net operating loss, as specified.
This bill would allow a startup innovator, as defined, to sell a net operating loss to an unrelated taxpayer. taxpayer, except as provided. The bill would require the sale price of a net operating loss to be at least 80% of the value of the net operating loss being transferred, and would limit a startup innovator to selling no more than $20,000,000 worth of net operating losses in the aggregate, as provided. The bill would require the Franchise Tax Board to establish a program through which a startup innovator may apply to sell net operating losses, and would authorize the Franchise Tax Board to charge a fee for a startup innovator to participate in the program, as provided. The bill would provide that a net operating loss sold by a startup innovator would retain the attributes it had in the hands of the seller, including any carryback or carryforward attributes. The bill would allow a purchaser of a net operating loss to apply the net operating loss to closed taxable years upon appropriation by the Legislature. for taxable years beginning on or after January 1, 2024. The bill would require a startup innovator to certify under penalty of perjury that proceeds received from the sale of a net operating loss are used for specified purposes. By expanding the crime of perjury, the bill would establish a state-mandated local program. The bill would repeal these provisions as of January 1, 2029.
The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally define gross income as income from whatever source derived, except as specifically excluded. Those laws also provide various exclusions from gross income.
This bill would, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, exclude from gross income any amount received by a startup innovator for the sale of a net operating loss.
Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.
This bill would include additional information required for any bill authorizing a new tax expenditure.
This bill would make findings and declarations related to a gift of public funds.The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.
This bill would provide that no reimbursement is required by this act for a specified reason.
This bill would take effect immediately as a tax levy.
The Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal income tax laws, allow various deductions in computing the income that is subject to the taxes imposed by those laws, including a deduction for a net operating loss, as specified.
This bill would allow a startup innovator, as defined, to sell a net operating loss to an unrelated taxpayer. The bill would require the sale price of a net operating loss to be at least 80% of the value of the net operating loss being transferred, and would limit a startup innovator to selling no more than $20,000,000 worth of net operating losses in the aggregate, as provided. The bill would require the Franchise Tax Board to establish a program through which a startup innovator may apply to sell net operating losses, and would authorize the Franchise Tax Board to charge a fee for a startup innovator to participate in the program, as provided. The bill would provide that a net operating loss sold by a startup innovator would retain the attributes it had in the hands of the seller, including any carryback or carryforward attributes. The bill would allow a purchaser of a net operating loss to apply the net operating loss to closed taxable years upon appropriation by the Legislature. The bill would repeal these provisions as of January 1, 2029.
The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally define gross income as income from whatever source derived, except as specifically excluded. Those laws also provide various exclusions from gross income.
This bill would, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, exclude from gross income any amount received by a startup innovator for the sale of a net operating loss.
Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.
This bill would include additional information required for any bill authorizing a new tax expenditure.
This bill would make findings and declarations related to a gift of public funds.
The Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal income tax laws, allow various deductions in computing the income that is subject to the taxes imposed by those laws, including a deduction for a net operating loss, as specified.
This bill would allow a startup innovator, as defined, to sell a net operating loss to an unrelated taxpayer. The bill would require the sale price of a net operating loss to be at least 80% of the value of the net operating loss being transferred, and would limit a startup innovator to selling no more than $20,000,000 worth of net operating losses in the aggregate, as provided. The bill would require the Franchise Tax Board to establish a program through which a startup innovator may apply to sell net operating losses, and would authorize the Franchise Tax Board to charge a fee for a startup innovator to participate in the program, as provided. The bill would provide that a net operating loss sold by a startup innovator would retain the attributes it had in the hands of the seller, including any carryback or carryforward attributes. The bill would allow a purchaser of a net operating loss to apply the net operating loss to closed taxable years upon appropriation by the Legislature.
The Personal Income Tax Law and the Corporation Tax Law, in conformity with federal income tax law, generally define gross income as income from whatever source derived, except as specifically excluded. Those laws also provide various exclusions from gross income.
This bill would, for taxable years beginning on or after January 1, 2024, exclude from gross income any amount received by a startup innovator for the sale of a net operating loss.
Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.
This bill would include additional information required for any bill authorizing a new tax expenditure.
This bill would make findings and declarations related to a gift of public funds.
The Personal Income Tax Law allows various credits against the taxes imposed by that law. Existing law, for each taxable year beginning on or after January 1, 2020, and before January 1, 2022, limits the total of all business credits otherwise allowable to $5,000,000, as specified. Existing law defines business credit for these purposes.This bill would require the Franchise Tax Board to track the utilization of business credits for the taxable year beginning on or after January 1, 2023, and before January 1, 2024, and submit a report the Legislature no later than November 1, 2024, reporting the number of taxpayers utilizing business credits, and the total dollar value of credit utilized.The Personal Income Tax Law allows various credits against the taxes imposed by that law. Existing law, for each taxable year beginning on or after January 1, 2020, and before January 1, 2022, limits the total of all business credits otherwise allowable to $5,000,000, as specified. Existing law defines business credit for these purposes.
This bill would require the Franchise Tax Board to track the utilization of business credits for the taxable year beginning on or after January 1, 2023, and before January 1, 2024, and submit a report the Legislature no later than November 1, 2024, reporting the number of taxpayers utilizing business credits, and the total dollar value of credit utilized.
(a)For taxable years beginning on or after January 1, 2024, and before January 1, 2029, gross income does not include any amount received by a startup innovator, as that term is defined in paragraph (2) of subdivision (h) of Section 17276, for the sale of a net operating loss.
(b)(1)For purposes of complying with Section 41, as it applies to the exclusion provided by this section and Section 24309.4, 24309.2, the Legislature finds and declares as follows:
(A)The goal, purpose, and objective of the exclusion is to promote competition and reduce oligopolistic consolidation in Californias STEM sector by enabling innovative startups to survive periods of net operating loss.
(B)The performance indicators for the Legislature to use in determining whether the exclusion is achieving the stated goal shall be the number of taxpayers that have sold net operating losses and the total dollar amount of net operating losses sold.
(2)(A)The Franchise Tax Board, no later than November 1, 2025, April 1, 2027, and annually thereafter, shall provide a report to the Legislature, in compliance with Section 9795 of the Government Code, detailing the number of taxpayers that have sold net operating losses, and the total dollar value of net operating losses sold.
(B)The disclosure provisions of this paragraph shall be treated as an exception to Section 19542.
(c)This section shall remain in effect only until December 1, 2029, and as of that date is repealed.
SEC. 2.Section 17276 of the Revenue and Taxation Code is amended to read:17276.Except as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified as follows:
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (d).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following shall apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in subdivision (d).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of that paragraph, paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, the term net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(d)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 taxable years except as otherwise provided in paragraphs (2) and (3).
(B)For a net operating loss for any taxable year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any taxable year beginning before January 1, 2000, in the case of a new business, the five taxable years in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 17276.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning before January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a taxpayer that is under the jurisdiction of the court in a Title 11 or similar case at any time during the income year. The loss carryover provided in the preceding sentence does not apply to any loss incurred after the date the taxpayer is no longer under the jurisdiction of the court in a Title 11 or similar case.
(e)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the taxable year.
(2)Except as provided in subdivision (f), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or S corporation corporation, paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(f)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In a case in which a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(g)Notwithstanding any provisions of this section to the contrary, a deduction shall be allowed to a qualified taxpayer as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7.
(h)(1)(A)A startup innovator may sell a net operating loss to a taxpayer that is not related to the startup innovator.
(B)Notwithstanding subparagraph (A), a net operating loss that is purchased pursuant to this subdivision may not be transferred by the purchaser.
(2)For purposes of this subdivision, startup innovator means a taxpayer that satisfies all of the following:
(A)Is primarily engaged in a science, technology, engineering, or mathematics business. activities that are described in Code 311221, 311224, 325193, 325311, 325312, 325314, 325320, 325411, 325412, 325413, 325414, 334510, 334516, 334517, 339112, 339113, 339114, 423450, 424210, 424910, 541380, 541713, 541714, 541715, or 621511 of the North American Industry Classification System (NAICS).
(B)Owns registered trademarks, copyrights, or patents.
(C)Has no more than 300 employees.
(D)Has not existed for longer than 10 years.
(E)Is not a member of a combined reporting group.
(F)Is headquartered in California.
(3)(A)A sale of a net operating loss pursuant to this subdivision shall be for at least 80 percent of the value of the net operating loss transferred.
(B)A startup innovator may not sell more than twenty million dollars ($20,000,000) worth of net operating losses during the lifetime of the business. For purposes of this subparagraph, the sale of net operating losses by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
(4)(A)The Franchise Tax Board shall establish a program for startup innovators to apply for the ability to sell net operating losses.(B)The Franchise Tax Board may require a startup innovator to pay a fee to participate in the program established under subparagraph (A), not to exceed the estimated costs of administering the program.(4)A startup innovator shall certify under penalty of perjury that all proceeds from the sale of net operating losses pursuant to this subdivision are used to finance employee compensation related to direct research activities, contract expenses paid to independent contractors for research activities, or nondepreciable personal tangible property used to conduct research.
(C)(5)(A)A net operating loss that is sold by a startup innovator in accordance with this section shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
(D)(B)A purchaser of a net operating loss may utilize the net operating loss in a closed taxable year only upon appropriation by the Legislature for this purpose. a taxable year beginning on or after January 1, 2024.
(E)(C)Notwithstanding any other law, a purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the net operating loss.
(5)(6)(A)The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this subdivision. Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this section.
(B)(i)The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of this subdivision.
(ii)The adoption of any regulations pursuant to clause (i) may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, these emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the Franchise Tax Board.
(7)The provisions of this subdivision are severable. If any provision of this subdivision or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
(i)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(j)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(k)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
(l)This section shall remain in effect only until January 1, 2029, and as of that date is repealed.
SEC. 3.Section 17276 is added to the Revenue and Taxation Code, to read:17276.Except as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified as follows:
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (d).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following shall apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in subdivision (d).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of that paragraph, paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, the term net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(d)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 taxable years except as otherwise provided in paragraphs (2) and (3).
(B)For a net operating loss for any taxable year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any taxable year beginning before January 1, 2000, in the case of a new business, the five taxable years in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 17276.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning before January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a taxpayer that is under the jurisdiction of the court in a Title 11 or similar case at any time during the income year. The loss carryover provided in the preceding sentence does not apply to any loss incurred after the date the taxpayer is no longer under the jurisdiction of the court in a Title 11 or similar case.
(e)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the taxable year.
(2)Except as provided in subdivision (f), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or S corporation paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(f)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In a case in which a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(g)Notwithstanding any provisions of this section to the contrary, a deduction shall be allowed to a qualified taxpayer as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7.
(h)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(i)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(j)This section shall become operative on January 1, 2029.
SEC. 4.Section 24309.7 is added to the Revenue and Taxation Code, to read:24309.7.SEC. 4.Section 24309.2 is added to the Revenue and Taxation Code, to read:24309.2.(a)For taxable years beginning on or after January 1, 2024, and before January 1, 2029, gross income does not include any amount received by a startup innovator, as that term is defined in paragraph (2) of subdivision (i) of Section 24416, for the sale of a net operating loss.
(b)For purposes of complying with Section 41, the goal, purpose, objective, performance indicators, and data collection requirements for the exclusion allowed by this section shall be as specified in subdivision (b) of Section 17137.
(c)This section shall remain in effect only until December 1, 2029, and as of that date is repealed.
SEC. 5.Section 24416 of the Revenue and Taxation Code is amended to read:24416.Except as provided in Sections 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss deduction shall be allowed in computing net income under Section 24341 and shall be determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (e).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in paragraph (1) of subdivision (e).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (e).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of paragraph (2), paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)For any taxable year in which the taxpayer has in effect a waters-edge election under Section 25110, the deduction of a net operating loss carryover shall be denied to the extent that the net operating loss carryover was determined by taking into account the income and factors of an affiliated corporation in a combined report whose income and apportionment factors would not have been taken into account if a waters-edge election under Section 25110 had been in effect for the taxable year in which the loss was incurred.
(d)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(e)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 years except as otherwise provided in paragraphs (2), (3), and (4).
(B)For a net operating loss for any income year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any income year beginning before January 1, 2000, in the case of a new business, the five taxable years referred to in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 24416.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning prior to January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a corporation that was either of the following:
(A)Under the jurisdiction of the court in a Title 11 or similar case at any time prior to January 1, 1994. The loss carryover provided in the preceding sentence shall not apply to any loss incurred in an income year after the taxable year during which the corporation is no longer under the jurisdiction of the court in a Title 11 or similar case.
(B)In receipt of assets acquired in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(G) of the Internal Revenue Code.
(f)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the income year.
(2)Except as provided in subdivision (g), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or an S corporation, paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(g)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules shall apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules shall apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Any acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In any case where a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h)For purposes of corporations whose net income is determined under Chapter 17 (commencing with Section 25101), Section 25108 applies to each of the following:
(1)The amount of net operating loss incurred in any taxable year that may be carried forward to another taxable year.
(2)The amount of any loss carry forward carryforward that may be deducted in any taxable year.
(i)(1)(A)A startup innovator may sell a net operating loss to a taxpayer that is not related to the startup innovator.
(B)Notwithstanding subparagraph (A), a net operating loss that is purchased pursuant to this subdivision may not be transferred by the purchaser.
(2)For purposes of this subdivision, startup innovator means a taxpayer that satisfies all of the following:
(A)Is primarily engaged in a science, technology, engineering, or mathematics business. activities that are described in Code 311221, 311224, 325193, 325311, 325312, 325314, 325320, 325411, 325412, 325413, 325414, 334510, 334516, 334517, 339112, 339113, 339114, 423450, 424210, 424910, 541380, 541713, 541714, 541715, or 621511 of the North American Industry Classification System (NAICS).
(B)Owns registered trademarks, copyrights, or patents.
(C)Has no more than 300 employees.
(D)Has not existed for longer than 10 years.
(E)Is not a member of a combined reporting group.
(F)Is headquartered in California.
(3)(A)A sale of a net operating loss pursuant to this subdivision must be for at least 80 percent of the value of the net operating loss transferred.
(B)A startup innovator may not sell more than twenty million dollars ($20,000,000) worth of net operating losses during the lifetime of the business. For purposes of this subparagraph, the sale of net operating losses by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
(4)(A)The Franchise Tax Board shall establish a program for startup innovators to apply for the ability to sell net operating losses.(B)The Franchise Tax Board may require a startup innovator to pay a fee to participate in the program established under subparagraph (A), not to exceed the estimated costs of administering the program.(4)A startup innovator shall certify under penalty of perjury that all proceeds from the sale of net operating losses pursuant to this subdivision are used to finance employee compensation related to direct research activities, contract expenses paid to independent contractors for research activities, or nondepreciable personal tangible property used to conduct research.
(C)(5)(A)A net operating loss that is sold by a startup innovator in accordance with this section shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
(D)(B)A purchaser of a net operating loss may utilize the net operating loss in a closed taxable year only upon appropriation by the Legislature for this purpose. a taxable year beginning on or after January 1, 2024.
(E)(C)Notwithstanding any other law, a purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the net operating loss.
(5)(6)(A)The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this subdivision. Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this section.
(B)(i)The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of this subdivision.
(ii)The adoption of any regulations pursuant to clause (i) may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, these emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the Franchise Tax Board.
(7)The provisions of this subdivision are severable. If any provision of this subdivision or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
(j)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(k)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(l)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
(m)This section shall remain in effect only until January 1, 2029, and as of that date is repealed.
SEC. 6.Section 24416 is added to the Revenue and Taxation Code, to read:24416.Except as provided in Sections 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss deduction shall be allowed in computing net income under Section 24341 and shall be determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (e).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in paragraph (1) of subdivision (e).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (e).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of paragraph (2), paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)For any taxable year in which the taxpayer has in effect a waters-edge election under Section 25110, the deduction of a net operating loss carryover shall be denied to the extent that the net operating loss carryover was determined by taking into account the income and factors of an affiliated corporation in a combined report whose income and apportionment factors would not have been taken into account if a waters-edge election under Section 25110 had been in effect for the taxable year in which the loss was incurred.
(d)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(e)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 years except as otherwise provided in paragraphs (2), (3), and (4).
(B)For a net operating loss for any income year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any income year beginning before January 1, 2000, in the case of a new business, the five taxable years referred to in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 24416.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning prior to January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a corporation that was either of the following:
(A)Under the jurisdiction of the court in a Title 11 or similar case at any time prior to January 1, 1994. The loss carryover provided in the preceding sentence shall not apply to any loss incurred in an income year after the taxable year during which the corporation is no longer under the jurisdiction of the court in a Title 11 or similar case.
(B)In receipt of assets acquired in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(G) of the Internal Revenue Code.
(f)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the income year.
(2)Except as provided in subdivision (g), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or an S corporation, paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(g)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules shall apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules shall apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Any acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In any case where a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h)For purposes of corporations whose net income is determined under Chapter 17 (commencing with Section 25101), Section 25108 applies to each of the following:
(1)The amount of net operating loss incurred in any taxable year that may be carried forward to another taxable year.
(2)The amount of any loss carry forward carryforward that may be deducted in any taxable year.
(i)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(j)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(k)This section shall become operative on January 1, 2029.
SEC. 7.The Legislature hereby finds and declares that the ability of innovative startups to transfer net operating losses for value, as provided by this act, serves the public purpose of promoting competition and reducing oligopolistic consolidation in the science, technology, engineering, and math (STEM) sector of Californias economy and does not constitute a gift of public funds within the meaning of Section 6 of Article XVI of the California Constitution. SEC. 7.No reimbursement is required by this act pursuant to Section 6 of Article XIIIB of the California Constitution because the only costs that may be incurred by a local agency or school district will be incurred because this act creates a new crime or infraction, eliminates a crime or infraction, or changes the penalty for a crime or infraction, within the meaning of Section 17556 of the Government Code, or changes the definition of a crime within the meaning of Section 6 of Article XIIIB of the California Constitution.
SEC. 8.This act provides for a tax levy within the meaning of Article IV of the California Constitution and shall go into immediate effect.
(a)For taxable years beginning on or after January 1, 2024, and before January 1, 2029, gross income does not include any amount received by a startup innovator, as that term is defined in paragraph (2) of subdivision (h) of Section 17276, for the sale of a net operating loss.
(b)(1)For purposes of complying with Section 41, as it applies to the exclusion provided by this section and Section 24309.4, the Legislature finds and declares as follows:
(A)The goal, purpose, and objective of the exclusion is to promote competition and reduce oligopolistic consolidation in Californias STEM sector by enabling innovative startups to survive periods of net operating loss.
(B)The performance indicators for the Legislature to use in determining whether the exclusion is achieving the stated goal shall be the number of taxpayers that have sold net operating losses and the total dollar amount of net operating losses sold.
(2)(A)The Franchise Tax Board, no later than November 1, 2025, and annually thereafter, shall provide a report to the Legislature, in compliance with Section 9795 of the Government Code, detailing the number of taxpayers that have sold net operating losses, and the total dollar value of net operating losses sold.
(B)The disclosure provisions of this paragraph shall be treated as an exception to Section 19542.
(c)This section shall remain in effect only until December 1, 2029, and as of that date is repealed.
SEC. 2.Section 17276 of the Revenue and Taxation Code is amended to read:17276.Except as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified as follows:
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (d).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following shall apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in subdivision (d).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of that paragraph, paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, the term net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(d)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 taxable years except as otherwise provided in paragraphs (2) and (3).
(B)For a net operating loss for any taxable year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any taxable year beginning before January 1, 2000, in the case of a new business, the five taxable years in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 17276.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning before January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a taxpayer that is under the jurisdiction of the court in a Title 11 or similar case at any time during the income year. The loss carryover provided in the preceding sentence does not apply to any loss incurred after the date the taxpayer is no longer under the jurisdiction of the court in a Title 11 or similar case.
(e)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the taxable year.
(2)Except as provided in subdivision (f), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or S corporation paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(f)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In a case in which a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(g)Notwithstanding any provisions of this section to the contrary, a deduction shall be allowed to a qualified taxpayer as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7.
(h)(1)A startup innovator may sell a net operating loss to a taxpayer that is not related to the startup innovator.
(2)For purposes of this subdivision, startup innovator means a taxpayer that satisfies all of the following:
(A)Is primarily engaged in a science, technology, engineering, or mathematics business.
(B)Owns registered trademarks, copyrights, or patents.
(C)Has no more than 300 employees.
(3)(A)A sale of a net operating loss pursuant to this subdivision shall be for at least 80 percent of the value of the net operating loss transferred.
(B)A startup innovator may not sell more than twenty million dollars ($20,000,000) worth of net operating losses during the lifetime of the business. For purposes of this subparagraph, the sale of net operating losses by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
(4)(A)The Franchise Tax Board shall establish a program for startup innovators to apply for the ability to sell net operating losses.
(B)The Franchise Tax Board may require a startup innovator to pay a fee to participate in the program established under subparagraph (A), not to exceed the estimated costs of administering the program.
(C)A net operating loss that is sold by a startup innovator in accordance with this section shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
(D)A purchaser of a net operating loss may utilize the net operating loss in a closed taxable year only upon appropriation by the Legislature for this purpose.
(E)Notwithstanding any other law, a purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the net operating loss.
(5)(A)The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this subdivision. Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this section.
(B)(i)The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of this subdivision.
(ii)The adoption of any regulations pursuant to clause (i) may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, these emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the Franchise Tax Board.
(i)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(j)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(k)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
(l)This section shall remain in effect only until January 1, 2029, and as of that date is repealed.
SEC. 3.Section 17276 is added to the Revenue and Taxation Code, to read:17276.Except as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified as follows:
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (d).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following shall apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in subdivision (d).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of that paragraph, paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, the term net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(d)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 taxable years except as otherwise provided in paragraphs (2) and (3).
(B)For a net operating loss for any taxable year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any taxable year beginning before January 1, 2000, in the case of a new business, the five taxable years in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 17276.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning before January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a taxpayer that is under the jurisdiction of the court in a Title 11 or similar case at any time during the income year. The loss carryover provided in the preceding sentence does not apply to any loss incurred after the date the taxpayer is no longer under the jurisdiction of the court in a Title 11 or similar case.
(e)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the taxable year.
(2)Except as provided in subdivision (f), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or S corporation paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(f)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In a case in which a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(g)Notwithstanding any provisions of this section to the contrary, a deduction shall be allowed to a qualified taxpayer as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7.
(h)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(i)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(j)This section shall become operative on January 1, 2029.
SEC. 3.Section 24309.4 is added to the Revenue and Taxation Code, to read:24309.4.SEC. 4.Section 24309.7 is added to the Revenue and Taxation Code, to read:24309.7.(a)For taxable years beginning on or after January 1, 2024, and before January 1, 2029, gross income does not include any amount received by a startup innovator, as that term is defined in paragraph (2) of subdivision (i) of Section 24416, for the sale of a net operating loss.
(b)For purposes of complying with Section 41, the goal, purpose, objective, performance indicators, and data collection requirements for the exclusion allowed by this section shall be as specified in subdivision (b) of Section 17137.
(c)This section shall remain in effect only until December 1, 2029, and as of that date is repealed.
SEC. 4.SEC. 5.Section 24416 of the Revenue and Taxation Code is amended to read:24416.Except as provided in Sections 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss deduction shall be allowed in computing net income under Section 24341 and shall be determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (e).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in paragraph (1) of subdivision (e).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (e).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of paragraph (2), paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)For any taxable year in which the taxpayer has in effect a waters-edge election under Section 25110, the deduction of a net operating loss carryover shall be denied to the extent that the net operating loss carryover was determined by taking into account the income and factors of an affiliated corporation in a combined report whose income and apportionment factors would not have been taken into account if a waters-edge election under Section 25110 had been in effect for the taxable year in which the loss was incurred.
(d)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(e)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 years except as otherwise provided in paragraphs (2), (3), and (4).
(B)For a net operating loss for any income year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any income year beginning before January 1, 2000, in the case of a new business, the five taxable years referred to in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 24416.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning prior to January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a corporation that was either of the following:
(A)Under the jurisdiction of the court in a Title 11 or similar case at any time prior to January 1, 1994. The loss carryover provided in the preceding sentence shall not apply to any loss incurred in an income year after the taxable year during which the corporation is no longer under the jurisdiction of the court in a Title 11 or similar case.
(B)In receipt of assets acquired in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(G) of the Internal Revenue Code.
(f)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the income year.
(2)Except as provided in subdivision (g), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or an S corporation, paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(g)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules shall apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules shall apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Any acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In any case where a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h)For purposes of corporations whose net income is determined under Chapter 17 (commencing with Section 25101), Section 25108 applies to each of the following:
(1)The amount of net operating loss incurred in any taxable year that may be carried forward to another taxable year.
(2)The amount of any loss carry forward that may be deducted in any taxable year.
(i)(1)A startup innovator may sell a net operating loss to a taxpayer that is not related to the startup innovator.
(2)For purposes of this subdivision, startup innovator means a taxpayer that satisfies all of the following:
(A)Is primarily engaged in a science, technology, engineering, or mathematics business.
(B)Owns registered trademarks, copyrights, or patents.
(C)Has no more than 300 employees.
(3)(A)A sale of a net operating loss pursuant to this subdivision must be for at least 80 percent of the value of the net operating loss transferred.
(B)A startup innovator may not sell more than twenty million dollars ($20,000,000) worth of net operating losses during the lifetime of the business. For purposes of this subparagraph, the sale of net operating losses by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
(4)(A)The Franchise Tax Board shall establish a program for startup innovators to apply for the ability to sell net operating losses.
(B)The Franchise Tax Board may require a startup innovator to pay a fee to participate in the program established under subparagraph (A), not to exceed the estimated costs of administering the program.
(C)A net operating loss that is sold by a startup innovator in accordance with this section shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
(D)A purchaser of a net operating loss may utilize the net operating loss in a closed taxable year only upon appropriation by the Legislature for this purpose.
(E)Notwithstanding any other law, a purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the net operating loss.
(5)(A)The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this subdivision. Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this section.
(B)(i)The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of this subdivision.
(ii)The adoption of any regulations pursuant to clause (i) may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, these emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the Franchise Tax Board.
(j)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(k)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(l)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
(m)This section shall remain in effect only until January 1, 2029, and as of that date is repealed.
SEC. 6.Section 24416 is added to the Revenue and Taxation Code, to read:24416.Except as provided in Sections 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss deduction shall be allowed in computing net income under Section 24341 and shall be determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (e).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in paragraph (1) of subdivision (e).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (e).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of paragraph (2), paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)For any taxable year in which the taxpayer has in effect a waters-edge election under Section 25110, the deduction of a net operating loss carryover shall be denied to the extent that the net operating loss carryover was determined by taking into account the income and factors of an affiliated corporation in a combined report whose income and apportionment factors would not have been taken into account if a waters-edge election under Section 25110 had been in effect for the taxable year in which the loss was incurred.
(d)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(e)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 years except as otherwise provided in paragraphs (2), (3), and (4).
(B)For a net operating loss for any income year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any income year beginning before January 1, 2000, in the case of a new business, the five taxable years referred to in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 24416.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning prior to January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a corporation that was either of the following:
(A)Under the jurisdiction of the court in a Title 11 or similar case at any time prior to January 1, 1994. The loss carryover provided in the preceding sentence shall not apply to any loss incurred in an income year after the taxable year during which the corporation is no longer under the jurisdiction of the court in a Title 11 or similar case.
(B)In receipt of assets acquired in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(G) of the Internal Revenue Code.
(f)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the income year.
(2)Except as provided in subdivision (g), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or an S corporation, paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(g)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules shall apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules shall apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Any acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In any case where a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h)For purposes of corporations whose net income is determined under Chapter 17 (commencing with Section 25101), Section 25108 applies to each of the following:
(1)The amount of net operating loss incurred in any taxable year that may be carried forward to another taxable year.
(2)The amount of any loss carry forward that may be deducted in any taxable year.
(i)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(j)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(k)This section shall become operative on January 1, 2029.
SEC. 5.SEC. 7.The Legislature hereby finds and declares that the ability of innovative startups to transfer net operating losses for value, as provided by this act, serves the public purpose of promoting competition and reducing oligopolistic consolidation in the science, technology, engineering, and math (STEM) sector of Californias economy and does not constitute a gift of public funds within the meaning of Section 6 of Article XVI of the California Constitution.
(a)For taxable years beginning on or after January 1, 2024, gross income does not include any amount received by a startup innovator, as that term is defined in paragraph (2) of subdivision (h) of Section 17276, for the sale of a net operating loss.
(b)(1)For purposes of complying with Section 41, as it applies to the exclusion provided by this section and Section 24309.4, the Legislature finds and declares as follows:
(A)The goal, purpose, and objective of the exclusion is to promote competition and reduce oligopolistic consolidation in Californias STEM sector by enabling innovative startups to survive periods of net operating loss.
(B)The performance indicators for the Legislature to use in determining whether the exclusion is achieving the stated goal shall be the number of taxpayers that have sold net operating losses and the total dollar amount of net operating losses sold.
(2)(A)The Franchise Tax Board, no later than November 1, 2025, and annually thereafter, shall provide a report to the Legislature, in compliance with Section 9795 of the Government Code, detailing the number of taxpayers that have sold net operating losses, and the total dollar value of net operating losses sold.
(B)The disclosure provisions of this paragraph shall be treated as an exception to Section 19542.
SEC. 2.Section 17276 of the Revenue and Taxation Code is amended to read:17276.Except as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified as follows:
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (d).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following shall apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in subdivision (d).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (d).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of that paragraph, paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, the term net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(d)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 taxable years except as otherwise provided in paragraphs (2) and (3).
(B)For a net operating loss for any taxable year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any taxable year beginning before January 1, 2000, in the case of a new business, the five taxable years in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 17276.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning before January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a taxpayer that is under the jurisdiction of the court in a Title 11 or similar case at any time during the income year. The loss carryover provided in the preceding sentence does not apply to any loss incurred after the date the taxpayer is no longer under the jurisdiction of the court in a Title 11 or similar case.
(e)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the taxable year.
(2)Except as provided in subdivision (f), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or S corporation paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(f)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In a case in which a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any gift, inheritance, transfer incident to divorce, or any other transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(g)Notwithstanding any provisions of this section to the contrary, a deduction shall be allowed to a qualified taxpayer as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7.
(h)(1)A startup innovator may sell a net operating loss to a taxpayer that is not related to the startup innovator.
(2)For purposes of this subdivision, startup innovator means a taxpayer that satisfies all of the following:
(A)Is primarily engaged in a science, technology, engineering, or mathematics business.
(B)Owns registered trademarks, copyrights, or patents.
(C)Has no more than 300 employees.
(3)(A)A sale of a net operating loss pursuant to this subdivision shall be for at least 80 percent of the value of the net operating loss transferred.
(B)A startup innovator may not sell more than twenty million dollars ($20,000,000) worth of net operating losses during the lifetime of the business. For purposes of this subparagraph, the sale of net operating losses by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
(4)(A)The Franchise Tax Board shall establish a program for startup innovators to apply for the ability to sell net operating losses.
(B)The Franchise Tax Board may require a startup innovator to pay a fee to participate in the program established under subparagraph (A), not to exceed the estimated costs of administering the program.
(C)A net operating loss that is sold by a startup innovator in accordance with this section shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
(D)A purchaser of a net operating loss may utilize the net operating loss in a closed taxable year only upon appropriation by the Legislature for this purpose.
(E)Notwithstanding any other law, a purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the net operating loss.
(5)(A)The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this subdivision. Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this section.
(B)(i)The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of this subdivision.
(ii)The adoption of any regulations pursuant to clause (i) may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, these emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the Franchise Tax Board.
(h)(i)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(i)(j)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(j)(k)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
SEC. 3.Section 24309.4 is added to the Revenue and Taxation Code, to read:24309.4.(a)For taxable years beginning on or after January 1, 2024, gross income does not include any amount received by a startup innovator, as that term is defined in paragraph (2) of subdivision (i) of Section 24416, for the sale of a net operating loss.
(b)For purposes of complying with Section 41, the goal, purpose, objective, performance indicators, and data collection requirements for the exclusion allowed by this section shall be as specified in subdivision (b) of Section 17137.
SEC. 4.Section 24416 of the Revenue and Taxation Code is amended to read:24416.Except as provided in Sections 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss deduction shall be allowed in computing net income under Section 24341 and shall be determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.
(a)(1)Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(b)(1)Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A)Fifty percent for any taxable year beginning before January 1, 2000.
(B)Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C)Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D)One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (e).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to the portion of the net operating loss that exceeds the net loss from the new business, the applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in paragraph (1) of subdivision (e).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii)With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (e).
(C)For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of paragraph (2), paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(6)For purposes of this section, net loss means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)For any taxable year in which the taxpayer has in effect a waters-edge election under Section 25110, the deduction of a net operating loss carryover shall be denied to the extent that the net operating loss carryover was determined by taking into account the income and factors of an affiliated corporation in a combined report whose income and apportionment factors would not have been taken into account if a waters-edge election under Section 25110 had been in effect for the taxable year in which the loss was incurred.
(d)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(e)(1)(A)For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute five taxable years in lieu of 20 years except as otherwise provided in paragraphs (2), (3), and (4).
(B)For a net operating loss for any income year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii) of the Internal Revenue Code is modified to substitute 10 taxable years in lieu of 20 taxable years.
(2)For any income year beginning before January 1, 2000, in the case of a new business, the five taxable years referred to in paragraph (1) shall be modified to read as follows:
(A)Eight taxable years for a net operating loss attributable to the first taxable year of that new business.
(B)Seven taxable years for a net operating loss attributable to the second taxable year of that new business.
(C)Six taxable years for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 24416.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning prior to January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994, shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a corporation that was either of the following:
(A)Under the jurisdiction of the court in a Title 11 or similar case at any time prior to January 1, 1994. The loss carryover provided in the preceding sentence shall not apply to any loss incurred in an income year after the taxable year during which the corporation is no longer under the jurisdiction of the court in a Title 11 or similar case.
(B)In receipt of assets acquired in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(G) of the Internal Revenue Code.
(f)For purposes of this section:
(1)Eligible small business means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the income year.
(2)Except as provided in subdivision (g), new business means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)Title 11 or similar case shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or an S corporation, paragraphs (1) and (2) shall be applied to the partnership or S corporation.
(g)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules shall apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules shall apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Any acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related person).
(2)In any case where a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (prior trade or business activity), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayers (or any related persons) current or prior trade or business activities.
(3)In a case in which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)Related person shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)Acquire shall include any transfer, whether or not for consideration.
(7)(A)For taxable years beginning on or after January 1, 1997, the term new business shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug Administration.
(B)For purposes of this paragraph:
(i)Biopharmaceutical activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii)Other biotechnology activities means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h)For purposes of corporations whose net income is determined under Chapter 17 (commencing with Section 25101), Section 25108 applies to each of the following:
(1)The amount of net operating loss incurred in any taxable year that may be carried forward to another taxable year.
(2)The amount of any loss carry forward that may be deducted in any taxable year.
(i)(1)A startup innovator may sell a net operating loss to a taxpayer that is not related to the startup innovator.
(2)For purposes of this subdivision, startup innovator means a taxpayer that satisfies all of the following:
(A)Is primarily engaged in a science, technology, engineering, or mathematics business.
(B)Owns registered trademarks, copyrights, or patents.
(C)Has no more than 300 employees.
(3)(A)A sale of a net operating loss pursuant to this subdivision must be for at least 80 percent of the value of the net operating loss transferred.
(B)A startup innovator may not sell more than twenty million dollars ($20,000,000) worth of net operating losses during the lifetime of the business. For purposes of this subparagraph, the sale of net operating losses by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
(4)(A)The Franchise Tax Board shall establish a program for startup innovators to apply for the ability to sell net operating losses.
(B)The Franchise Tax Board may require a startup innovator to pay a fee to participate in the program established under subparagraph (A), not to exceed the estimated costs of administering the program.
(C)A net operating loss that is sold by a startup innovator in accordance with this section shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
(D)A purchaser of a net operating loss may utilize the net operating loss in a closed taxable year only upon appropriation by the Legislature for this purpose.
(E)Notwithstanding any other law, a purchaser of a net operating loss may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the net operating loss.
(5)(A)The Franchise Tax Board may prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this subdivision. Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any rule, guideline, or procedure prescribed by the Franchise Tax Board pursuant to this section.
(B)(i)The Franchise Tax Board may prescribe any regulations necessary or appropriate to carry out the purposes of this subdivision.
(ii)The adoption of any regulations pursuant to clause (i) may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act (Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code) and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. Notwithstanding Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code, these emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the Franchise Tax Board.
(i)(j)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(j)(k)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(k)(l)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
SEC. 5.The Legislature hereby finds and declares that the ability of innovative startups to transfer net operating losses for value, as provided by this act, serves the public purpose of promoting competition and reducing oligopolistic consolidation in the science, technology, engineering, and math (STEM) sector of Californias economy and does not constitute a gift of public funds within the meaning of Section 6 of Article XVI of the California Constitution.
SECTION 1.Section 17039.3 of the Revenue and Taxation Code is amended to read:17039.3.(a)Notwithstanding any provision of this part or Part 10.2 (commencing with Section 18401) to the contrary, for taxpayers not required to be included in a combined report under Section 25101 or 25110, or taxpayers not authorized to be included in a combined report under Section 25101.15, for each taxable year beginning on or after January 1, 2020, and before January 1, 2022, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, for the taxable year shall not reduce the net tax, as defined in Section 17039, by more than five million dollars ($5,000,000).(b)Notwithstanding any provision of this part or Part 10.2 (commencing with Section 18401) to the contrary, for taxpayers required to be included in a combined report under Section 25101 or 25110, or taxpayers authorized to be included in a combined report under Section 25101.15, for each taxable year beginning on or after January 1, 2020, and before January 1, 2022, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, by all members of the combined report shall not reduce the aggregate amount of tax, as defined in Section 23036, of all members of the combined report by more than five million dollars ($5,000,000).(c)For purposes of this section, business credit means a credit allowable under any provision of Chapter 2 (commencing with Section 17041) other than the following credits:(1)The credit allowed by Section 17052 (relating to credit for earned income).(2)The credit allowed by Section 17052.1 (relating to credit for young child).(3)The credit allowed by Section 17052.6 (relating to credit for household and dependent care).(4)The credit allowed by Section 17052.25 (relating to credit for adoption costs).(5)The credit allowed by Section 17053.5 (relating to renters tax credit).(6)The credit allowed by Section 17054 (relating to credit for personal exemption).(7)The credit allowed by Section 17054.5 (relating to credit for qualified joint custody head of household and a qualified taxpayer with a dependent parent).(8)The credit allowed by Section 17054.7 (relating to credit for qualified senior head of household).(9)The credit allowed by Section 17058 (relating to credit for low-income housing).(10)The credit allowed by Section 17061 (relating to refunds pursuant to the Unemployment Insurance Code).(d)Any amounts included in an election pursuant to Section 6902.5, relating to an irrevocable election to apply credit amounts under Section 17053.85, 17053.95, 17053.98, 23685, 23695, or 23698 against qualified sales and use tax, as defined in Section 6902.5, are not included in the five-million-dollar ($5,000,000) limitation set forth in subdivision (a) or (b).(e)The amount of any credit otherwise allowable for the taxable year under Section 17039 that is not allowed due to application of this section shall remain a credit carryover amount under this part.(f)The carryover period for any credit that is not allowed due to the application of this section shall be increased by the number of taxable years the credit or any portion thereof was not allowed.(g)Notwithstanding anything to the contrary in this part or Part 10.2 (commencing with Section 18401), the credits listed in subdivision (c) shall be applied after any business credits, as limited by subdivision (a) or (b), are applied.(h)Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code does not apply to any standard, criterion, procedure, determination, rule, notice, or guideline established or issued by the Franchise Tax Board pursuant to this section.(i)(1)For the taxable year beginning on or after January 1, 2023, and before January 1, 2024, the Franchise Tax Board shall track the utilization of business credits and provide a report to the Legislature no later than November 1, 2024, in compliance with Section 9795 of the Government Code, reporting the number of taxpayers utilizing business credits, and the total dollar value of credit utilized.(2)The disclosure requirements of this subdivision shall be treated as an exception to Section 19542. (j)The amendments made to this section by Section 7 of Chapter 3 of the Statutes of 2022 shall be operative for taxable years beginning on or after January 1, 2022.(a)Notwithstanding any provision of this part or Part 10.2 (commencing with Section 18401) to the contrary, for taxpayers not required to be included in a combined report under Section 25101 or 25110, or taxpayers not authorized to be included in a combined report under Section 25101.15, for each taxable year beginning on or after January 1, 2020, and before January 1, 2022, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, for the taxable year shall not reduce the net tax, as defined in Section 17039, by more than five million dollars ($5,000,000).
(b)Notwithstanding any provision of this part or Part 10.2 (commencing with Section 18401) to the contrary, for taxpayers required to be included in a combined report under Section 25101 or 25110, or taxpayers authorized to be included in a combined report under Section 25101.15, for each taxable year beginning on or after January 1, 2020, and before January 1, 2022, the total of all business credits otherwise allowable under any provision of Chapter 2 (commencing with Section 17041), including the carryover of any business credit under a former provision of that chapter, by all members of the combined report shall not reduce the aggregate amount of tax, as defined in Section 23036, of all members of the combined report by more than five million dollars ($5,000,000).
(c)For purposes of this section, business credit means a credit allowable under any provision of Chapter 2 (commencing with Section 17041) other than the following credits:
(1)The credit allowed by Section 17052 (relating to credit for earned income).
(2)The credit allowed by Section 17052.1 (relating to credit for young child).
(3)The credit allowed by Section 17052.6 (relating to credit for household and dependent care).
(4)The credit allowed by Section 17052.25 (relating to credit for adoption costs).
(5)The credit allowed by Section 17053.5 (relating to renters tax credit).
(6)The credit allowed by Section 17054 (relating to credit for personal exemption).
(7)The credit allowed by Section 17054.5 (relating to credit for qualified joint custody head of household and a qualified taxpayer with a dependent parent).
(8)The credit allowed by Section 17054.7 (relating to credit for qualified senior head of household).
(9)The credit allowed by Section 17058 (relating to credit for low-income housing).
(10)The credit allowed by Section 17061 (relating to refunds pursuant to the Unemployment Insurance Code).
(d)Any amounts included in an election pursuant to Section 6902.5, relating to an irrevocable election to apply credit amounts under Section 17053.85, 17053.95, 17053.98, 23685, 23695, or 23698 against qualified sales and use tax, as defined in Section 6902.5, are not included in the five-million-dollar ($5,000,000) limitation set forth in subdivision (a) or (b).
(e)The amount of any credit otherwise allowable for the taxable year under Section 17039 that is not allowed due to application of this section shall remain a credit carryover amount under this part.
(f)The carryover period for any credit that is not allowed due to the application of this section shall be increased by the number of taxable years the credit or any portion thereof was not allowed.
(g)Notwithstanding anything to the contrary in this part or Part 10.2 (commencing with Section 18401), the credits listed in subdivision (c) shall be applied after any business credits, as limited by subdivision (a) or (b), are applied.
(h)Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code does not apply to any standard, criterion, procedure, determination, rule, notice, or guideline established or issued by the Franchise Tax Board pursuant to this section.
(i)(1)For the taxable year beginning on or after January 1, 2023, and before January 1, 2024, the Franchise Tax Board shall track the utilization of business credits and provide a report to the Legislature no later than November 1, 2024, in compliance with Section 9795 of the Government Code, reporting the number of taxpayers utilizing business credits, and the total dollar value of credit utilized.
(2)The disclosure requirements of this subdivision shall be treated as an exception to Section 19542.
(i)(j)The amendments made to this section by the act adding this subdivision Section 7 of Chapter 3 of the Statutes of 2022 shall be operative for taxable years beginning on or after January 1, 2022.
|
Date
|
Status
|
|---|---|
| Feb 1, 2024 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
| Jan 31, 2024 | Died pursuant to Art. IV, Sec. 10(c) of the Constitution. |
| May 1, 2023 | In committee: Set, final hearing. Held under submission. |
| Apr 24, 2023 | In committee: Set, second hearing. Referred to REV. & TAX. suspense file. |
| Apr 18, 2023 | Re-referred to Com. on REV. & TAX. |
| Apr 17, 2023 | From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended. |
| Mar 28, 2023 | In committee: Set, first hearing. Hearing canceled at the request of author. |
| Mar 21, 2023 | Re-referred to Com. on REV. & TAX. |
| Mar 20, 2023 | From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended. |
| Mar 8, 2023 | Re-referred to Com. on REV. & TAX. |
| Mar 7, 2023 | From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended. |
| Mar 2, 2023 | Referred to Com. on REV. & TAX. |
| Feb 16, 2023 | From printer. May be heard in committee March 18. |
| Feb 15, 2023 | Read first time. To print. |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
|
Organization
|
Position
|
Date
|
|---|---|---|
| American Federation of State, County, & Municipal Employees | * Against | Apr 24, 2023 |
| Bay Area Council | ** Support | |
| Biocom California | * Support | Apr 24, 2023 |
| Biotechnology Innovation Organization | ** Support | |
| CalChamber | ** Support | |
| California Life Sciences | ** Support | |
| California Manufacturers & Technology Association | ** Support | |
| California School Employees Association, AFL-CIO | ** Against | |
| California Teachers Association | ** Against | |
| Expanesthetics Inc | * Support | Apr 24, 2023 |
| San Diego Regional Chamber Of Commerce | ** Support | |
| Technet | ** Support |
Date of Hearing: May 1, 2023
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Jacqui Irwin, Chair
ABPCA Bill Id:AB 1105 (
Author:Petrie-Norris) – As Amended Ver:April 17, 2023
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal Income Tax Law: Corporation Tax Law: sale of net operating losses
SUMMARY: Allows a "startup innovator", as defined, to sell a net operating loss (NOL) to an unrelated taxpayer. Specifically, this bill:
- Authorizes a "startup innovator" to sell a NOL to a taxpayer that is not related to the "startup innovator".
- Provides that a purchased NOL may not be transferred by the purchaser.
- Defines a "startup innovator" as a taxpayer that satisfies all of the following:
- Is primarily engaged in activities that are described in Code 311221, 311224, 325193, 325311, 325312, 325314, 325320, 325411, 325412, 325413, 325414, 334510, 334516, 334517, 339112, 339113, 339114, 423450, 424210, 424910, 541380, 541713, 541714, 541715, or 621511 of the North American Industry Classification System (NAICS);
- Owns registered trademarks, copyrights, or patents;
- Has no more than 300 employees;
- Has not existed for longer than 10 years;
- Is not a member of a combined reporting group; and,
- Is headquartered in California.
- Provides that a sale of a NOL must be for at least 80% of the value of the NOL transferred.
- Provides that a startup innovator may not sell more than $20 million worth of NOLs during the lifetime of the business. For purposes of this limit, the sale of NOLs by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
- Requires a startup innovator to certify under penalty of perjury that all proceeds from the sale of NOLs are used to finance employee compensation related to direct research activities, contract expenses paid to independent contractors for research activities, or nondepreciable personal tangible property used to conduct research.
- Provides that a NOL that is sold by a startup innovator in accordance with this bill shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
- Provides that a NOL purchaser may utilize the NOL in a taxable year beginning on or after January 1, 2024.
- Provides that a NOL purchaser may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the NOL.
- Authorizes the Franchise Tax Board (FTB) to prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this bill. The Administrative Procedure Act shall not apply to any rule, guideline, or procedure prescribed by the FTB pursuant to this bill.
- Authorizes the FTB to prescribe any regulations necessary or appropriate to carry out the purposes of this bill.
- Provides that the adoption of any regulations may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. These emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the FTB.
- Specifies that these provisions are severable. If any provision or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
- Specifies that the provisions described above shall remain in effect until January 1, 2029.
- Provides, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, a gross income exclusion for any amount received by a startup innovator for the sale of a NOL.
- Provides that, for purposes of complying with Revenue and Taxation Code (R&TC) Section 41, as it applies to this bill's gross income exclusion, the Legislature finds and declares the following:
- The goal, purpose, and objective of the exclusion is to promote competition and reduce oligopolistic consolidation in California's STEM sector by enabling innovative startups to survive periods of NOL; and,
- The performance indicators for the Legislature to use in determining whether the exclusion is achieving the stated goal shall be the number of taxpayers that have sold NOLs and the total dollar amount of NOLs sold.
- Requires the FTB, no later than April 1, 2027, and annually thereafter, to provide a report to the Legislature, in compliance with Government Code Section 9795, detailing the number of taxpayers that have sold NOLs, and the total dollar value of NOLs sold.
- Takes immediate effect as a tax levy.
EXISTING LAW:
- Allows under both the Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal law, various deductions in computing the income that is subject to tax, including a deduction for a NOL, as specified.
- Defines "gross income" as income from whatever source derived, except as specifically excluded. (R&TC Section 17071.)
- Requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators, and data collection requirements. (R&TC Section 41.)
FISCAL EFFECT: Pending, but staff estimate annual revenue losses in excess of $150,000.
COMMENTS:
- The author has provided the following statement in support of this bill:
To preserve and expand its global innovation leadership, California must pursue creative opportunities to assist start-up companies which promote scientific innovation, research, and economic growth.
AB 1105 will leverage California's tax code to provide growth capital for promising early-stage companies navigating periods of economic volatility, enabling entrepreneurs and small business owners to further invest in expansion and development at a critical juncture in their growth. AB 1105 would permit small businesses in science, technology, engineering, and math (STEM) fields to sell their unused Net Operating Loss Carryover (NOL) for at least 80% of the value. This will allow small and start-up companies to turn their tax losses into cash to reinvest back in their company by purchasing equipment or facilities, further develop their workforce or for other allowable expenditures. This idea is based upon a successful program in New Jersey that has operated for a decade.
- This bill is supported by California Life Sciences, which notes:
Start-up innovator companies face significant challenges in California as they deal with obstacles such as insufficient capital or cash flow, recruiting employees, and marketing. Although California has the most startups businesses in the country, unfortunately most startups fail. In addition, recent interest rate hikes have spooked investors away from startups and made it even more difficult for startups to succeed. To preserve and expand its global innovation leadership, California must pursue creative opportunities to assist start-up companies which promote scientific and technological innovation, research, and economic growth. One such creative and established policy is the sale of Net Operating Loss.
- This bill is opposed by the California School Employees Association, which notes:
Amid a projected $22.5 billion shortfall and growing, AB 1105 could cause even more revenue loss to our state general fund. This loss would be on top of the billions lost annually due to longstanding and pre-existing tax expenditure programs that disproportionately benefit high-net worth individuals and corporations.
For every dollar in our state general fund, roughly 40 cents goes toward Proposition 98, which funds public education. When there is a revenue loss, there is a proportionate 40% loss to public education funding. Our students are our most precious investments, and we should be crafting solutions to increase funding for public education instead of policies that could adversely impact school funding.
- Committee Staff Comments:
- What is an NOL? An NOL occurs when a business's expenses exceed its taxable income in a given period, and can generally be "carried forward" to offset future taxable income to reduce future tax liability. The basic rationale for allowing losses to be carried forward flows from a recognition that businesses are established with the goal of making a profit over a business cycle rather than in any particular year. NOLs help smooth out the income and taxes paid over a business cycle, thereby allowing a business to make efficient decisions regarding financing and investment. For example, consider two firms, one with a $100 loss in year one and a $300 gain in year two, and the second with a $100 gain in each of the two years. Without an NOL deduction, the first firm would report $300 in taxable income, while the second would report $200, even though each had $200 in net income over the same period. [Department of Finance, Annual Tax Expenditure Report (2008-09).]
- What would this bill do? This bill would authorize a "startup innovator", as defined, to sell a NOL to an unrelated taxpayer. A "startup innovator", in turn, is defined as a taxpayer that: (i) is primarily engaged in specified business activities; (ii) owns registered trademarks, copyrights, or patents; (iii) has 300 or fewer employees; (iv) has not existed for longer than 10 years; (v) is not a member of a combined reporting group; and, (vi) is headquartered in California.
Under this bill, a startup innovator would have to sell their NOLs for at least 80% of their value, and startup innovators would be prohibited from selling more than $20 million worth of NOLs during the lifetime of the startup innovator's business. Lastly, this bill would provide a gross income exclusion for any amount received by a startup innovator for the sale of a NOL.
- Who is this bill designed to help? This bill would benefit at least two distinct categories of taxpayers: (i) startup innovators with NOLs and little to no taxable income; and, (ii) profitable firms with taxable income to offset. Again, an example may be helpful. Imagine a startup innovator organized as a C-corporation with $20 million in NOLs. Imagine further that this startup does not expect to have taxable income in the next few years. Under this bill, the startup innovator could sell its $20 million in NOLs for 80% of their value or $1,414,400.[1] This immediate infusion of cash would be tax free at the state level as a result of this bill's gross income exclusion and could be used to keep the company afloat until it reaches profitability.
Under this example, the NOL purchaser would also benefit. Imagine the purchaser has $20 million in taxable income and no credits to apply. Typically, this would result in a tax liability of $1,768,000 (i.e., $20 million x 8.84%). By purchasing the startup innovator's $20 million in NOLs, however, the profitable company is able to zero out its taxable income and attendant tax liability. The company has essentially satisfied a $1,768,000 tax liability with a payment of only $1,414,400 (the NOL purchase price) for a savings of $353,600.
- A question of tradeoffs: Assuming successful implementation, this bill would have two almost certain outcomes. First, as explained above, this bill would allow large, profitable businesses to satisfy their tax liabilities at a significant savings. Second, this bill would accelerate revenue losses to the General Fund. Absent this bill, many startups would potentially continue to accumulate NOLs for several years before achieving profitability and the ability to use them. Less fortunate firms would eventually fail. This bill posits that these likely outcomes should be balanced against the benefits of providing immediate cash to struggling startups, with the hope of ensuring their long-term viability. Long-term success, in turn, would positively impact everything from California's employment rate, innovation ecosystem, and future tax receipts. The Committee may wish to consider, however, whether a maximum cash infusion of roughly $1.5 million under the example outlined above would be sufficient to make a difference in the long-term prospects of most startups.
- The New Jersey example: According to the author's office, this bill is modeled on New Jersey's Technology Business Tax Certificate Transfer Program, more commonly known as the NOL Program. Now in its 23rd year, the NOL Program enables participants to sell their New Jersey NOLs and unused R&D tax credits to unrelated profitable corporations for cash. The program is jointly administered by the state's Department of Treasury and the New Jersey Economic Development Authority, which describes the program as a "lifeline" for entrepreneurs seeking capital for their companies.
- Implementation considerations: Committee staff has identified a number of implementation concerns with this bill, and is willing to assist the author to address these and any other issues subsequently identified. These considerations include:
- What happens in the case of an audit? It is not readily apparent to Committee staff what would happen if the FTB were to audit the books of a startup innovator that has sold its NOLs. For example, if the FTB were to disallow some or all of those NOLs, would the company that purchased them have to file an amended return reflecting the disallowance?
- NOL value: As noted above, this bill provides that NOLs must be sold "for at least 80 percent of the value of the [NOL]." Committee staff assumes this actually refers to the tax result of applying the NOL and not the absolute dollar value of the NOL itself. While the value of the tax result may be relatively easy to calculate for CT taxpayers given the single corporate tax rate of 8.84%, it is not clear how the value of an NOL would be calculated under the PIT, where there are multiple rates and the value of a particular deduction varies depending on the rate applied.
- Definition of a startup innovator: To qualify as a startup innovator under this bill, a taxpayer must be primarily engaged in specified business activities. Committee staff suggests the term "primarily" be defined as 50% or more.
REGISTERED SUPPORT / OPPOSITION:
Support
Bay Area Council
Biotechnology Innovation Organization
CalChamber
California Life Sciences
California Manufacturers & Technology Association
San Diego Regional Chamber of Commerce
TechNet
Opposition
California School Employees Association, AFL-CIO
California Teachers Association
Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098
To obtain this dollar figure, one must engage in two calculations. First, one calculates the full value of the startup's NOLs by multiplying $20 million by the corporate tax rate of 8.84% to arrive at $1,768,000. Second, one multiplies this figure by 80% to arrive at $1,414,400. ↑
Date of Hearing: April 24, 2023
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Jacqui Irwin, Chair
ABPCA Bill Id:AB 1105 (
Author:Petrie-Norris) – As Amended Ver:April 17, 2023
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Personal Income Tax Law: Corporation Tax Law: sale of net operating losses
SUMMARY: Allows a "startup innovator", as defined, to sell a net operating loss (NOL) to an unrelated taxpayer. Specifically, this bill:
- Authorizes a "startup innovator" to sell a NOL to a taxpayer that is not related to the "startup innovator".
- Provides that a purchased NOL may not be transferred by the purchaser.
- Defines a "startup innovator" as a taxpayer that satisfies all of the following:
- Is primarily engaged in activities that are described in Code 311221, 311224, 325193, 325311, 325312, 325314, 325320, 325411, 325412, 325413, 325414, 334510, 334516, 334517, 339112, 339113, 339114, 423450, 424210, 424910, 541380, 541713, 541714, 541715, or 621511 of the North American Industry Classification System (NAICS);
- Owns registered trademarks, copyrights, or patents;
- Has no more than 300 employees;
- Has not existed for longer than 10 years;
- Is not a member of a combined reporting group; and,
- Is headquartered in California.
- Provides that a sale of a NOL must be for at least 80% of the value of the NOL transferred.
- Provides that a startup innovator may not sell more than $20 million worth of NOLs during the lifetime of the business. For purposes of this limit, the sale of NOLs by a predecessor in interest shall be included in the lifetime sales of a successor in interest.
- Requires a startup innovator to certify under penalty of perjury that all proceeds from the sale of NOLs are used to finance employee compensation related to direct research activities, contract expenses paid to independent contractors for research activities, or nondepreciable personal tangible property used to conduct research.
- Provides that a NOL that is sold by a startup innovator in accordance with this bill shall retain the same characteristics in the hands of the purchaser as though it were generated by the purchaser in the same taxable year as it was generated by the startup innovator, including, but not limited to, carryback and carryforward provisions that may apply.
- Provides that a NOL purchaser may utilize the NOL in a taxable year beginning on or after January 1, 2024.
- Provides that a NOL purchaser may not claim a deduction, either as an ordinary and necessary business expense or otherwise, for the cost paid to purchase the NOL.
- Authorizes the Franchise Tax Board (FTB) to prescribe rules, guidelines, procedures, or other guidance to carry out the purposes of this bill. The Administrative Procedure Act shall not apply to any rule, guideline, or procedure prescribed by the FTB pursuant to this bill.
- Authorizes the FTB to prescribe any regulations necessary or appropriate to carry out the purposes of this bill.
- Provides that the adoption of any regulations may be adopted as emergency regulations in accordance with the rulemaking provisions of the Administrative Procedure Act and shall be deemed an emergency and necessary for the immediate preservation of the public peace, health and safety, or general welfare. These emergency regulations shall not be subject to the review and approval of the Office of Administrative Law. The regulations shall become effective immediately upon filing with the Secretary of State, and shall remain in effect until revised or repealed by the FTB.
- Specifies that these provisions are severable. If any provision or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
- Specifies that the provisions described above shall remain in effect until January 1, 2029.
- Provides, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, a gross income exclusion for any amount received by a startup innovator for the sale of a NOL.
- Provides that, for purposes of complying with Revenue and Taxation Code (R&TC) Section 41, as it applies to this bill's gross income exclusion, the Legislature finds and declares the following:
- The goal, purpose, and objective of the exclusion is to promote competition and reduce oligopolistic consolidation in California's STEM sector by enabling innovative startups to survive periods of NOL; and,
- The performance indicators for the Legislature to use in determining whether the exclusion is achieving the stated goal shall be the number of taxpayers that have sold NOLs and the total dollar amount of NOLs sold.
- Requires the FTB, no later than April 1, 2027, and annually thereafter, to provide a report to the Legislature, in compliance with Government Code Section 9795, detailing the number of taxpayers that have sold NOLs, and the total dollar value of NOLs sold.
- Takes immediate effect as a tax levy.
EXISTING LAW:
- Allows under both the Personal Income Tax Law and the Corporation Tax Law, in modified conformity with federal law, various deductions in computing the income that is subject to tax, including a deduction for a NOL, as specified.
- Defines "gross income" as income from whatever source derived, except as specifically excluded. (R&TC Section 17071.)
- Requires any bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives that the tax expenditure will achieve, detailed performance indicators, and data collection requirements. (R&TC Section 41.)
FISCAL EFFECT: Pending, but staff estimate annual revenue losses in excess of $150,000.
COMMENTS:
- The author has provided the following statement in support of this bill:
To preserve and expand its global innovation leadership, California must pursue creative opportunities to assist start-up companies which promote scientific innovation, research, and economic growth.
AB 1105 will leverage California's tax code to provide growth capital for promising early-stage companies navigating periods of economic volatility, enabling entrepreneurs and small business owners to further invest in expansion and development at a critical juncture in their growth. AB 1105 would permit small businesses in science, technology, engineering, and math (STEM) fields to sell their unused Net Operating Loss Carryover (NOL) for at least 80% of the value. This will allow small and start-up companies to turn their tax losses into cash to reinvest back in their company by purchasing equipment or facilities, further develop their workforce or for other allowable expenditures. This idea is based upon a successful program in New Jersey that has operated for a decade.
- This bill is supported by California Life Sciences, which notes:
Start-up innovator companies face significant challenges in California as they deal with obstacles such as insufficient capital or cash flow, recruiting employees, and marketing. Although California has the most startups businesses in the country, unfortunately most startups fail. In addition, recent interest rate hikes have spooked investors away from startups and made it even more difficult for startups to succeed. To preserve and expand its global innovation leadership, California must pursue creative opportunities to assist start-up companies which promote scientific and technological innovation, research, and economic growth. One such creative and established policy is the sale of Net Operating Loss.
- This bill is opposed by the California School Employees Association, which notes:
Amid a projected $22.5 billion shortfall and growing, AB 1105 could cause even more revenue loss to our state general fund. This loss would be on top of the billions lost annually due to longstanding and pre-existing tax expenditure programs that disproportionately benefit high-net worth individuals and corporations.
For every dollar in our state general fund, roughly 40 cents goes toward Proposition 98, which funds public education. When there is a revenue loss, there is a proportionate 40% loss to public education funding. Our students are our most precious investments, and we should be crafting solutions to increase funding for public education instead of policies that could adversely impact school funding.
- Committee Staff Comments:
- What is an NOL? An NOL occurs when a business's expenses exceed its taxable income in a given period, and can generally be "carried forward" to offset future taxable income to reduce future tax liability. The basic rationale for allowing losses to be carried forward flows from a recognition that businesses are established with the goal of making a profit over a business cycle rather than in any particular year. NOLs help smooth out the income and taxes paid over a business cycle, thereby allowing a business to make efficient decisions regarding financing and investment. For example, consider two firms, one with a $100 loss in year one and a $300 gain in year two, and the second with a $100 gain in each of the two years. Without an NOL deduction, the first firm would report $300 in taxable income, while the second would report $200, even though each had $200 in net income over the same period. [Department of Finance, Annual Tax Expenditure Report (2008-09).]
- What would this bill do? This bill would authorize a "startup innovator", as defined, to sell a NOL to an unrelated taxpayer. A "startup innovator", in turn, is defined as a taxpayer that: (i) is primarily engaged in specified business activities; (ii) owns registered trademarks, copyrights, or patents; (iii) has 300 or fewer employees; (iv) has not existed for longer than 10 years; (v) is not a member of a combined reporting group; and, (vi) is headquartered in California.
Under this bill, a startup innovator would have to sell their NOLs for at least 80% of their value, and startup innovators would be prohibited from selling more than $20 million worth of NOLs during the lifetime of the startup innovator's business. Lastly, this bill would provide a gross income exclusion for any amount received by a startup innovator for the sale of a NOL.
- Who is this bill designed to help? This bill would benefit at least two distinct categories of taxpayers: (i) startup innovators with NOLs and little to no taxable income; and, (ii) profitable firms with taxable income to offset. Again, an example may be helpful. Imagine a startup innovator organized as a C-corporation with $20 million in NOLs. Imagine further that this startup does not expect to have taxable income in the next few years. Under this bill, the startup innovator could sell its $20 million in NOLs for 80% of their value or $1,414,400.[1] This immediate infusion of cash would be tax free at the state level as a result of this bill's gross income exclusion and could be used to keep the company afloat until it reaches profitability.
Under this example, the NOL purchaser would also benefit. Imagine the purchaser has $20 million in taxable income and no credits to apply. Typically, this would result in a tax liability of $1,768,000 (i.e., $20 million x 8.84%). By purchasing the startup innovator's $20 million in NOLs, however, the profitable company is able to zero out its taxable income and attendant tax liability. The company has essentially satisfied a $1,768,000 tax liability with a payment of only $1,414,400 (the NOL purchase price) for a savings of $353,600.
- A question of tradeoffs: Assuming successful implementation, this bill would have two almost certain outcomes. First, as explained above, this bill would allow large, profitable businesses to satisfy their tax liabilities at a significant savings. Second, this bill would accelerate revenue losses to the General Fund. Absent this bill, many startups would potentially continue to accumulate NOLs for several years before achieving profitability and the ability to use them. Less fortunate firms would eventually fail. This bill posits that these likely outcomes should be balanced against the benefits of providing immediate cash to struggling startups, with the hope of ensuring their long-term viability. Long-term success, in turn, would positively impact everything from California's employment rate, innovation ecosystem, and future tax receipts. The Committee may wish to consider, however, whether a maximum cash infusion of roughly $1.5 million under the example outlined above would be sufficient to make a difference in the long-term prospects of most startups.
- The New Jersey example: According to the author's office, this bill is modeled on New Jersey's Technology Business Tax Certificate Transfer Program, more commonly known as the NOL Program. Now in its 23rd year, the NOL Program enables participants to sell their New Jersey NOLs and unused R&D tax credits to unrelated profitable corporations for cash. The program is jointly administered by the state's Department of Treasury and the New Jersey Economic Development Authority, which describes the program as a "lifeline" for entrepreneurs seeking capital for their companies.
- Implementation considerations: Committee staff has identified a number of implementation concerns with this bill, and is willing to assist the author to address these and any other issues subsequently identified. These considerations include:
- What happens in the case of an audit? It is not readily apparent to Committee staff what would happen if the FTB were to audit the books of a startup innovator that has sold its NOLs. For example, if the FTB were to disallow some or all of those NOLs, would the company that purchased them have to file an amended return reflecting the disallowance?
- NOL value: As noted above, this bill provides that NOLs must be sold "for at least 80 percent of the value of the [NOL]." Committee staff assumes this actually refers to the tax result of applying the NOL and not the absolute dollar value of the NOL itself. While the value of the tax result may be relatively easy to calculate for CT taxpayers given the single corporate tax rate of 8.84%, it is not clear how the value of an NOL would be calculated under the PIT, where there are multiple rates and the value of a particular deduction varies depending on the rate applied.
- Definition of a startup innovator: To qualify as a startup innovator under this bill, a taxpayer must be primarily engaged in specified business activities. Committee staff suggests the term "primarily" be defined as 50% or more.
REGISTERED SUPPORT / OPPOSITION:
Support
Bay Area Council
Biotechnology Innovation Organization
CalChamber
California Life Sciences
California Manufacturers & Technology Association
San Diego Regional Chamber of Commerce
TechNet
Opposition
California School Employees Association, AFL-CIO
California Teachers Association
Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098
To obtain this dollar figure, one must engage in two calculations. First, one calculates the full value of the startup's NOLs by multiplying $20 million by the corporate tax rate of 8.84% to arrive at $1,768,000. Second, one multiplies this figure by 80% to arrive at $1,414,400. ↑
Discussed in Hearing
13MIN
Assembly Standing Committee on Revenue and Taxation
Bill Author
Bill Co-Author(s):