California New Tax Law: NOL Suspension, Credit Cap, and SB 711

California’s new tax laws for 2024 through 2026 do three big things to watch when you file: net operating loss deductions are suspended for higher-income filers, business tax credits are capped at $5 million a year, and Senate Bill 711 moved the state’s conformity with the Internal Revenue Code forward a full decade to January 1, 2025. Rate brackets, standard deductions, and “doing business” thresholds have also been adjusted for 2025, and the pass-through entity elective tax has been extended through 2030.

NOL Deductions Are Suspended Through 2026

For tax years 2024, 2025, and 2026, California has suspended the deduction of net operating loss carryovers for taxpayers above specific income thresholds.1Franchise Tax Board. Net Operating Loss The thresholds depend on filer type:

Below those thresholds, NOL deductions work normally. If your deduction is blocked by the suspension, the carryover period is extended by one year for each year you couldn’t use it, and you can keep computing and carrying over new NOLs during the suspension period. Disaster loss carryovers are not caught by the suspension.2Franchise Tax Board. 2024 Instructions for Form FTB 3805Q Net Operating Loss Computation and NOL and Disaster Loss Limitations – Corporations California still decouples from the federal 80% NOL cap, so even once the suspension lifts, the state and federal rules will diverge.

$5 Million Cap on Business Tax Credits

Running on the same 2024–2026 window, California limits the total business tax credits any taxpayer can use in a single year to $5 million, including carryovers from prior years.3California Legislative Information. California Revenue and Taxation Code 17039.3 For corporate groups filing a combined report, the $5 million applies to the group as a whole rather than each member. Credits you can’t use because of the cap carry forward.

Several credits sit outside the cap:3California Legislative Information. California Revenue and Taxation Code 17039.3

  • Low-income housing credit
  • CalEITC and Young Child Tax Credit
  • Renter’s credit
  • Personal exemption credits
  • Pass-through entity elective tax credit

The R&D credit and most other business incentive credits are inside the cap. If your business routinely generates substantial credits, the carryforward math across multiple years becomes a planning exercise.

SB 711 and the New Conformity Date

Senate Bill 711 took effect October 1, 2025, and moved California’s general conformity date with the Internal Revenue Code from January 1, 2015, to January 1, 2025.4Franchise Tax Board. e-file for Business California now recognizes a decade of federal provisions it had previously ignored. Specific decouplings remain, including the NOL rules above.

SB 711 also aligned California with federal e-file requirements. Business entities that prepare their returns using tax preparation software must now file them electronically with the FTB, and that includes exempt organizations filing Form 109.4Franchise Tax Board. e-file for Business5Franchise Tax Board. 2025 Instructions for Form 109 Exempt Organization Business Income Tax Booklet

PTE Elective Tax Extended Through 2030

California’s pass-through entity elective tax, which was set to expire after the 2025 tax year, has been extended for five more years. It now covers taxable years beginning on or after January 1, 2026, and before January 1, 2031.6Franchise Tax Board. Tax News August 2025 Qualifying partnerships and S corporations elect to pay California income tax at the entity level, and the tax paid flows through to owners as a credit.

The federal payoff is the point. Under IRS Notice 2020-75, the entity-level payment is deductible by the partnership or S corporation in computing its non-separately stated income, and that deduction is not subject to the federal state and local tax deduction cap.7Internal Revenue Service. Notice 2020-75 Forthcoming Regulations Regarding the Deductibility of Payments by Partnerships and S Corporations for Certain State and Local Income Taxes Pass-through owners can effectively deduct their full California state income tax federally by routing it through the entity. The PTE credit is also excluded from California’s $5 million business credit cap, so making the election does not eat into your capacity to use other credits.8Franchise Tax Board. Pass-Through PTE Elective Tax

2025 Brackets and Standard Deduction

California taxes personal income across nine progressive brackets from 1% to 12.3%. For 2025 single filers:

  • 1%: up to $11,079
  • 2%: $11,079 to $26,264
  • 4%: $26,264 to $41,452
  • 6%: $41,452 to $57,542
  • 8%: $57,542 to $72,724
  • 9.3%: $72,724 to $371,479
  • 10.3%: $371,479 to $445,771
  • 11.3%: $445,771 to $742,953
  • 12.3%: above $742,953

Joint filers and heads of household use wider brackets; joint filers don’t reach 12.3% until taxable income exceeds $1,485,906.9Franchise Tax Board. 2025 California Tax Rate Schedules

The 2025 standard deduction is $5,706 for single filers and $11,412 for joint filers and heads of household, up from $5,540 and $11,080 for 2024.10Franchise Tax Board. 2025 Instructions for Form 540 California Resident Income Tax Return11Franchise Tax Board. Tax News October 2024

The 1% Behavioral Health Surcharge

The California Behavioral Health Services Act adds 1% on all taxable income above $1 million, pushing the effective top marginal rate to 13.3% regardless of filing status. This surcharge is included in the estimated tax calculation, so high earners who leave it out of quarterly payments can underpay without realizing it. You won’t owe an underpayment penalty if last year’s total tax liability was under $500 ($250 for married filing separately), or if you had no liability at all on a full 12-month prior-year return.12Franchise Tax Board. 2025 Instructions for Form FTB 5805F Underpayment of Estimated Tax by Individuals and Fiduciaries

Corporate Tax, the $800 Minimum, and the LLC Change

C-corporations pay a flat 8.84% on California income; banks and financial institutions pay 10.84%. Those rates have not changed.13Franchise Tax Board. Business Tax Rates

Most entities doing business in California owe the $800 annual minimum franchise tax, including corporations, LLCs, limited partnerships, and limited liability partnerships.14Franchise Tax Board. Corporations First-year treatment is where things recently shifted:

  • A corporation that incorporates or qualifies in California through the Secretary of State is exempt from the $800 in its first taxable year.15Franchise Tax Board. 2025 Instructions for Form 100 Corporation Tax Booklet
  • The parallel first-year exemption for LLCs expired on January 1, 2024. New LLCs now owe the $800 from their first taxable year.14Franchise Tax Board. Corporations

If you’re choosing an entity, that gap is now real: a new corporation gets a year before the minimum tax, a new LLC does not. LLCs with meaningful California revenue also owe a graduated fee on top of the $800, based on total California income:16Franchise Tax Board. FTB Publication 3556 Limited Liability Company Filing Information

  • $250,000 to $499,999: $900
  • $500,000 to $999,999: $2,500
  • $1,000,000 to $4,999,999: $6,000
  • $5,000,000 or more: $11,790

The fee is based on gross receipts, not net profit. A high-revenue, low-margin LLC can owe $12,590 before the state looks at taxable income.

“Doing Business” Thresholds for 2025

Whether California considers you to be doing business here, and therefore liable for the minimum franchise tax and filing obligations, depends on bright-line numbers that are adjusted every year. For 2025, you cross the line if any of the following is true:17Franchise Tax Board. Doing Business in California

  • California sales exceed $757,070
  • California property or payroll exceeds $75,707
  • Any of those factors is more than 25% of your total

Federal Public Law 86-272 can still shield out-of-state businesses from net income tax when their only California activity is soliciting orders for tangible goods shipped from outside the state. It does not cover services, digital products, licensing, or intangible property. A remote employee working from California generally creates taxable presence on its own, which catches out-of-state employers whose workers relocate without notifying the tax department.

Disaster Declarations and Extended Deadlines

State-declared disasters can automatically extend filing and payment deadlines. Taxpayers in Los Angeles County affected by the January 2025 wildfires received an extension to October 15, 2025, covering nearly all 2024 and 2025 tax obligations, including individual returns, quarterly estimated payments, business entity returns, LLC annual tax payments, and PTE elective tax payments.18Franchise Tax Board. Los Angeles County Fires19Franchise Tax Board. Disaster Declaration Tax Payments

If a disaster extension applies to you, the FTB asks that you submit separate payments for different tax years rather than combining them. Extensions apply only to taxpayers in the declared disaster area, and the FTB keeps the current list of active disaster declarations on its website.