California NOL Carryback Rules, Suspension, and Carryforward

California does not allow a net operating loss carryback for losses arising after the 2018 tax year. The state’s old two-year carryback under Revenue and Taxation Code 17276(c) expired, and California never conformed to the federal CARES Act five-year carryback that covered 2018 through 2020 losses.1California Legislative Information. California Revenue and Taxation Code 17276 The one narrow exception is a disaster loss tied to a governor-proclaimed state of emergency, which you can elect to deduct against the immediately preceding tax year. For every other loss, your only option is to carry it forward, and even that deduction is suspended for most taxpayers through 2026.

Why There Is No Carryback for Current Losses

California used to permit a limited carryback. For losses in tax years 2013 through 2018, Revenue and Taxation Code 17276(c) allowed a two-year carryback with percentage caps that phased in: 50% for 2013 losses, 75% for 2014 losses, and 100% for losses from 2015 through 2018.2California Legislative Information. California Revenue and Taxation Code 17276 That window closed permanently for losses arising after 2018.

At the federal level, things moved in the opposite direction and then back again. The Tax Cuts and Jobs Act of 2017 eliminated most carrybacks going forward, and then the CARES Act of 2020 temporarily reinstated a five-year carryback for losses in 2018, 2019, and 2020.3Internal Revenue Service. Frequently Asked Questions About Carrybacks of NOLs for Taxpayers Who Have Had Section 965 Inclusions California refused to conform. Taxpayers who claimed a federal carryback during that period got nothing comparable on their California return.

The practical consequence: if you have a net operating loss in 2024, 2025, or 2026, you cannot apply it to a prior California tax year, even if you carried the same loss back federally. The mismatch catches people off guard, particularly those expecting the state refund to track the federal one. It doesn’t.

The Disaster Loss Exception

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

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

The FTB maintains a running list of qualifying events with specific disaster codes. Recent 2025 examples include the January 2025 fires and windstorm affecting Los Angeles County (Disaster Code 157) and the late December storms affecting six counties (Disaster Code 175).6Franchise Tax Board. List of California Disasters Qualifying disaster losses that cannot be fully absorbed in the year claimed carry over for 20 years.

If your loss doesn’t tie to a governor-proclaimed emergency, this exception doesn’t help you. An ordinary business downturn, a bad investment year, or a casualty outside a declared disaster area has to be carried forward like every other California NOL.

Carrying the Loss Forward Instead

Since carryforward is the only path for ordinary losses, the length of that carryforward matters. It depends on when the loss was generated:

  • Losses from 2008 and later: 20-year carryforward.
  • Losses from 2000 through 2007: 10-year carryforward.
  • Losses from 1987 through 1999: 5-year carryforward, with longer periods for new businesses during their first three years.2California Legislative Information. California Revenue and Taxation Code 17276

California does not conform to the federal rule allowing indefinite carryforwards for NOLs arising after 2017. A loss generated in 2026 gives you 20 years to absorb it on your California return, even though the same loss never expires federally. For large losses that take years to work through, that clock matters.

One area where California is more generous than federal law: the percentage of income the deduction can offset. Since 2004, California has allowed taxpayers to deduct 100% of their NOL carryforward against taxable income, while federal law caps post-2020 NOL deductions at 80% of taxable income.2California Legislative Information. California Revenue and Taxation Code 17276 NOL deductions are applied in the order generated, oldest first.

Because California does not allow a deduction for state income taxes and treats several other items differently, your California NOL amount will rarely match your federal NOL. Track them separately from the start. Nonresidents and part-year residents must also apportion the loss under Schedule R, following Revenue and Taxation Code Sections 25120 through 25141, so only the California-source portion becomes a California carryforward.7Franchise Tax Board. 2025 Instructions for Schedule R – Apportionment and Allocation of Income

The 2024–2026 Suspension Blocks Most Deductions

Even with a valid carryforward sitting on your books, you probably can’t use it right now. Senate Bill 167 suspended the NOL deduction entirely for tax years 2024 through 2026 for most taxpayers.8California Legislative Information. California AB-175 Taxation You can still compute and track the NOL during the suspension period, but you cannot deduct it until the suspension lifts.

The suspension does not apply to smaller taxpayers:

  • Corporations are exempt if income subject to tax is less than $1 million for the taxable year.
  • Individuals are exempt if either net business income or modified adjusted gross income is below $1 million for the taxable year.8California Legislative Information. California AB-175 Taxation

SB 167 also capped the total reduction in tax from business credits at $5 million per year during the same period. If your credits exceed the cap, you may make an irrevocable election to receive a refundable credit equal to 20% of the credits that would otherwise have been available.8California Legislative Information. California AB-175 Taxation

This isn’t new behavior. Assembly Bill 85 suspended NOL deductions for 2020 and 2021 for taxpayers with net business income over $1 million, before the 2022 portion was repealed early.9Franchise Tax Board. Net Operating Loss When California faces a budget shortfall, NOL deductions are among the first items suspended. Plan accordingly: a carryforward is an asset, but one the Legislature can freeze.

Forms and Documentation

Whether you are electing a disaster loss against the prior year or tracking a carryforward through the suspension, the forms depend on who you are:

Compute and file the NOL form every year, including suspension years. Skipping the computation now creates problems when you try to use the carryforward after the suspension ends.

Hang onto records. The FTB’s statute of limitations for issuing a Notice of Proposed Assessment is generally four years from the due date or filing date.12Franchise Tax Board. Keeping Your Tax Records But because NOL carryforwards last up to 20 years, retain the records supporting the original loss for the full carryforward period plus at least four years. If the FTB questions the deduction in year 15, you need the year-one documentation to defend it.

If the FTB Disallows Your Deduction

If the Franchise Tax Board denies your NOL deduction, you receive a Notice of Proposed Assessment explaining the adjustment and the tax owed. You have 60 days from the NPA date to file a written protest with supporting evidence: prior-year returns, financial statements, and business records showing the loss was genuine.13Franchise Tax Board. FTB 5821 – Publication Protest Procedures Miss the deadline and the assessment becomes final.

If the FTB upholds the denial, it issues a Notice of Action, and you can appeal to the Office of Tax Appeals. Once the OTA accepts the appeal, the FTB has 60 days to respond, and you have 30 days to reply.14Office of Tax Appeals. Briefing Process The taxpayer carries the burden of proof on factual issues by a preponderance of the evidence. Fraud is the only exception, where the FTB must prove intent to evade by clear and convincing evidence.

The safest posture through 2026 is simple: continue computing and tracking the NOL on the required forms, keep the records that prove it, and do not deduct it if your income exceeds the $1 million threshold. The carryforward is still yours when the suspension expires.