California NOL Rules: 2024–2026 Suspension and Carryforward

California’s net operating loss rules diverge from federal law in several meaningful ways, and the biggest divergence right now is a three-year suspension: for tax years beginning on or after January 1, 2024, and before January 1, 2027, taxpayers with $1 million or more of qualifying income cannot deduct NOL carryovers against California tax. Below that threshold, deductions continue as usual. California also caps carryforwards at 20 years, bars carrybacks for any loss attributable to a tax year beginning after 2018, and does not follow the federal 80% income limitation.

The 2024–2026 Suspension

Senate Bill 167, enacted on June 27, 2024, suspended California NOL deductions for tax years beginning on or after January 1, 2024, and before January 1, 2027. The suspension is codified in Revenue and Taxation Code Sections 17276.24 (personal income tax) and 24416.24 (corporate tax).¹ It is the second suspension in recent memory; the first, under Sections 17276.23 and 24416.23, blocked NOL deductions for 2020 and 2021.²

The same legislation capped business tax credits at $5 million per year for 2024 through 2026. For combined reporting groups, that $5 million cap applies to the entire group, not each member individually.

Who the Suspension Affects

The $1 million threshold is measured differently depending on filing type.

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

Taxpayers who don’t think of themselves as high-income can still get caught. A one-time asset sale, a large partnership K-1 distribution, or a rental portfolio with an unusually strong year can push modified adjusted gross income past $1 million, triggering the suspension for that single year.

Suspended Losses Still Carry Over

A loss blocked by the suspension doesn’t disappear. The statute extends the carryover period for any loss that could not be deducted during the suspended years, with the extension length depending on when the loss was originally incurred:

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

The same extension logic applied during the 2020–2021 suspension, so some taxpayers now carry losses whose expiration dates have been pushed out by both sets of rules.¹ A loss originally incurred in 2010 with a 20-year carryforward would normally expire after the 2030 tax year; combined extensions could push that out by as many as six additional years. Even while deductions are suspended, you must still compute the NOL and track the carryover. Losing the running balance during the suspension years can mean losing the benefit entirely when the suspension lifts.³

Possible Early Termination for 2025 or 2026

The suspension includes an off-ramp. If by May 14 of the relevant year, the Director of Finance determines that General Fund revenue is sufficient without the suspension’s revenue impact, and the annual Budget Act includes legislation to waive the suspension, it will not apply for that tax year.¹ Watch the May budget revisions each year rather than assuming the full three-year suspension is locked in.

Where California Breaks From Federal NOL Rules

California calculates net operating losses using broadly the same framework as the IRS, but several structural differences matter for anyone with both a federal and a California return.⁴

Carryforward duration. Federal law allows losses arising after 2017 to carry forward indefinitely. California caps the carryforward at 20 years for most losses incurred on or after January 1, 2008.⁵⁶
Carrybacks. Federal law still permits carrybacks for farming losses and certain insurance company losses. California eliminated all NOL carrybacks for losses attributable to tax years beginning after 2018.⁴
The 80% income limitation. At the federal level, NOL deductions arising after 2017 can offset only 80% of taxable income in any given year. California imposes no such cap. For losses incurred on or after January 1, 2004, the full 100% of the loss is eligible for carryover.⁷
Periodic suspensions. California has suspended NOL deductions twice in recent years for high-income taxpayers. No equivalent federal suspension exists.

The practical result is that a multistate business or an individual with both federal and California obligations often ends up with different NOL balances on each return. The California loss has to be tracked separately, and the available deduction in any given year may not match the federal figure.

Carryforward Period

For most California taxpayers, losses incurred on or after January 1, 2008, carry forward for 20 years.⁶ Older vintages had shorter windows: 10 years for losses incurred from 2000 through 2007, and 5 years for losses before 2000.⁷ Those older losses have largely expired unless their carryover periods were extended by the 2020–2021 or 2024–2026 suspensions.

Compared to the federal indefinite carryforward, California’s 20-year window creates real urgency. A business that stays unprofitable in California for a long stretch, or one that generates income in other states but not in California, can watch a large loss expire unused.

No Carrybacks for Losses After 2018

California briefly allowed two-year NOL carrybacks for losses incurred in tax years 2013 through 2018. That window is closed. For any loss attributable to a tax year beginning after December 31, 2018, carrybacks are not available.⁴ California never conformed to the CARES Act’s temporary five-year federal carryback for 2018, 2019, and 2020 losses either.⁵ If your business has a bad year in California, the only way to recover tax value from the loss is to earn enough future California-source income to use it against.

Special Categories: New Business and Eligible Small Business

California recognizes two NOL categories that historically received more favorable treatment.

A new business NOL comes from a trade or business first started in California on or after January 1, 1994. The category also includes biopharmaceutical and biotechnology companies, as well as taxpayers that have not yet received FDA regulatory approval for any product. The full loss is eligible for carryover, but only up to the net loss from that new business activity. Any excess carries over as a general NOL.³

An eligible small business NOL comes from a business with gross receipts (less returns and allowances) under $1 million during the tax year. As with new business losses, the full loss carries over, but only to the extent of the net loss from the eligible small business activity.³

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

Forms and Records

California requires specific forms to compute and track NOL deductions. Individuals, estates, and trusts use Form FTB 3805V (Net Operating Loss Computation and NOL and Disaster Loss Limitations).⁶ Corporations use Form FTB 3805Q. Both must be attached to the annual California return (Form 540 for individuals, Form 100 for C corporations, Form 100S for S corporations). Corporations filing combined reports must complete a separate Form FTB 3805Q for each member included in the combined report.³

Completing the forms requires knowing the original loss amount from the year it was incurred, the amount used in every intervening year, and any adjustments from suspension periods. If you have losses from both the 2020–2021 and 2024–2026 suspension windows, the extended carryover calculations layer on top of each other. A dedicated schedule that logs each loss vintage, its original expiration date, and any extensions is far more reliable than reconstructing the history from old returns at filing time.

Keep records supporting any deduction until the statute of limitations expires for the return on which the deduction is claimed.⁸ For an NOL carryforward, that means holding the original loss-year return and supporting documentation through the last year the carryforward could possibly be used, plus the audit window. With California’s 20-year carryforward, possible suspension extensions, and the Franchise Tax Board’s four-year statute of limitations, you could be retaining records for 27 years or more from the year a loss was incurred. Digital copies are fine, provided they remain accessible.

Planning Points During the Suspension

A few considerations are worth flagging while the suspension is active. Taxpayers with income near the $1 million threshold have reason to time income recognition and deductions carefully. Deferring a capital gain or accelerating a deductible expense into a year where income is already below $1 million can preserve access to the NOL deduction for that year.

The disaster loss exception is a genuine carve-out. If any portion of your NOL carryforward originated from a Governor-declared disaster, that portion remains deductible even during the suspension period.⁴ Given the frequency of wildfire and flood declarations in California, this exception reaches more taxpayers than you might expect.

And again: even during suspended years, compute the NOL and track the carryover. The loss does not disappear. It simply cannot be deducted yet.³

1
California Legislative Information. California Revenue and Taxation Code 17276.24
2
California Legislative Information. California Revenue and Taxation Code 17276.23
3
Franchise Tax Board. 2024 Instructions for Form FTB 3805Q
4
Franchise Tax Board. Net Operating Loss
5
Office of the Law Revision Counsel. 26 USC 172 – Net Operating Loss Deduction
6
Franchise Tax Board. 2024 Instructions for Form FTB 3805V
7
California Legislative Information. California Revenue and Taxation Code 24416
8
Internal Revenue Service. How Long Should I Keep Records