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Tax Law

California Meets Budget Deadline, Passes Trailer Bill with Tax Increases

On June 15, 2020, the California Legislature passed SB 74, the state budget for the 2020-2021 fiscal year. The California Constitution requires a balanced budget to be finalized by June 15th of each year. SB 74 relies on additional federal aid to balance the budget and only invokes spending cuts if federal aid is not provided.

The Legislature also approved budget trailer bill AB 85, “State Taxes and Charges.” The bill includes two significant tax increases on business taxpayers, as proposed in Governor Newsom’s May Revise. AB 85 suspends use of net operating losses for business taxpayers with net business income of $1 million dollars or more during tax years 2020 to 2022. The bill also limits the amount of business tax credits that taxpayers can claim annually to $5 million dollars during the same period – tax years 2020 to 2022. The business tax credit cap applies to specific tax credits, including the Research Tax Credit, the California Competes Tax Credit, the Jobs Tax Credit, and the Motion Picture Tax Credits. AB 85 passed by the required two-thirds majority vote for tax increases, with a 27-11 vote in the Senate and a 55-21 vote in the Assembly.

Governor Newsom is expected to sign both the budget and the budget trailer bill into law. The Governor and the Legislature likely will continue negotiating and revising the budget in the coming months.