Proposition 24 repeals recent legislation that allows businesses to lower their tax liability. Three provisions of California tax law approved by the Legislature and the governor in 2008 and 2009 would be removed. Tax policies in these areas would return to what they were before recent law changes:
1. Businesses' Use of Financial Losses
A business that has more deductible expenses than income in a given year has a net operating loss (NOL) for that year. An NOL in one year can generally be used to reduce taxes in a subsequent profitable year. California legislation passed in 2008 would allow businesses for the first time in 2011 to use an NOL from one year to reduce California taxes for the two years before the NOL was generated. The 2008 legislation also extends the time period after a business generates an NOL when it can be used to reduce taxes from 10 years to 20 years. Proposition 24 would repeal these changes to California tax law.
2. Determination of Income of Multistate Businesses Taxed by California
A business that operates in more than one state currently determines its California tax liability by a formula that involves three factors: 1) the value of the business' properties in California compared to the value of its properties throughout the nation, 2) the value of the business' compensation to employees in California compared to its employees throughout the nation, and 3) the value of the business' sales in California compared to its sales throughout the nation. For most businesses the third factor counts the most.
2009 legislation made changes to this formula that will take effect in 2011. The new law will allow most multistate businesses to choose each year between two formulas to determine their California tax liability. Businesses will choose between 1) the three-factor formula currently used, or 2) a new formula based only on the portion of their overall national sales that are in California. A business would typically choose the formula that results in the smaller tax amount.
Proposition 24 would repeal the 2009 changes to California tax law, keeping in effect the current three-factor formula as the only option.
3. Ability of Businesses to Share Tax Credits
Under current California tax law, businesses that earn tax credits by doing certain things that the state wants to encourage may use that credit to reduce their state taxes. Businesses that are members of a group of businesses known as a "unitary group" are not currently permitted to share tax credits with other businesses within the group. A law approved by the Legislature and the Governor in 2008 would change the law so that in 2010 and later tax years a business could transfer unused tax credits to another business in the same unitary group. Proposition 24 would repeal the 2008 law, so that businesses would not be able to share tax credits.