Introduction: California NOL Suspension Overview
For business owners in Moreno Valley, Riverside, and across the Inland Empire, the California NOL suspension, a net operating loss suspension, is one of the most consequential state tax differences from federal law during the current filing and planning cycle. Federal rules may still allow an NOL deduction subject to limitations, while California can disallow the same deduction entirely for taxpayers above the exemption threshold. That mismatch affects projected taxable income, estimated payments, and carryover tracking.
California has suspended the net operating loss carryover deduction for taxable years beginning on or after January 1, 2024, and before January 1, 2027, according to FTB form instructions. Taxpayers may continue to compute and carry forward an NOL during the suspension period. Corporations with taxable income below $1,000,000, and individuals, estates, and trusts with net business income or modified adjusted gross income below $1,000,000, are not affected, nor are taxpayers with disaster loss carryovers. (FTB 2024 Form 3805Q Instructions; FTB 2025 Form 3805V Instructions)
⚠️ September 15, 2026 is 24 days away
S-Corp Form 1120-S and Partnership Form 1065 returns on extension are due for calendar-year filers, and Q3 federal plus CA estimated tax payments are due (1040-ES, 540-ES, 1120-W). Late-filing for 1120-S/1065 carries a $255-per-shareholder-per-month penalty under IRC §§6699 and 6698. (IRS Form 1120-S instructions)
Key Takeaways: California NOL Suspension
- California suspends the NOL carryover deduction for taxable years beginning on or after January 1, 2024, and before January 1, 2027. (FTB 2024 Form 3805Q Instructions)
- The suspension does not apply to corporations with taxable income below the $1,000,000 threshold or to individuals, estates, and trusts with net business income or modified AGI below the $1,000,000 threshold. (FTB 3805Q; FTB 3805V)
- Taxpayers with disaster loss carryovers are not affected by the suspension rules. (FTB 3805V)
- During the suspension period, taxpayers may continue to compute and carry forward an NOL. (FTB 3805Q)
- Carryover periods are extended: three years for losses from taxable years beginning before January 1, 2024; two years for losses from 2024; one year for losses from 2025. (FTB 3805Q)
- For corporate taxpayers, California references R&TC Section 24416.24 and FTB Legal Ruling 2011-04; for individuals, estates, and trusts, R&TC Section 17276.24 applies. (FTB 3805Q; FTB 3805V)
- A supporting CPA article notes the suspension could end early for 2025 and 2026 if California meets certain revenue goals and the annual budget includes legislation to skip the suspension. (Cambaliza McGee LLP)
If your California return has prior-year NOLs but the state is disallowing the deduction, your estimated tax picture may look very different from your federal picture. Adham Abadier, CPA can review your FTB 3805Q or 3805V schedules, your $1,000,000 threshold position, and your carryover extension calculations.
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What Is the California NOL Suspension for Tax Years 2024 Through 2026?
The California NOL suspension means that, during the covered years, the state does not allow taxpayers to deduct net operating loss carryovers against current-year income if the suspension rules apply. The FTB’s corporate form instructions state that for taxable years beginning on or after January 1, 2024, and before January 1, 2027, California has suspended the NOL carryover deduction. Corporations may continue to compute and carry over an NOL during the suspension period. (FTB 2024 Form 3805Q Instructions)
The individual, estate, and trust instructions use the same suspension window. Taxpayers may continue to compute and carry forward an NOL during the suspension period, but the carryover deduction is suspended unless an exception applies. (FTB 2025 Form 3805V Instructions)
Who Is Covered by the California NOL Suspension?
For corporations, the instructions to Form FTB 3805Q state that the NOL carryover deduction is suspended for the 2024, 2025, and 2026 taxable years if the corporation’s taxable income is $1,000,000 or more. Corporations with taxable income below the $1,000,000 threshold, or with disaster loss carryovers, are not affected. (FTB 3805Q)
For individuals, estates, and trusts, the instructions to Form FTB 3805V state that taxpayers with net business income or modified adjusted gross income below the $1,000,000 threshold, or with disaster loss carryovers, are not affected by the suspension rules. (FTB 3805V)
Statutory and Form References
The corporate instructions cite California Revenue and Taxation Code Section 24416.24 and Situation 1 of FTB Legal Ruling 2011-04 regarding application of an NOL suspension provision. The individual, estate, and trust instructions cite R&TC Section 17276.24 and the same legal ruling. A supporting article attributes the 2024-2026 suspension to Senate Bill 167. (FTB 3805Q; FTB 3805V; Cambaliza McGee LLP)
For official guidance, refer to the California Franchise Tax Board and the Internal Revenue Service.
Why the California NOL Suspension Creates Federal-State Differences
The federal and California NOL rules diverge in several respects. The FTB instructions state that the California NOL is generally figured the same way as the federal NOL, but carryover periods and amounts differ from federal allowances. (FTB 3805Q)
A supporting CPA article describes the federal landscape for 2026: federal NOLs arising in tax years after 2017 are limited to 80% of current-year taxable income, carryforwards are indefinite, and carrybacks are generally not allowed, with narrow exceptions for certain farming and non-life insurance companies. California’s rule differs because, for taxpayers subject to the suspension, the deduction is suspended rather than limited to a percentage. The same article notes that California does not follow the federal 80% limitation. (Eric Hunt CPA; Cambaliza McGee LLP)
Carrybacks and Carryover Periods in California
The FTB instructions state that for taxable years beginning on or after January 1, 2019, NOL carrybacks are not allowed. For NOLs incurred in taxable years beginning on or after January 1, 2008, California extended the carryover period from 10 taxable years to 20 taxable years following the year of the loss. (FTB 3805Q; FTB 3805V)
How the California NOL Suspension Affects Estimated Tax Planning
When the NOL carryover deduction is unavailable for California purposes, taxable income for state purposes can be higher than it would be if the deduction were allowed. That matters for quarterly estimated tax planning. The approaching September 15, 2026 date brings Q3 federal and CA estimated tax payments, along with extended S corporation and partnership returns. (IRS Form 1120-S instructions)
For calendar-year pass-through entities, the extended Form 1120-S or Form 1065 filing deadline is September 15, 2026. Late filing can trigger a $255-per-shareholder-per-month penalty under IRC §§6699 and 6698 for returns filed in 2026. (IRS Form 1120-S instructions)
A Planning Checklist Before September 15
- Identify every California NOL carryover layer. Separate each loss by the taxable year in which it was incurred, because the extension period depends on the loss-year beginning date. (FTB 3805Q)
- Determine whether the taxpayer is below the $1,000,000 threshold. For corporations, the relevant measure in the FTB instructions is taxable income. For individuals, estates, and trusts, the instructions refer to net business income or modified adjusted gross income. (FTB 3805Q; FTB 3805V)
- Check for disaster loss carryovers. Taxpayers with disaster loss carryovers are not affected by the suspension rules. (FTB 3805V)
- Apply the correct carryover extension. Use three additional years for losses from taxable years beginning before January 1, 2024; two additional years for losses from taxable years beginning on or after January 1, 2024 and before January 1, 2025; and one additional year for losses from taxable years beginning on or after January 1, 2025 and before January 1, 2026. (FTB 3805Q)
- Reconcile federal and California schedules. Federal NOL treatment may differ, so maintain separate federal and California workpapers rather than assuming the same deduction appears on both returns. (FTB 3805Q)
Accurate records also depend on clean general ledger detail and loss-year support. If prior-year loss documentation is scattered, catch-up bookkeeping can help organize loss-year income and expense detail before the schedules are finalized.
Example Using Only Supported Rules
Assume a corporation has a California NOL carryover from a taxable year beginning before January 1, 2024. Under the FTB instructions, the carryover period for that loss is extended by three years because the deduction is suspended for 2024 through 2026. If the corporation’s taxable income in a suspension year is $1,000,000 or more, the NOL carryover deduction is suspended for that year. If the corporation’s taxable income is below $1,000,000, the suspension rules do not affect the taxpayer. (FTB 3805Q)
Special Situations: S Corporations, Combined Groups, and Disaster Losses
S Corporations
The FTB corporate instructions state that an S corporation is allowed to carry over a loss incurred during a taxable year in which it has a valid S election in effect. The loss is separately calculated under pass-through rules and passed to shareholders in the year incurred, and it is taken into account in determining each shareholder’s NOL carryover, if any. If a corporation changes from C corporation to S corporation, a loss incurred while it was a C corporation may not offset income subject to the 1.5% S corporation tax, but C corporation losses may be applied against built-in gains subject to tax. (FTB 3805Q)
Combined Reporting Groups
For corporations that are members of a unitary group filing a single return, the instructions require intrastate apportionment and separate computation of the loss carryover for each corporation using its individual apportionment factors under R&TC Section 25108. A separate Form FTB 3805Q is completed for each taxpayer included in the combined report. Unlike federal consolidated treatment, a California loss carryover for one member in a combined report may not be applied to the income of another member. (FTB 3805Q)
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Disaster Loss Carryovers
Disaster losses receive separate treatment. The instructions state that any law that suspends, defers, reduces, or otherwise diminishes the deduction of an NOL shall not apply to an NOL attributable to specified disaster losses. For taxable years beginning on or after January 1, 2014, and before January 1, 2029, taxpayers may deduct a disaster loss for losses sustained in a California city, county, or city and county proclaimed by the Governor to be in a state of emergency. Presidential declarations continue to activate disaster loss provisions as well. (FTB 3805Q; FTB 3805V)
California NOL Suspension at a Glance
| Item | Rule Supported by FTB Instructions |
|---|---|
| Suspension period | Taxable years beginning on or after January 1, 2024, and before January 1, 2027. (FTB 3805Q) |
| Corporate threshold | Suspension applies if corporate taxable income is $1,000,000 or more; below the $1,000,000 threshold is not affected. (FTB 3805Q) |
| Individual/estate/trust threshold | Taxpayers with net business income or modified AGI below the $1,000,000 threshold are not affected. (FTB 3805V) |
| Disaster loss carryovers | Not affected by the suspension rules. (FTB 3805V) |
| Extension for pre-2024 losses | Three years for losses incurred in taxable years beginning before January 1, 2024. (FTB 3805Q) |
| Extension for 2024 losses | Two years for losses incurred in taxable years beginning on or after January 1, 2024, and before January 1, 2025. (FTB 3805Q) |
| Extension for 2025 losses | One year for losses incurred in taxable years beginning on or after January 1, 2025, and before January 1, 2026. (FTB 3805Q) |
| California carrybacks | Not allowed for NOLs incurred in taxable years beginning on or after January 1, 2019. (FTB 3805Q) |
| Possible early end | A supporting article states the suspension could end early for 2025 and 2026 if revenue goals are met and budget legislation skips the suspension. (Cambaliza McGee LLP) |
Mid-CTA: Review Your California NOL Suspension Position
If your California return includes prior-year NOLs, Catalyst CPA can reconcile federal and California schedules, confirm your $1,000,000 threshold position, and review carryover extensions before your next filing or estimated tax payment. Whether you need an S corporation tax return, partnership tax return, or individual business return, our California business CPA team can help with Inland Empire business tax, California tax planning, and compliance. Call (951) 223-1826.
Frequently Asked Questions
What is the California NOL suspension for 2024 through 2026?
The California NOL suspension suspends the NOL carryover deduction for taxable years beginning on or after January 1, 2024, and before January 1, 2027. Taxpayers may continue to compute and carry forward an NOL during the suspension period, but taxpayers above the $1,000,000 threshold cannot deduct the carryover unless another exception applies. (FTB 3805Q)
Does the suspension apply if taxable income is below the $1,000,000 threshold?
No. For corporations, taxpayers with taxable income below the $1,000,000 threshold are not affected by the suspension rules. For individuals, estates, and trusts, taxpayers with net business income or modified adjusted gross income below the $1,000,000 threshold are not affected. (FTB 3805Q; FTB 3805V)
Are disaster loss carryovers suspended?
No. The FTB instructions state that taxpayers with disaster loss carryovers are not affected by the NOL suspension rules. They also state that a law suspending or diminishing the NOL deduction does not apply to an NOL attributable to specified disaster losses. (FTB 3805V)
How long are suspended California NOL carryover periods extended?
The carryover period is extended by three years for losses incurred in taxable years beginning before January 1, 2024; two years for losses from taxable years beginning on or after January 1, 2024 and before January 1, 2025; and one year for losses from taxable years beginning on or after January 1, 2025 and before January 1, 2026. (FTB 3805Q)
Which FTB forms apply to the NOL computation?
Corporations use Form FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations — Corporations. Individuals, estates, and trusts use Form FTB 3805V, the corresponding form for those taxpayers. (FTB 3805Q; FTB 3805V)
Can California NOLs still be carried back?
No, for recent losses. The FTB instructions state that NOL carrybacks are not allowed for taxable years beginning on or after January 1, 2019. (FTB 3805Q)
Could the California NOL suspension end early for 2025 or 2026?
A supporting article states that the suspension could end early if California meets certain revenue goals and the annual budget includes legislation to skip the suspension for 2025 and 2026. The FTB form instructions in this article confirm the suspension period but do not state that an early-end event has occurred. (Cambaliza McGee LLP)
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Adham Abadier, CPA personally reviews your California NOL carryover layers, checks whether your taxable income or modified AGI falls under the $1,000,000 exception, identifies disaster loss issues, and outlines how the suspension affects your 2026 California estimates.
Final CTA: Plan Around the California NOL Suspension
Because the California NOL suspension affects 2024, 2025, and 2026 taxable years, taxpayers with prior-year losses should review their schedules before filing extended returns or making Q3 estimated payments. Catalyst CPA can be reached at (951) 223-1826 or adham@catalyst-cpa.com, and serves clients in Moreno Valley, Riverside, Corona, Eastvale, Murrieta, Temecula, Ontario, San Bernardino, Fontana, Orange County, the Inland Empire, and remotely nationwide.
For business tax return preparation and California tax planning, contact business tax return preparation or tax planning strategy.
Disclaimer
This article is for general information only and is not tax, legal, or accounting advice. Laws and guidance may change, and facts can vary. Consult Catalyst CPA or another qualified professional before acting.
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