Amended by Stats. 1984, Ch. 193, Sec. 130.
In addition to the deductions provided in Article 1 (commencing with Section 24341), there shall be allowed as deductions in computing taxable income the items specified in this article.
Article 2 - Special Deductions
California Revenue and Taxation Code — §§ 24401-24416.24
Sections (21)
Amended by Stats. 2000, Ch. 862, Sec. 154. Effective January 1, 2001.
(a)A portion of the dividends received during the taxable year declared from income which has been included in the measure of the taxes imposed under Chapter 2 (commencing with Section 23101), Chapter 2.5 (commencing with Section 23400), or Chapter 3 (commencing with Section 23501) upon the taxpayer declaring the dividends.
(b)The portion of dividends which may be deducted under this section shall be as follows:
(1)In the case of any dividend described in subdivision (a), received from a “more than 50 percent owned corporation,” 100 percent.
(2)In the case of any dividend described in subdivision (a), received from a “20 percent owned corporation,” 80 percent.
(3)In the case of any dividend described in subdivision (a), received from a corporation that is less than 20 percent owned, 70 percent.
(c)For purposes of this section:
(1)The term “more than 50 percent owned corporation” means any corporation if more than 50 percent of the stock of that corporation (by vote and value) is owned by the taxpayer. For purposes of the preceding sentence, stock described in Section 1504(a)(4) of the Internal Revenue Code shall not be taken into account.
(2)The term “20 percent owned corporation” means any corporation if 20 percent or more of the stock of that corporation (by vote and value) is owned by the taxpayer. For purposes of the preceding sentence, stock described in Section 1504(a)(4) of the Internal Revenue Code shall not be taken into account.
(d)(1) No deduction shall be allowed under this section in respect of any dividend on any share of stock:
(A) which is held by the taxpayer for 45 days or less during the 90-day period beginning on the date which is 45 days before the date on which the share becomes ex-dividend with respect to that dividend, or
(B) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related
payments with respect to positions in substantially similar or related property.
(2)In the case of stock having preference in dividends, if the taxpayer receives dividends with respect to that stock which are attributable to a period or periods aggregating in excess of 366 days, subparagraph (A) of paragraph (1) shall be applied as follows:
(A)By substituting “90 days” for “45 days” in each place it appears.
(B)By substituting “180-day period” for “90-day period.”
(3)For purposes of this subdivision, in determining the period for which the taxpayer has held any share of stock:
(A)the day of disposition, but not the day of acquisition, shall be taken into account, and
(B)Section 1223(4) of the Internal Revenue Code shall not apply.
(4)Section 246(c)(4) of the Internal Revenue Code, relating to the holding period reduced for periods where risk of loss diminished, shall apply, except as otherwise provided.
(e)(1) The amendments made by the act adding this subdivision shall apply to dividends received or accrued after the 30th day after the date of the enactment of the act adding this subdivision.
(2)The amendments made by the act adding this subdivision shall not apply to dividends received or accrued during the two-year period beginning on the date of the enactment of the act adding this subdivision if:
(A)the dividend is paid
with respect to stock held by the taxpayer on January 1, 1998 and all times thereafter until the dividend is received,
(B)that stock is continuously subject to a position described in Section 246(c)(4) of the Internal Revenue Code on January 1, 1998, and all times thereafter until the dividend is received, and
(C)that stock and position are clearly identified in the taxpayer’s records within 30 days after the date of the enactment of the act adding this subdivision.
(3)Stock shall not be treated as meeting the requirement of subparagraph (B) of paragraph (2) if the position is sold, closed, or otherwise terminated and reestablished.
Added by Stats. 1955, Ch. 938.
In the case of a building and loan association, organized and operating wholly or partly on a mutual plan, or a federal savings and loan association, organized and operating wholly or partly on a mutual plan, the return paid or credited on or apportioned to their withdrawable shares.
Amended by Stats. 2000, Ch. 862, Sec. 155. Effective January 1, 2001.
In the case of farmers, fruit growers, or like associations organized and operated in whole or in part on a cooperative or mutual basis, (a) for the purpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, which may include reasonable reserves, on the basis of either the quantity or the value of the products furnished by them, or (b) for the purpose of purchasing, or producing, supplies and equipment for the use of
members or other persons, and turning over such supplies and equipment to them at actual cost, plus necessary expenses, all income resulting from or arising out of such business activities for or with their members carried on by them or their agents; or when done on a nonprofit basis for or with nonmembers.
For the purposes of this section “all income resulting from or arising out of such business activities for or with their members” shall include all amounts, whether or not derived from patronage, allocated to members during the taxable year. Amounts allocated include cash, merchandise, capital stock, revolving fund certificates, certificates of indebtedness, retain certificates, letters of advice, or written instruments which in some other manner disclose to each member the dollar amount allocated to him. Allocations made after the close of the taxable year and on or before the fifteenth day of the ninth month following the close of such year shall be considered
as made on the last day of such taxable year to the extent the allocations are attributable to income derived before the close of such year.
Amended by Stats. 1993, Ch. 1121, Sec. 2. Effective October 11, 1993.
(a)In the case of other associations organized and operated in whole or in part on a cooperative or a mutual basis, all income resulting from or arising out of business activities for or with their members carried on by them or their agents, or when done on a nonprofit basis for or with nonmembers, shall be an allowable deduction. However, the deduction allowable under this section shall not apply to those cooperative or mutual associations whose income is principally derived from the sale in the regular course of business of tangible
personal property other than water, agricultural products, or food sold at wholesale.
(b)For the purposes of subdivision (a), “food sold at wholesale” means a sale of food to anyone engaged in the business of selling food who holds a seller’s permit issued pursuant to Section 6066, and who at the time of purchasing the food either:
(1)Intends to sell it in the regular course of business.
(2)Is unable to ascertain at the time of purchase whether the food will be sold or used for some other purpose.
(c)For the purposes of subdivision (a), a credit union’s activities are “for or with” the members of the credit union if the activities involve the investment of surplus member savings capital in investments permitted for credit unions pursuant to
Sections 14406, 14652, 14653, 14653.5, 14654, 14655, and 14656 of the Financial Code. “Surplus member savings capital” means the savings capital of credit union members which is in excess of the amount of savings capital which is loaned to members of the credit union. The term “savings capital” shall have the meaning set forth in subdivision (a) of Section 14400 of the Financial Code.
(d)For purposes of subdivision (a), “income resulting from or arising out of business activities for or with their members” includes, but is not limited to, all income resulting from reciprocal transactions with member credit unions.
Added by Stats. 1961, Ch. 1934.
In the case of other associations organized and operated as co-operative corporations pursuant to Part 2 (commencing with Section 12200), Division 3, Title 1 of the Corporations Code, whose income is principally derived from the sale in the regular course of business of tangible personal property other than water, agricultural products or food sold at wholesale, all patronage refunds paid or accrued to patrons if the patronage refunds are made and allocated as follows:
(a)Made pursuant to a pre-existing obligation which is created by the association’s bylaws or
other written instrument.
(b)Made from earnings which are attributable to business done by the association with the patrons to whom the patronage refunds are made, and allocated ratably according to patronage.
(c)Allocated, and the patrons to whom the patronage refunds are to be made are notified of the allocation, on or before the due date for the filing of the association’s franchise tax return, including any extension of time, pursuant to this part, for the year in which the patronage occurred.
Added by Stats. 1989, Ch. 349, Sec. 3.
(a)In the case of gas producers’ cooperative associations organized and operated as cooperative corporations pursuant to Chapter 1 (commencing with Section 3001) of Part 4 of Division 1 of the Public Utilities Code, whose income is principally derived from the sale in the regular course of business of tangible personal property other than water, agricultural products or food sold at wholesale, all patronage refunds paid or accrued to patrons if the patronage refunds are made and allocated as follows:
(1)Made pursuant to
a preexisting obligation which is created by the association’s bylaws or other written instrument.
(2)Made from earnings which are attributable to business done by the association with the patrons to whom the patronage refunds are made, and allocated ratably according to patronage.
(3)Allocated, and the patrons to whom the patronage refunds are to be made are notified of the allocation, on or before the due date for the filing of the association’s franchise tax return, including any extension of time, pursuant to this part, for the year in which the patronage occurred.
(b)Each cooperative corporation shall certify to the Franchise Tax Board its eligibility for the deduction provided by this section. Certification shall be made at the time and in the manner prescribed by the Franchise Tax Board in forms or
instructions.
Added by Stats. 2005, Ch. 691, Sec. 65. Effective October 7, 2005.
For purposes of Section 24373.5, and Sections 24404 to 24406.5, inclusive, net earnings shall not be reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation, bylaws of the organization, or other contract with patrons provide that those dividends are in addition to amounts otherwise payable to patrons that are derived from business done for or with patrons during the taxable year.
Amended by Stats. 2005, Ch. 691, Sec. 66. Effective October 7, 2005.
(a)The organizational expenditures of a corporation may, at the election of the corporation (made in accordance with regulations prescribed by the Franchise Tax Board), be treated as deferred expenses. In computing net income, the deferred expenses remaining, if any, after the application of subdivision (b) shall be allowed as a deduction ratably over that period of not less than 180 months as may be selected by the corporation (beginning with the month in which the corporation begins business).
(b)(1) The corporation shall be allowed a deduction for the deferred expenses under subdivision (a) in an amount equal to the lesser of either of the following:
(A) The amount of organizational expenditures of the taxpayer that are treated as deferred expenses under subdivision (a).
(B) Five thousand dollars ($5,000), reduced, but not below zero, by an amount equal to the excess of the amount of the taxpayer’s organizational expenditures treated as deferred expenses under subdivision (a) over fifty thousand dollars ($50,000).
(2)The deduction under paragraph (1) shall be allowed in the taxable year in which the first month of the period specified in subdivision (a) occurs.
(c)The
amendments made to this section by the act adding this subdivision shall apply to amounts paid or incurred on or after January 1, 2005.
Amended by Stats. 1997, Ch. 605, Sec. 92. Effective January 1, 1998.
The term “organizational expenditures” means any expenditure that meets all of the following requirements:
(a)Is incident to the creation of the corporation.
(b)Is chargeable to capital account.
(c)Is of a character which, if expended incident to the creation of a corporation having a limited life, would be amortizable over that life.
Amended by Stats. 2000, Ch. 862, Sec. 156. Effective January 1, 2001.
The election provided by Section 24407 may be made for any taxable year beginning after December 31, 1960, but only if made not later than the time prescribed by law for filing the return for that taxable year (including extensions thereof). The period so elected shall be adhered to in computing the income of the corporation for the taxable year for which the election is made and all subsequent taxable years. The election shall apply only with respect to the expenditures paid or incurred on or after June 23, 1961.
Repealed and added by Stats. 2004, Ch. 868, Sec. 2. Effective September 29, 2004.
(a)For taxable years commencing on or after January 1, 2004, the allowable dividends received deduction with respect to qualified dividends received by a corporation during the taxable year from a corporation that is an insurer within the meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California, if at the time of each dividend payment at least 80 percent of each class of the stock of the insurer was owned, directly or indirectly, by the corporation receiving the
dividend shall equal the percentage specified in paragraph (1) of the amount of the qualified dividends received.
(1)For purposes of this subdivision, the percentage is equal to:
(A)Eighty percent for taxable years beginning on or after January 1, 2004, and before January 1, 2008.
(B)Eighty-five percent for taxable years beginning on or after January 1, 2008, and thereafter.
(b)(1) For all taxable years ending on or after December 1, 1997, and commencing before January 1, 2004, a taxpayer may elect to determine its deduction under this section for dividends received by the taxpayer (or the members of the taxpayer’s commonly controlled group, if any) during each taxable year from a corporation that is an insurer within the
meaning of Section 28 of Article XIII of the California Constitution, whether or not the insurer is engaged in business in California, in an amount equal to 80 percent of the qualified dividends received, if at the time of each dividend payment at least 80 percent of each class of stock of the insurer was owned, directly or indirectly, by the corporation receiving the dividend.
(2)A taxpayer shall make the election under this subdivision by timely filing a return for at least one taxable year ending on or after December 1, 1997, and commencing before January 1, 2004, expressly electing to be subject to the dividends received deduction in accordance with the percentage set forth in paragraph (1), and reporting and remitting any amounts due pursuant to that election.
(3)A return is timely filed for purposes of paragraph (2) if it is filed within 180 days of the effective date of
the act adding this section.
(4)By making the election pursuant to this subdivision, the taxpayer agrees to all of the following:
(A)To be subject to the dividends received deduction in accordance with the percentage set forth in paragraph (1) for all taxable years ending on or after December 1, 1997, and commencing before January 1, 2004, for which the Franchise Tax Board may propose an assessment or allow a claim for refund, or in which the final determination of tax for the taxable year has not been made because of a dispute related to the dividends received deduction or the application of Section 24425 to any expense related to that dividends received deduction.
(B)(i) Except as provided in clause (ii), to file a return (or amended return) and remit any amounts due pursuant to the
election for all taxable years ending on or after December 1, 1997, and commencing before January 1, 2004, for which the Franchise Tax Board may propose an assessment or allow a claim for refund, within 180 days of the effective date of the act adding this section.
(ii) In the case of a taxable year for which the due date of the return is more than 180 days after the effective date of the act adding this section, to file the return and remit any amounts due pursuant to the election under this subdivision on or before the due date of the return.
(5)For purposes of determining taxable income on the return (or amended returns) filed pursuant to the election set forth in paragraph (1), Section 24425 does not apply to the amount of the dividends received deduction.
(6)The election is irrevocable. With respect to
electing taxpayers, no refund, credit, or offset may be allowed for a deduction for dividends received from an insurance company in excess of the amounts allowed under this subdivision for taxable years ending on or after December 1, 1997, and beginning before January 1, 2004.
(c)For purposes of determining the allowable dividend received deduction under this section, a qualified dividend received during the taxable year means a dividend received by the taxpayer during the taxable year multiplied by the percentage prescribed under paragraph (1), (2), or (3) of this subdivision, as the case may be.
(1)If the ratio of the five-year average net written premiums for all insurance companies in a commonly controlled group to the five-year average total income for all insurance companies in the commonly controlled group for the taxable year is greater than or equal to the applicable
percentage, then the percentage under this subdivision shall be 100 percent.
(2)If the ratio of the five-year average net written premiums for all insurance companies in a commonly controlled group to the five-year average total income for all insurance companies in the commonly controlled group for the taxable year is less than the applicable percentage and greater than 10 percent, then the percentage under this subdivision shall be equal to the following fraction, expressed as a percentage:
(A)The numerator is the five-year average net written premiums for the taxable year.
(B)The denominator is the applicable percentage times the five-year average total income for that taxable year.
(3)If the ratio of the five-year average net written premiums
for all insurance companies in a commonly controlled group to the five-year average total income for all insurance companies in the commonly controlled group for the taxable year is equal to or less than 10 percent, the percentage under this subdivision shall be zero.
(4)For purposes of this subdivision:
(A)The “five-year average” means the aggregate net written premiums or total income, as the case may be, over the five immediately preceding calendar or fiscal years, divided by five. For purposes of this computation, if an insurance company in the commonly controlled group has been in existence for fewer than five years, its aggregate net written premiums and total income shall each be multiplied by five and divided by the number of years of its existence. If an insurance company does not have a regulatory filing requirement, the period covered shall be the fiscal year used for
the insurance company’s financial statements. The use of either the calendar year or fiscal year, as the case may be, for determination of the five-year average shall, for the first taxable year in which it is computed, be treated as an accounting method under this part and may thereafter only be changed with the written consent of the Franchise Tax Board.
(B)For taxable years beginning before January 1, 2008, the applicable percentage shall be 60 percent. For taxable years beginning on or after January 1, 2008, the applicable percentage shall be 70 percent.
(d)The following rules apply with respect to the application of this section to dividends received from an insurance company that insures risks of a member of the insurance company’s commonly controlled group.
(1)Notwithstanding paragraph (2), for purposes of
determining the amount of the deduction authorized by subdivisions (a) and (b), no deduction is allowed for dividends attributable to premiums received or accrued by the insurance company from a member of the insurance company’s commonly controlled group. For purposes of this paragraph, dividends attributable to premiums received or accrued from a member of a commonly controlled group is equal to total dividends received multiplied by the greater of either of the following:
(A)The ratio of net written premiums from a member of the insurance company’s commonly controlled group divided by total net written premiums.
(B)(i) For a property casualty insurer, the ratio of the underwriting risk associated with a member of the commonly controlled group’s insurance contracts to the insurance company’s total underwriting risks for all insurance contracts. The
underwriting risk is the underwriting risk reserves (losses plus expense risk-based capital after discount) as calculated using the “RBC Instructions.”
(ii) For a life insurer, the ratio of aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims held for policies issued to members of the insurance company’s commonly controlled group divided by total aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims.
(2)Net written premiums do not include premiums received or accrued from another member of the insurance company’s commonly controlled group. Premiums from another member of the commonly controlled group is the greater of either of the following:
(A)Net written premiums from a
member of the insurance company’s commonly controlled group.
(B)(i) For a property casualty insurer, the net written premiums received or accrued by the insurance company multiplied by the ratio of the underwriting risk associated with the member of the commonly controlled group’s insurance contracts to the insurance company’s total underwriting risks for all insurance contracts. The underwriting risk is the underwriting risk reserves (loss plus expense risk-based capital after discount) as calculated using the “RBC Instructions.”
(ii) For a life insurer, net written premiums received or accrued by the insurance company multiplied by the ratio of aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims held for policies issued to members of the insurance company’s commonly controlled group
divided by total aggregate reserves for life, accident, and health contracts plus liability for deposit type contracts plus contract claims.
(3)For purposes of this section, investment income shall be limited to that portion of investment income equal to the ratio of net written premiums (determined under paragraph (2)) to total net written premiums (determined without regard to paragraph (2)).
(4)For purposes of the limitations described in this subdivision, premiums received or accrued from a member of the insurance company’s commonly controlled group does not include premiums where the direct insurance risks ceded by affiliates and assumed by the insurance company originated with a person that is not a member of the insurance company’s commonly controlled group.
(e)For purposes of this section:
(1)“Net written premiums” means direct written premiums plus premiums from reinsurance assumed, less premiums ceded to a reinsurance company, as would be required to be reported in an insurer’s Statutory Annual Statement in accordance with the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners. Net written premiums from life insurance contracts shall be determined by multiplying the net written premiums received, assumed, or ceded by 1.3. Net written premiums from financial guaranty insurance contracts shall be determined by multiplying the net written premiums received, assumed, or ceded by the lesser of 2.3 or an amount that would cause the ratio of the five-year average net written premiums for all financial guaranty insurance companies in the commonly controlled group to the five-year average total income for all financial guaranty insurance companies
in the commonly controlled group to be equal to the applicable percentage. Paragraph (4) of subdivision (c) applies for purposes of the preceding sentence.
(A)“Direct written premiums” means amounts written by an insurance company in consideration for insurance and annuity contracts issued to policyholders.
(B)“Premiums from reinsurance assumed” means amounts received or accrued by an insurance company in consideration for liabilities it assumes from another insurance company.
(C)“Premiums ceded” means insurance premiums paid or accrued by an insurance company to a reinsurer to support the liabilities assumed by the reinsurer.
(2)“Total income” means net written premiums plus investment income.
(3)“Investment income” means an insurance company’s earnings from its investment portfolio, including interest, dividends, realized gains (or losses), and rent, as would be required to be reported in an insurer’s Statutory Annual Statement in accordance with the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners, except as otherwise provided.
(A)Except for reinsurance transactions, realized gains (or losses) do not include losses incurred in transactions with a person that is a member of the taxpayer’s or the insurance company’s commonly controlled group.
(B)Investment income does not include dividends from a person that is a member of the commonly controlled group. Intercompany dividends that have been eliminated from investment income as would be required to be reported
in the Statutory Annual Statement in accordance with the Annual Statement Instructions and Accounting Practices and Procedures Manual promulgated by the National Association of Insurance Commissioners shall not again be eliminated for this purpose.
(C)Investment income does not include income included in the taxpayer’s combined report filed in accordance with Chapter 17 (commencing with Section 25101) of this part.
(4)For taxable years beginning before January 1, 2004, the “RBC Instructions” as defined in Section 739 of the Insurance Code means the Risk Based Capital Instructions and Report as promulgated by the National Association of Insurance Commissioners, as it read on January 1, 2004. For taxable years beginning on or after January 1, 2004, the “RBC Instructions” as defined in Section 739 of the Insurance Code means the Risk Based Capital Instructions and Report as
promulgated by the National Association of Insurance Commissioners, or any substantially equivalent successor instructions and report, as it read on January 1 of the year in which the taxpayer’s taxable year begins.
(5)The phrase “commonly controlled group” shall have the same meaning as that phrase has under Section 25105.
(f)The Franchise Tax Board may prescribe those regulations that may be necessary to provide for the following:
(1)Establishment of a comparable weighting factor as described in paragraph 1 of subdivision (e) for new lines of insurance not described in the act adding this subdivision.
(2)For purposes of determining the applicable ratios described in subdivisions (c) and (d), the inclusion or exclusion of items of investment income
to eliminate the effects of devices designed to manipulate those ratios for purposes of avoiding the tax imposed under this part.
(3)For purposes of determining the applicable ratios described in subdivisions (c) and (d), the inclusion or exclusion of items of investment income to prevent distortion causing significant reduction in those ratios.
Amended by Stats. 1997, Ch. 605, Sec. 94. Effective January 1, 1998.
(a)For purposes of those taxpayers electing to compute income under Section 25110, 100 percent of the qualifying dividends described in subdivision (c) and 75 percent of other qualifying dividends to the extent not otherwise allowed as a deduction or eliminated from income. “Qualifying dividends” means those received by the water’s-edge group from corporations if both of the following conditions are satisfied:
(1)The average of the property, payroll, and sales factors
within the United States for the corporation is less than 20 percent.
(2)More than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by the water’s-edge group.
(b)The water’s-edge group consists of corporations whose income and apportionment factors are taken into account pursuant to Section 25110.
(c)Dividends derived from a construction project, the location of which is not subject to the taxpayer’s control.
For purposes of this subdivision:
(1)“Construction project” means any activity which meets the following requirements:
(A)Is undertaken for any entity, including a
governmental entity, which is not affiliated with the taxpayer.
(B)The majority of its cost of performance is attributable to an addition to real property or an alteration of land or any improvement thereto as those terms are utilized for purposes of this code.
“Construction project” does not include the operation, rental, leasing, or depletion of real property, land, or any improvement thereto.
(2)“Location of which is not subject to the taxpayer’s control” means that the place at which the majority of the construction takes place results from the nature or character of the construction project and not as a result of the terms of the contract or agreement governing the construction project.
Amended by Stats. 1993, Ch. 878, Sec. 17. Effective January 1, 1994.
(a)Section 195 of the Internal Revenue Code, relating to startup expenditures, shall apply, except as otherwise provided.
(b)References to Sections 163(a), 164, 165, and 174 of the Internal Revenue Code, relating to interest, taxes, losses, and research and experimental expenditures, are modified to refer to Sections 24344, 24345, 24347, and 24365, respectively.
Amended by Stats. 2000, Ch. 862, Sec. 158. Effective January 1, 2001.
(a)To the extent specified in subdivision (b), there shall be allowed as a deduction to a taxpayer those payments of the taxpayer which are made pursuant to an interindemnity arrangement specified in Section 1280.7 of the Insurance Code and which are paid to a trust of members of a cooperative corporation organized and operated under Part 2 (commencing with Section 12200) of Division 3 of Title 1 of the Corporations Code and the members of which consist solely of physicians and surgeons licensed in this state.
(b)The deduction authorized by subdivision (a) shall be taken with respect to the taxable year in which the payment is made and shall be taken only to the extent that the payment does not exceed the amount which would otherwise be payable to an independent insurance company for similar coverage for medical malpractice insurance in that taxable year. Any portion of the payment in excess of that amount shall be treated as a payment under the interindemnity arrangement for five succeeding taxable years and may be carried forward as a deduction to those five succeeding taxable years until used. The deduction shall be applied first to the earliest years possible.
(c)In the event any payment is refunded by the trust to the taxpayer for any reason, the payment shall be included in the taxpayer’s income for the taxable year in which it is received to the extent that the payment or any
portion thereof was taken as a deduction in any earlier taxable year.
(d)Any refund of a payment which is made by a trust to a taxpayer shall be reported by the trust to the Franchise Tax Board in the year in which the refund is made. The trust shall furnish the taxpayer with a copy of that report. In the case of any payment to be made to a taxpayer who is not a resident of the State of California in the year in which the refund is made, the Franchise Tax Board may, by regulation, require the trust to withhold an amount from the refund, determined by the Franchise Tax Board to reasonably represent the amount of tax due when that refund is included with other income of the taxpayer, and to transmit the amount withheld to the Franchise Tax Board at a time as it may designate.
(e)For purposes of this section:
(1)“Payment” means a contribution to or an assessment by an interindemnity arrangement described in Section 1280.7 of the Insurance Code.
(2)“Taxpayer” means a corporation whose shares are held by a physician and surgeon, or physicians and surgeons, licensed in this state which is a participating member in an interindemnity arrangement described in Section 1280.7 of the Insurance Code.
(3)“Trust” means a trust described in subdivision (a).
(f)Upon request, the trust shall submit to the Franchise Tax Board the names and membership dates of all participating corporations.
(g)The Franchise Tax Board shall prescribe those regulations as may be necessary to carry out the purposes of this section.
Amended by Stats. 2025, Ch. 231, Sec. 98. (SB 711) Effective October 1, 2025.
Except as provided in Sections 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7, a net operating loss deduction shall be allowed in computing net income under Section 24341 and shall be determined in accordance with Section 172 of the Internal Revenue Code, except as otherwise provided.
(a)(1) Net operating losses attributable to taxable years beginning before January 1, 1987, shall not be allowed.
(2)A net operating loss shall not be carried forward to any taxable year beginning before January 1, 1987.
(3)The amendments made by Section 13302(a)(1) of the Tax
Cuts and Jobs Act (Public Law 115-97) and Section 2303(a)(1) of the Coronavirus Aid, Relief, and Economic Security Act (Public Law 116-136) to Section 172(a) of the Internal Revenue Code, relating to the deduction allowed, shall not apply.
(b)(1) Except as provided in paragraphs (3) and (4), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to amount of carrybacks and carryovers, shall be modified so that the applicable percentage of the entire amount of the net operating loss for any taxable year shall be eligible for carryover to any subsequent taxable year. For purposes of this subdivision, the applicable percentage shall be:
(A) Fifty percent for any taxable year beginning before January 1, 2000.
(B) Fifty-five percent for any taxable year beginning on or after January 1, 2000, and before January 1, 2002.
(C) Sixty percent for any taxable year beginning on or after January 1, 2002, and before January 1, 2004.
(D) One hundred percent for any taxable year beginning on or after January 1, 2004.
(2)Section 172(b)(2)(C) of the Internal Revenue Code shall not apply.
(3)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates a new business during that taxable year, each of the following shall apply to each loss incurred
during the first three taxable years of operating the new business:
(A)If the net operating loss is equal to or less than the net loss from the new business, 100 percent of the net operating loss shall be carried forward as provided in subdivision (e).
(B)If the net operating loss is greater than the net loss from the new business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the new business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii) With respect to the portion of the net operating loss that exceeds the net loss from the new business, the
applicable percentage of that amount shall be carried forward as provided in subdivision (d).
(C) For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii) of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(4)In the case of a taxpayer who has a net operating loss in any taxable year beginning on or after January 1, 1994, and who operates an eligible small business during that taxable year, each of the following apply:
(A)If the net operating loss is equal to or less than the net loss from the eligible small business, 100 percent of the net operating loss shall be carried forward to the taxable years specified in paragraph
(1)of subdivision (e).
(B)If the net operating loss is greater than the net loss from the eligible small business, the net operating loss shall be carried over as follows:
(i)With respect to an amount equal to the net loss from the eligible small business, 100 percent of that amount shall be carried forward as provided in subdivision (e).
(ii) With respect to that portion of the net operating loss that exceeds the net loss from the eligible small business, the applicable percentage of that amount shall be carried forward as provided in subdivision (e).
(C) For purposes of Section 172(b)(2) of the Internal Revenue Code, the amount described in clause (ii)
of subparagraph (B) shall be absorbed before the amount described in clause (i) of subparagraph (B).
(5)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates a business that qualifies as both a new business and an eligible small business under this section, that business shall be treated as a new business for the first three taxable years of the new business.
(6)In the case of a taxpayer who has a net operating loss in a taxable year beginning on or after January 1, 1994, and who operates more than one business, and more than one of those businesses qualifies as either a new business or an eligible small business under this section, paragraph (2) shall be applied first, except that if there is
any remaining portion of the net operating loss after application of clause (i) of subparagraph (B) of paragraph (2), paragraph (3) shall be applied to the remaining portion of the net operating loss as though that remaining portion of the net operating loss constituted the entire net operating loss.
(7)For purposes of this section, “net loss” means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code.
(c)For any taxable year in which the taxpayer has in effect a water’s-edge election under Section 25110, the deduction of a net operating loss carryover shall be denied to the extent that the net operating loss carryover was determined by taking into account the income and factors of an affiliated corporation in a combined report whose
income and apportionment factors would not have been taken into account if a water’s-edge election under Section 25110 had been in effect for the taxable year in which the loss was incurred.
(d)Section 172(b)(1) of the Internal Revenue Code, relating to years to which the loss may be carried, is modified as follows:
(1)Net operating loss carrybacks shall not be allowed for any net operating losses attributable to taxable years beginning after December 31, 2018, and before January 1, 2013.
(2)A net operating loss attributable to taxable years beginning on or after January 1, 2013, and before January 1, 2019, shall be a net operating loss carryback to each of the two taxable years preceding the taxable year of the loss in
lieu of the number of years provided therein.
(A)For a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2014, the amount of carryback to any taxable year shall not exceed 50 percent of the net operating loss.
(B)For a net operating loss attributable to a taxable year beginning on or after January 1, 2014, and before January 1, 2015, the amount of carryback to any taxable year shall not exceed 75 percent of the net operating loss.
(C)For a net operating loss attributable to a taxable year beginning on or after January 1, 2015, and before January 1, 2019, the amount of carryback to any taxable year shall not exceed 100 percent of the net operating
loss.
(3)A net operating loss carryback shall not be carried back to any taxable year beginning before January 1, 2011.
(e)(1) (A) For a net operating loss for any taxable year beginning on or after January 1, 1987, and before January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code shall apply as it read on January 1, 2015, and is modified to substitute “five taxable years” in lieu of “20 years” except as otherwise provided in paragraphs (2), (3), and (4).
(B) For a net operating loss for any income year beginning on or after January 1, 2000, and before January 1, 2008, Section 172(b)(1)(A)(ii)(I) of the Internal Revenue Code is modified to substitute “10
taxable years” in lieu of “20 taxable years.”
(C) Section 172(b)(1)(A) of the Internal Revenue Code shall not apply.
(D) Section 172(b)(1)(D) of the Internal Revenue Code shall not apply.
(2)For any income year beginning before January 1, 2000, in the case of a “new business,” the “five taxable years” referred to in paragraph (1) shall be modified to read as follows:
(A)“Eight taxable years” for a net operating loss attributable to the first taxable year of that new business.
(B)“Seven taxable years” for a net operating loss attributable to the second taxable year of that new business.
(C)“Six taxable years” for a net operating loss attributable to the third taxable year of that new business.
(3)For any carryover of a net operating loss for which a deduction is denied by Section 24416.3, the carryover period specified in this subdivision shall be extended as follows:
(A)By one year for a net operating loss attributable to taxable years beginning in 1991.
(B)By two years for a net operating loss attributable to taxable years beginning prior to January 1, 1991.
(4)The net operating loss attributable to taxable years beginning on or after January 1, 1987, and before January 1, 1994,
shall be a net operating loss carryover to each of the 10 taxable years following the year of the loss if it is incurred by a corporation that was either of the following:
(A)Under the jurisdiction of the court in a Title 11 or similar case at any time prior to January 1, 1994. The loss carryover provided in the preceding sentence shall not apply to any loss incurred in an income year after the taxable year during which the corporation is no longer under the jurisdiction of the court in a Title 11 or similar case.
(B)In receipt of assets acquired in a transaction that qualifies as a tax-free reorganization under Section 368(a)(1)(G) of the Internal Revenue Code.
(f)For purposes of this section:
(1)“Eligible small business” means any trade or business that has gross receipts, less returns and allowances, of less than one million dollars ($1,000,000) during the income year.
(2)Except as provided in subdivision (g), “new business” means any trade or business activity that is first commenced in this state on or after January 1, 1994.
(3)“Title 11 or similar case” shall have the same meaning as in Section 368(a)(3) of the Internal Revenue Code.
(4)In the case of any trade or business activity conducted by a partnership or an “S” corporation, paragraphs (1) and (2) shall be applied to the partnership or “S” corporation.
(g)For purposes of this section, in determining whether a trade or business activity qualifies as a new business under paragraph (2) of subdivision (e), the following rules shall apply:
(1)In any case where a taxpayer purchases or otherwise acquires all or any portion of the assets of an existing trade or business (irrespective of the form of entity) that is doing business in this state (within the meaning of Section 23101), the trade or business thereafter conducted by the taxpayer (or any related person) shall not be treated as a new business if the aggregate fair market value of the acquired assets (including real, personal, tangible, and intangible property) used by the taxpayer (or any related person) in the conduct of its trade or business exceeds 20 percent of the aggregate fair market value of the total assets of the trade or business
being conducted by the taxpayer (or any related person). For purposes of this paragraph only, the following rules shall apply:
(A)The determination of the relative fair market values of the acquired assets and the total assets shall be made as of the last day of the first taxable year in which the taxpayer (or any related person) first uses any of the acquired trade or business assets in its business activity.
(B)Any acquired assets that constituted property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the transferor shall not be treated as assets acquired from an existing trade or business, unless those assets also constitute property described in Section 1221(a)(1) of the Internal Revenue Code in the hands of the acquiring taxpayer (or related
person).
(2)In any case where a taxpayer (or any related person) is engaged in one or more trade or business activities in this state, or has been engaged in one or more trade or business activities in this state within the preceding 36 months (“prior trade or business activity”), and thereafter commences an additional trade or business activity in this state, the additional trade or business activity shall only be treated as a new business if the additional trade or business activity is classified under a different division of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, than are any of the taxpayer’s (or any related person’s) current or prior trade or business activities.
(3)In a case in
which a taxpayer, including all related persons, is engaged in trade or business activities wholly outside of this state and the taxpayer first commences doing business in this state (within the meaning of Section 23101) after December 31, 1993 (other than by purchase or other acquisition described in paragraph (1)), the trade or business activity shall be treated as a new business under paragraph (2) of subdivision (e).
(4)In a case in which the legal form under which a trade or business activity is being conducted is changed, the change in form shall be disregarded and the determination of whether the trade or business activity is a new business shall be made by treating the taxpayer as having purchased or otherwise acquired all or any portion of the assets of an existing trade or business under the rules of paragraph (1).
(5)“Related person” shall mean any person that is related to the taxpayer under either Section 267 or 318 of the Internal Revenue Code.
(6)“Acquire” shall include any transfer, whether or not for consideration.
(7)(A) For taxable years beginning on or after January 1, 1997, the term “new business” shall include any taxpayer that is engaged in biopharmaceutical activities or other biotechnology activities that are described in Codes 2833 to 2836, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, and as further amended, and that has not received regulatory approval for any product from the Food and Drug
Administration.
(B)For purposes of this paragraph:
(i)“Biopharmaceutical activities” means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(ii) “Other biotechnology activities” means activities consisting of the application of recombinant DNA technology to produce commercial products, as well as activities regarding pharmaceutical delivery systems
designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(h)For purposes of corporations whose net income is determined under Chapter 17 (commencing with Section 25101), Section 25108 applies to each of the following:
(1)The amount of net operating loss incurred in any taxable year that may be carried forward to another taxable year.
(2)The amount of any loss carry forward that may be deducted in any taxable year.
(i)The Franchise Tax Board may prescribe appropriate regulations to carry out the purposes of this section, including any regulations necessary to prevent the avoidance of the purposes of this
section through splitups, shell corporations, partnerships, tiered ownership structures, or otherwise.
(j)The Franchise Tax Board may reclassify any net operating loss carryover determined under either paragraph (2) or (3) of subdivision (b) as a net operating loss carryover under paragraph (1) of subdivision (b) upon a showing that the reclassification is necessary to prevent evasion of the purposes of this section.
(k)Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 apply to net operating losses for taxable years beginning on or after January 1, 2000.
Amended by Stats. 2001, Ch. 623, Sec. 5. Effective October 9, 2001.
(a)A qualified taxpayer, as defined in Section 24416.2, 24416.4, 24416.5, 24416.6, or 24416.7, may elect to take the deduction provided by Section 172 of the Internal Revenue Code, relating to the net operating loss deduction, as modified by Section 24416, in computing net income under Section 24341, with the following exceptions to Section 24416:
(1)Subdivision (a) of Section 24416, relating to years in which allowable losses are sustained, shall not be applicable.
(2)Subdivision (b) of Section 24416, relating to the 50-percent reduction of losses, shall not be applicable.
(3)The provisions of subparagraphs (B) and (C) of Section 172 (b) (1) of the Internal Revenue Code shall not apply. To the extent applicable to California law, net operating losses attributable to entities with losses described by Section 172(b)(1)(J) shall be applied in accordance with Section 172(b)(1)(A) and (B) of the Internal Revenue Code.
(b)Corporations whose income is subject to the provisions of Section 25101 or 25101.15 shall make the computations required by Section 25108.
(c)The election to compute the net operating loss under this section shall be made in a statement attached to the original return, timely filed for the year in
which the net operating loss is incurred and shall be irrevocable. In addition to the exceptions specified in subdivision (a), Section 24416.2, 24416.4, 24416.5, 24416.6, or 24416.7, as appropriate, shall be applicable.
(d)Any carryover of a net operating loss sustained by a qualified taxpayer, as defined in subdivision (a) or (b) of Section 24416.2 as that section read immediately prior to January 1, 1997, shall, if previously elected, continue to be a deduction, as provided in subdivision (a), applied as if the provisions of subdivision (a) or (b) of Section 24416.2, as that section read prior to January 1, 1997, still applied.
Amended by Stats. 2019, Ch. 39, Sec. 25. (AB 91) Effective July 1, 2019.
(a)Notwithstanding Sections 24416, 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, and 24416.7 of this code and Section 172 of the Internal Revenue Code, no net operating loss deduction shall be allowed for any taxable year beginning on or after January 1, 2008, and before January 1, 2012.
(b)For any net operating loss or carryover of a net operating
loss for which a deduction is denied by subdivision (a), the carryover period under Section 172 of the Internal Revenue Code shall be extended as follows:
(1)By one year, for losses incurred in taxable years beginning on or after January 1, 2010, and before January 1, 2011.
(2)By two years, for losses incurred in taxable years beginning on or after January 1, 2009, and before January 1, 2010.
(3)By three years, for losses incurred in taxable years beginning on or after January 1, 2008, and before January 1, 2009.
(4)By four years, for losses incurred in taxable years beginning before January 1, 2008.
(c)Notwithstanding subdivision (a), a net operating loss deduction shall be allowed
for carryback of a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2019.
(d)The disallowance of any net operating loss deduction for any taxable year beginning on or after January 1, 2008, and before January 1, 2010, pursuant to subdivision (a) shall not apply to a taxpayer with income subject to tax under this part of less than five hundred thousand dollars ($500,000) for the taxable year.
(e)(1) The disallowance of any net operating loss deduction for any taxable year beginning on or after January 1, 2010, and before January 1, 2012, pursuant to subdivision (a) shall not apply to a taxpayer with preapportioned income of less than three hundred thousand dollars ($300,000) for the taxable year.
(2)For purposes of this
subdivision, “preapportioned income” means net income after state adjustments, before the application of the apportionment and allocation provisions of this part.
(3)For taxpayers that are required to be included in a combined report under Section 25101 or authorized to be included in a combined report under Section 25101.15, the amount prescribed in paragraph (1) shall apply to the aggregate amount of preapportioned income for all members included in a combined report.
(f)Notwithstanding subdivision (a), this section shall not apply to a taxpayer that ceased to do business or has a final taxable year ending prior to August 28, 2008, that sold or transferred substantially all of its assets resulting in a gain on sale during a taxable year ending prior to August 28, 2008, for which the gain could be offset with existing net operating loss deductions and the sale or transfer
occurred pursuant to a plan of reorganization under Chapter 11 of Title 11 of the United States Code. An amended tax return claiming net operating loss deductions allowed pursuant to this subdivision shall be treated as a timely filed original return.
(g)The Legislature finds and declares that the addition of subdivision (f) to this section by the act adding this subdivision fulfills a statewide public purpose by providing necessary tax relief for a taxpayer that ceased to do business or has a final taxable year ending prior to August 28, 2008, that sold or transferred substantially all of its assets resulting in a gain or sale during a taxable year prior to August 28, 2008, for which the gain could be offset with existing net operating loss deductions and the sale or transfer occurred pursuant to a plan of reorganization under Chapter 11 of Title 11 of the United States Code, in order to ensure that these taxpayers are not permanently denied
the net operating loss deduction.
Amended by Stats. 2019, Ch. 39, Sec. 26. (AB 91) Effective July 1, 2019.
Notwithstanding Section 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, or 24416.7 to the contrary, a net operating loss attributable to a taxable year beginning on or after January 1, 2008, shall be a net operating carryover to each of the 20 taxable years following the year of the loss, and a net operating loss attributable to a taxable year beginning on or after January 1, 2013, and before January 1, 2019, shall also be a net
operating loss carryback to each of the two taxable years preceding the taxable year of loss.
Amended by Stats. 2022, Ch. 3, Sec. 21. (SB 113) Effective February 9, 2022.
(a)Notwithstanding Sections 24416, 24416.1, 24416.4, 24416.7, and 24416.22, former Sections 24416.2, 24416.5, 24416.6, and 24416.20, and Section 172 of the Internal Revenue Code, a net operating loss deduction shall not be allowed for any taxable year beginning on or after January 1, 2020, and before January 1, 2022.
(b)For any net operating loss or carryover of a net operating loss for which a deduction is denied by subdivision (a), the carryover period under Section 172 of the Internal Revenue Code shall be extended as follows:
(1)By one year, for losses incurred in taxable years beginning on or after January 1, 2021, and before January 1, 2022.
(2)By two years, for losses incurred in taxable years beginning on or after January 1, 2020, and before January 1, 2021.
(3)By three years, for losses incurred in taxable years beginning before January 1, 2020.
(c)The disallowance of any net operating loss deduction for any taxable year beginning on or after January 1, 2020, and before January 1, 2022, pursuant to subdivision (a) shall not apply to a taxpayer with income subject to tax under this part of less than one million dollars ($1,000,000) for the taxable year.
(d)The amendments made to this section by the act adding this subdivision shall be operative for taxable years beginning on or after January 1, 2022.
Amended by Stats. 2024, Ch. 42, Sec. 13. (SB 175) Effective June 29, 2024.
(a)Notwithstanding Sections 24416, 24416.1, 24416.4, 24416.7, and 24416.22, former Sections 24416.2, 24416.5, 24416.6, and 24416.20, and Section 172 of the Internal Revenue Code, a net operating loss deduction shall not be allowed for any taxable year beginning on or after January 1, 2024, and before January 1, 2027.
(b)For any net operating loss or carryover of a net operating loss for which a deduction is denied by subdivision (a), the carryover period under Section 172 of the Internal Revenue Code shall be extended as follows:
(1)By one year, for losses incurred in taxable years beginning on or after January 1, 2025, and before January 1, 2026.
(2)By two years, for losses incurred in taxable years beginning on or after January 1, 2024, and before January 1, 2025.
(3)By three years, for losses incurred in taxable years beginning before January 1, 2024.
(c)The disallowance of any net operating loss deduction for any taxable year beginning on or after January 1, 2024, and before January 1, 2027, pursuant to subdivision (a) shall not apply to a taxpayer with income subject to tax under this part of less than one million dollars ($1,000,000) for the taxable year.
(d)(1) For taxable years beginning on or after January 1, 2025, and before January 1, 2026, this section shall not apply if, by May
14, 2025, the Director of Finance determines that General Fund money over the multiyear forecast is sufficient without the revenue impact of the net operating loss suspension and credit limitation, and pursuant to legislation in the annual Budget Act to not apply this section of law.
(2)For taxable years beginning on or after January 1, 2026, and before January 1, 2027, this section shall not apply if, by May 14, 2026, the Director of Finance determines that General Fund money over the multiyear forecast is sufficient without the revenue impact of the net operating loss suspension and credit limitation, and pursuant to legislation in the annual Budget Act to not apply this section of law.