In June 2020, California lawmakers passed legislation that limited use of net operating losses (NOLs) for California taxpayers with net business income of $1 million or more for the tax years 2020, 2021, and 2022. In addition, the amount of business tax credits that could be used in a year to offset California tax was limited to $5 million for the same tax years. (See related Wilson Sonsini alert here.)

On February 9, 2022, California enacted 2022 CA SB 113 (SB 113), which shortens the previously enacted suspension on the use of NOLs and prior limits on the use of business tax credits, including the research and development (R&D) credit. Specifically, California income may generally be offset by California NOL carryforwards and business credits (including the research and development credit) may be utilized to reduce taxes payable in 2022.

SB 113 may have an immediate impact on the structure of some merger and acquisition (M&A) transactions by limiting the California tax liability that could result from the sale of assets. Under the revised rules, certain companies may be able to accommodate a buyer's request to acquire assets since California tax liability may be reduced or eliminated.