California startups and high-income founders were hit hard when the Net Operating Loss (NOL) deduction was suspended under AB 85 during pandemic-era budgets. With 2025 underway, many are asking: Will California reinstate NOL usage, or will suspensions continue?
Let’s decode what’s happening, what to prepare for, and how to preserve your NOL carryforwards while staying compliant with FTB rules.
Background: What is the NOL Suspension?
California’s AB 85 (2020) suspended the use of Net Operating Losses for tax years 2020, 2021, and 2022, and again under SB 113, extended partial relief in 2023–24 for certain filers.
If your California taxable income exceeds $1 million, you could not apply NOL deductions in those years.
However, those disallowed NOLs were preserved for future years.
Current Status
As of now:
- The NOL suspension has expired for 2024 returns
- NOLs are once again allowed for 2025 (unless new legislation passes)
- The carryforward period is still valid:
- 20 years for most NOLs under CA RTC §24416
- 10 years for certain newer loss types (e.g. disaster losses)
That said, the CA Franchise Tax Board (FTB) continues to monitor state revenue closely, so a future reintroduction of the NOL cap is possible during budget cycles.
Who’s Affected?
- Startups with large R&D losses
- VC-backed C-Corps with delayed revenue models
- Founders paying CA Personal Income Tax (PIT) who had suspended NOLs in pass-throughs
- Tech businesses relying on NOLs to offset post-exit gains
Key Code References
| Item | Reference |
|---|---|
| CA NOL Suspension Law | AB 85, SB 113 |
| NOL Carryover Rule | CA Rev & Tax Code §24416 |
| Federal NOL Limit | IRC §172(a) (CA does not conform fully) |
| CA Form to Track NOL | Form 3805Q (Corp), Form 3805V (Indiv.) |
| Audit Notes | FTB NOL Tracker Worksheet |
Example: C-Corp with Prior-Year Losses
CloudVerse Inc., a San Jose-based AI firm, reported:
- 2020–2022 NOLs: $3.2M (suspended under AB 85)
- 2025 CA taxable income: $1.5M
, CloudVerse can now begin utilizing its suspended NOLs, assuming the suspension is not renewed. They file Form 100 and attach Form 3805Q to apply $1.5M of those losses.
If CA reinstates suspension for income >$1M in 2026, CloudVerse may again face NOL usage caps.
Step-by-Step Guide to NOL Recovery
- Identify Carryforward Amounts
Use prior Form 3805Q/3805V filings and Schedule P (100 or 540). - Confirm You’re Under Allowed Limits
As of 2025, there’s no suspension, but monitor for updates. - Attach NOL Statement
File Form 3805Q (Corp) or 3805V (Individual) with the current return. - Carryforward Remaining Amounts
Losses can be applied against future income up to 20 years. - Prepare for Future Changes
If CA revives suspensions in 2026+, ensure your records are NOL-compliant.
Conclusion
The temporary freeze on California NOLs may be over but the political winds can shift quickly. Startups and founders should resume using their NOLs while maintaining full compliance documentation for possible retroactive caps.
Call to Action
Want to unlock the full value of your startup’s NOLs or prep for possible future suspensions?
Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant in the U.S., admitted to practice before the IRS, and a cross-border tax expert serving California founders, SaaS startups, and venture-backed businesses.
Book a call now to review your CA NOL strategy
Disclaimer
This blog is for informational purposes only and does not constitute tax or legal advice. Laws may change. Please consult a qualified CPA to evaluate your specific tax situation. Content is accurate as of 2025.
FAQs
- Can I now use my 2020–2022 NOLs ?
Yes, the suspension has expired, and you can start applying carryforward losses. - Do I need to refile for suspended years?
No need to amend past returns just carry the losses forward per FTB instructions. - Are there PIT limits for individuals?
Yes. For years with suspensions, individuals with CA income >$1M had limited NOL usage. - What if CA reinstates NOL caps later?
Your unused carryforwards are still preserved but future use may be limited again. - Does CA conform to federal NOL rules under IRC §172?
No. CA has its own rules under §24416, and doesn’t allow indefinite carryforwards.
About Our CPA
Anshul Goyal, CPA EA FCA brings 10+ years of expertise helping California tech founders, AI startups, and venture-backed companies structure tax-smart strategies. He specializes in multi-state filings, federal & state-level credits, and audit-proofing complex returns.