Your Federal Loss Strategy May Not Work in CA

Many California taxpayers assume that if a loss reduces their federal tax bill, it will automatically reduce their California tax as well. Unfortunately, that assumption can lead to unpleasant surprises. California does not always follow federal rules when it comes to net operating losses (NOLs), and right now the gap between federal and state treatment is especially significant.

At the federal level, net operating losses are generally allowed to be carried forward and used to offset future taxable income, subject to certain limitations. For businesses and individuals who experienced losses in recent years, federal NOLs remain an important planning tool.

California, however, plays by different rules.

For tax years beginning in 2024 through 2026, California has suspended the use of NOL deductions for many taxpayers. While losses may still be calculated and carried forward, some higher-income taxpayers and larger businesses cannot currently use those losses to reduce their California taxable income. In other words, you may receive a federal tax benefit from your losses while still owing substantial California tax.

There are limited exceptions. Taxpayers with net business income or modified adjusted gross income under $1 million may still be able to use California NOLs, and certain disaster-related losses are treated differently. We talk about this in our January and February 2025 blog posts.

For everyone else, the deduction is essentially paused. To offset this suspension, California has extended the carryforward period for affected losses. Unfortunately, this does not help with near-term cash flow or estimated tax planning.

This mismatch creates several real-world problems. Businesses relying on federal projections may underpay California estimated taxes. Startups and professional practices expecting losses to shelter state income may find themselves unexpectedly exposed. In mergers or business sales, California loss carryforwards are often overvalued if this suspension is not considered.

The key takeaway is simple: federal tax planning does not equal California tax planning. Loss strategies that make perfect sense at the federal level can fail at the state level if they are not carefully reviewed through a California lens.

If you are carrying forward losses, anticipating losses, or relying on federal projections to plan cash flow, now is the time to reassess. Proper planning may involve adjusting estimates, reviewing eligibility for exceptions, or re-timing income and deductions where possible.

At Wilson Tax Law Group, APLC, we regularly help California businesses and individuals navigate these state-specific pitfalls before they turn into costly surprises. If you’re assuming your federal loss strategy will protect you in California, it’s worth getting a second look and/or legal opinion from a trusted tax attorney before the Franchise Tax Board does.

If you have any questions regarding your individual or businesses’ state and/or federal tax return(s)/tax liabilities or received a notice from the IRS, FTB, EDD, CDTFA or any other regulatory agency, please call or email Wilson Tax Law Group, APLC, to setup a consultation with our firm.

Wilson Tax Law Group, APLC is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group, APLC, is comprised of former IRS litigators & Special Agents, and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division, which at the time handled both civil tax lawsuits and criminal tax prosecutions on behalf of the United States of America.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Tel: (949) 397-2292 (Newport Beach Office) 

Tel: (714) 463-4430 (Yorba Linda Office)

Disclaimer: This blog post is for informational purposes only and does not constitute legal, tax or financial advice. Please consult with a qualified attorney, accountant or financial advisor for specific guidance related to your circumstances.