BILL NUMBER: AB 1511AMENDED BILL TEXT AMENDED IN SENATE AUGUST 20, 2010 AMENDED IN SENATE JULY 15, 2010 AMENDED IN ASSEMBLY APRIL 29, 2009 AMENDED IN ASSEMBLY APRIL 14, 2009 INTRODUCED BY Assembly Member De Leon FEBRUARY 27, 2009 An act to amend Sections 17276, 17276.9, 24416, and24416.924416.9, and 25128 of, to add Sections 17276.11, 17276.12, 17276.13, 23663.1, 24416.11, 24416.12, 24416.13, and 25128.7 to, and to repeal Sections 17276.10, 23663, 24416.10, and 25128.5 of, the Revenue and Taxation Code, relating to taxation, to take effect immediately, tax levy. LEGISLATIVE COUNSEL'S DIGEST AB 1511, as amended, De Leon. Income taxes: net operating losses: credit sharing: single sales factor. Existing law allows individual and corporate taxpayers to utilize net operating losses and carryovers and carrybacks of those losses for purposes of offsetting their individual and corporate tax liabilities. Existing law, for net operating losses incurred in taxable years beginning on or after January 1, 2008, provides a carryover period of 20 years and allows net operating losses attributable to taxable years beginning on or after January 1, 2011, to be carrybacks to each of the preceding 2 taxable years. Existing law disallows the deduction for net operating losses and net operating loss carryovers in the 2008 and 2009 taxable years for a taxpayer with business income of $500,000 or more and extends the carryover period for those net operating losses, thus allowing the taxpayer to have the same number of years to utilize the deduction as it would have had if the disallowance for 2008 and 2009 had not occurred. This bill would disallow the use of net operating loss carrybacks by individual and corporate taxpayers. This bill would also extend the disallowance of the netoperationoperating loss deduction and carryovers, and the carryover extension, to the 2010 and 2011 taxable years. The Corporation Tax Law, for taxable years beginning on or after January 1, 2008, allows a credit to be assigned to an eligible assignee, as defined, for use by that assignee in a taxable year beginning on or after January 1, 2010. This bill would delay the use of the assigned credit by an eligible assignee to taxable years beginning on or after January 1, 2012. The Corporation Tax Law imposes taxes measured by income and, in the case of a business with income derived from or attributable to sources both within and without this state, apportions the business income between this state and other states and foreign countries in accordance with a specified 4-factor formula based on the property, payroll, and sales within and without this state, except that in the case of an apportioning trade or business that derives more than 50% of its gross business receipts from conducting one or more qualified business activities, as defined, business income is apportioned in accordance with a specified 3-factor formula. Existing law, for taxable years beginning on or after January 1, 2011, allows a taxpayer required to apportion its business income in accordance with the 4-factor formula to make an annual election to have that business income apportioned in accordance with a single sales factor formula. This bill would eliminate the authorization for specified taxpayers to elect to have business income apportioned in accordance with a single sales factor formula and instead require those taxpayers to apportion their business income in accordance with a single sales factor formula for taxable years beginning on or after January 1, 2012.UnderVarious provisions under the Personal Income Tax Law and the Corporation Tax Law, various provisions ofconform to the federal Internal Revenue Code, including provisions relating to net operating losses, in the Revenue and Taxation Code, Chapter 14 of the Statutes of 2010 would change that specified date to January 1, 2010, for taxable years beginning on or after that datethat were chaptered by Chapter 14 of the Statutes of 2010 and apply to taxable years beginning on or after January 1, 2010 . This bill would add provisions relating to net operating losses that would conform to the provisions in Chapter 14 of the Statutes of 2010, as provided. This bill would result in a change in state taxes for the purpose of increasing state revenues within the meaning of Section 3 of Article XIII A of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature. This bill would take effect immediately as a tax levy. Vote: 2/3. Appropriation: no. Fiscal committee: yes. State-mandated local program: no. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 17276 of the Revenue and Taxation Code is amended to read: 17276. Except as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7, the deduction provided by Section 172 of the Internal Revenue Code, relating to a net operating loss deduction, shall be modified as follows: (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. (b) (1) Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to the amount of 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) 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 (d). (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 (d). (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). (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 an eligible small business during that taxable year, each of the following shall 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 subdivision (d). (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 (d). (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 (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 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. (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 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 that paragraph, 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. (6) For purposes of this section, the term "net loss" means the amount of net loss after application of Sections 465 and 469 of the Internal Revenue Code. (c) Net operating loss carrybacks shall not be allowed. (d) (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, relating to years to which net operating losses may be carried, is modified to substitute "five taxable years" in lieu of "20 taxable years" except as otherwise provided in paragraphs (2) and (3). (B) For a net operating loss for any taxable year beginning on or after January 1, 2000, Section 172(b)(1)(A)(ii) of the Internal Revenue Code, relating to years to which net operating losses may be carried, is modified to substitute "10 taxable years" in lieu of "20 taxable years." (2) For any taxable year beginning before January 1, 2000, in the case of a "new business," the "five taxable years" 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 17276.3, 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 taxpayer that is under the jurisdiction of the court in a Title 11 or similar case at any time during the income year. The loss carryover provided in the preceding sentence shall not apply to any loss incurred after the date the taxpayer is no longer under the jurisdiction of the court in a Title 11 or similar case. (e) 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 taxable year. (2) Except as provided in subdivision (f), "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 "S" corporation paragraphs (1) and (2) shall be applied to the partnership or "S" corporation. (f) 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(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(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 any case where 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 any case where 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) of this subdivision. (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 gift, inheritance, transfer incident to divorce, or any other 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 United States 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. (g) In computing the modifications under Section 172(d)(2) of the Internal Revenue Code, relating to capital gains and losses of taxpayers other than corporations, the exclusion provided by Section 18152.5 shall not be allowed. (h) Notwithstanding any provisions of this section to the contrary, a deduction shall be allowed to a "qualified taxpayer" as provided in Sections 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7. (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 shall apply to net operating losses for taxable years beginning on or after January 1, 2000. SEC. 2. Section 17276.9 of the Revenue and Taxation Code is amended to read: 17276.9. (a) Notwithstanding Sections 17276, 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, and 17276.7 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, 2010. (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, 2008, and before January 1, 2009. (2) By two years, for losses incurred in taxable years beginning before January 1, 2008. (c) The provisions of this section shall not apply to a taxpayer with net business income of less than five hundred thousand dollars ($500,000) for the taxable year. For purposes of this subdivision, business income means: (1) Income from a trade or business, whether conducted by the taxpayer or by a passthrough entity owned directly or indirectly by the taxpayer. For purposes of this paragraph, the term "passthrough entity" means a partnership or an "S" corporation. (2) Income from rental activity. (3) Income attributable to a farming business. SEC. 3. Section 17276.10 of the Revenue and Taxation Code is repealed. SEC. 4. Section 17276.11 is added to the Revenue and Taxation Code, to read: 17276.11. (a) Notwithstanding Sections 17276, 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, 17276.7, and 17276.9 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, 2010, 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 two years, for a total of four years pursuant to Section 17276.9 and this section, for losses incurred in taxable years beginning before January 1, 2008. (2) By one year, for a total of three years pursuant to Section 17276.9 and this section, for losses incurred in taxable years beginning on or after January 1, 2008, and before January 1, 2009. (3) By two years, for losses incurred in taxable years beginning on or after January 1, 2009, and before January 1, 2010. (4) By one year, for losses incurred in taxable years beginning on or after January 1, 2010, and before January 1, 2011. (c) The provisions of this section shall not apply to a taxpayer with net business income of less than five hundred thousand dollars ($500,000) for the taxable year. For purposes of this subdivision, business income means: (1) Income from a trade or business, whether conducted by the taxpayer or by a passthrough entity owned directly or indirectly by the taxpayer. For purposes of this paragraph, the term "passthrough entity" means a partnership or an "S" corporation. (2) Income from rental activity. (3) Income attributable to a farming business. SEC. 5. Section 17276.12 is added to the Revenue and Taxation Code, to read: 17276.12. Notwithstanding Section 17276, 17276.1, 17276.2, 17276.4, 17276.5, 17276.6, or 17276.7 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. SEC. 6. Section 17276.13 is added to the Revenue and Taxation Code, to read: 17276.13. (a) Notwithstanding any other law, in addition to the modifications made by Section 17276, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified for the purposes of this part as follows: (1) Section 172(b)(1)(J) of the Internal Revenue Code, relating to certain losses attributable to federally declared disasters, shall not apply. (2) Section 172(j) of the Internal Revenue Code, relating to rules relating to qualified disaster losses, shall not apply. (b) This section shall apply to taxable years beginning on or after January 1, 2010. SEC. 7. Section 23663 of the Revenue and Taxation Code is repealed. SEC. 8. Section 23663.1 is added to the Revenue and Taxation Code, to read: 23663.1. (a) (1) Notwithstanding any other law to the contrary, for each taxable year beginning on or after July 1, 2008, any credit allowed to a taxpayer under this chapter that is an "eligiblecreditcredit" (within the meaning of paragraph (2) of subdivision (b)) may be assigned by that taxpayer to any "eligible assignee" (within the meaning of paragraph (3) of subdivision (b)). (2) A credit assigned under paragraph (1) or under former Section 23663 may only be applied by the eligible assignee against the "tax" of the eligible assignee in a taxable year beginning on or after January 1, 2012. (3) Except as specifically provided in this section, following an assignment of any eligible credit under this section, the eligible assignee shall be treated as if it originally earned the assigned credit. (b) For purposes of this section, the following definitions shall apply: (1) "Affiliated corporation" means a corporation that is a member of a commonly controlled group as defined in Section 25105. (2) "Eligible credit" shall mean: (A) Any credit earned by the taxpayer in a taxable year beginning on or after July 1, 2008, or (B) Any credit earned in any taxable year beginning before July 1, 2008, that is eligible to be carried forward to the taxpayer's first taxable year beginning on or after July 1, 2008, under the provisions of this part. (3) "Eligible assignee" shall mean any affiliated corporation that is properly treated as a member of the same combined reporting group pursuant to Section 25101 or 25110 as the taxpayer assigning the eligible credit as of: (A) In the case of credits earned in taxable years beginning before July 1, 2008: (i) June 30, 2008, and (ii) The last day of the taxable year of the assigning taxpayer in which the eligible credit is assigned. (B) In the case of credits earned in taxable years beginning on or after July 1, 2008. (i) The last day of the first taxable year in which the credit was allowed to the taxpayer, and (ii) The last day of the taxable year of the assigning taxpayer in which the eligible credit is assigned. (c) (1) The election to assign any credit under subdivision (a) shall be irrevocable once made, and shall be made by the taxpayer allowed that credit on its original return for the taxable year in which the assignment is made. (2) The taxpayer assigning any credit under this section shall reduce the amount of its unused credit by the face amount of any credit assigned under this section, and the amount of the assigned credit shall not be available for application against the assigning taxpayer's "tax" in any taxable year, nor shall it thereafter be included in the amount of any credit carryover of the assigning taxpayer. (3) The eligible assignee of any credit under this section may apply all or any portion of the assigned credits against the "tax" (as defined in Section 23036) of the eligible assignee for the taxable year in which the assignment occurs, or any subsequent taxable year, subject to any carryover period limitations that apply to the assigned credit and also subject to the limitation in paragraph (2) of subdivision (a). (4) In no case may the eligible assignee sell, otherwise transfer, or thereafter assign the assigned credit to any other taxpayer. (d) (1) No consideration shall be required to be paid by the eligible assignee to the assigning taxpayer for assignment of any credit under this section. (2) In the event that any consideration is paid by the eligible assignee to the assigning taxpayer for the transfer of an eligible credit under this section, then: (A) No deduction shall be allowed to the eligible assignee under this part with respect to any amounts so paid, and (B) No amounts so received by the assigning taxpayer shall be includable in gross income under this part. (e) (1) The Franchise Tax Board shall specify the form and manner in which the election required under this section shall be made, as well as any necessary information that shall be required to be provided by the taxpayer assigning the credit to the eligible assignee. (2) Any taxpayer who assigns any credit under this section shall report any information, in the form and manner specified by the Franchise Tax Board, necessary to substantiate any credit assigned under this section and verify the assignment and subsequent application of any assigned credit. (3) Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code shall not apply to any standard, criterion, procedure, determination, rule, notice, or guideline established or issued by the Franchise Tax Board pursuant to paragraphs (1) and (2). (4) The Franchise Tax Board may issue any regulations necessary to implement the purposes of this section, including any regulations necessary to specify the treatment of any assignment that does not comply with the requirements of this section, including, for example, where the taxpayer and eligible assignee are not properly treated as members of the same combined reporting group on any of the dates specified in paragraph (3) of subdivision (b). (f) (1) The taxpayer and the eligible assignee shall be jointly and severally liable for any tax, addition to tax, or penalty that results from the disallowance, in whole or in part, of any eligible credit assigned under this section. (2) Nothing in this section shall limit the authority of the Franchise Tax Board to audit either the assigning taxpayer or the eligible assignee with respect to any eligible credit assigned under this section. (g) Any credit assigned under former Section 23663 that was assigned prior to the effective date of the repeal of Section 23663 shall be treated as if made under this section and shall be subject to the limitations of this section, including the limitation of the application of an assigned credit to taxable years beginning on or after January 1, 2012.(g)(h) On or before June 30, 2015, the Franchise Tax Board shall report to the Joint Legislative Budget Committee, the Legislative Analyst, and the relevant policy committees of both houses of the Legislature on the effects of this section. The report shall include, but need not be limited to, the following: (1) An estimate of use of credits in the 2012 and 2013 taxable years by eligible taxpayers. (2) An analysis of effect of this section on expanding business activity in the state related to these credits. (3) An estimate of the resulting tax revenue loss to the state. (4) The report shall cover all credits covered in this section, but focus on the credits related to research and development, economic incentive areas, andlow incomelow-income housing. SEC. 9. Section 24416 of the Revenue and Taxation Code is amended to read: 24416. 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. (b) (1) Except as provided in paragraphs (2) and (3), the provisions of Section 172(b)(2) of the Internal Revenue Code, relating to the amount of 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) 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). (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 an eligible small business during that taxable year, each of the following shall 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). (4) 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. (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 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. (6) 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) Net operating loss carrybacks shall not be allowed. (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, relating to years to which net operating losses may be carried, 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, Section 172(b)(1)(A)(ii) of the Internal Revenue Code, relating to years to which net operating losses may be carried, is modified to substitute "10 taxable years" in lieu of "20 taxable years." (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(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(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 any case where 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 any case where 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) of this subdivision. (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 United States 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 shall apply 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 provisions of Section 172(b)(1)(D) of the Internal Revenue Code, relating to bad debt losses of commercial banks, shall not be applicable. (j) 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. (k) 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. ( l ) Except as otherwise provided, the amendments made by Chapter 107 of the Statutes of 2000 shall apply to net operating losses for taxable years beginning on or after January 1, 2000. SEC. 10. Section 24416.9 of the Revenue and Taxation Code is amended to read: 24416.9. (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, 2010. (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, 2008, and before January 1, 2009. (2) By two years, for losses incurred in taxable years beginning before January 1, 2008. (c) The provisions of this section 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. SEC. 11. Section 24416.10 of the Revenue and Taxation Code is repealed. SEC. 12. Section 24416.11 is added to the Revenue and Taxation Code, to read: 24416.11. (a) Notwithstanding Sections 24416, 24416.1, 24416.2, 24416.4, 24416.5, 24416.6, 24416.7, and 24416.9 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, 2010, 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 two years, for a total of four years pursuant to Section 24416.9 and this section, for losses incurred in taxable years beginning before January 1, 2008. (2) By two years, for a total of three years pursuant to Section 24416.9 and this section, for losses incurred in taxable years beginning on or after January 1, 2008, and before January 1, 2009. (3) By two years, for losses incurred in taxable years beginning on or after January 1, 2009, and before January 1, 2010. (4) By one year, for losses incurred in taxable years beginning on or after January 1, 2010, and before January 1, 2011. (c) The provisions of this section 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. SEC. 13. Section 24416.12 is added to the Revenue and Taxation Code, to read: 24416.12. Notwithstanding Section 24416, 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. SEC. 14. Section 24416.13 is added to the Revenue and Taxation Code, to read: 24416.13. (a) Notwithstanding any other law, in addition to the modifications made by Section 24416, the deduction provided by Section 172 of the Internal Revenue Code, relating to net operating loss deduction, shall be modified for the purposes of this part as follows: (1) Section 172(b)(1)(J) of the Internal Revenue Code, relating to certain losses attributable to federally declared disasters, shall not apply. (2) Section 172(j) of the Internal Revenue Code, relating to rules relating to qualified disaster losses, shall not apply. (b) This section shallappearapply to taxable years beginning on or after January 1, 2010. SEC. 15. Section 25128 of the Revenue and Taxation Code is amended to read: 25128. (a) Notwithstanding Section 38006, all business income shall be apportioned to this state by multiplying the business income by a fraction, the numerator of which is the property factor plus the payroll factor plus twice the sales factor, and the denominator of which is four, except as provided in subdivision (b) or (c). (b) If an apportioning trade or business derives more than 50 percent of its "gross business receipts" from conducting one or more qualified business activities, all business income of the apportioning trade or business shall be apportioned to this state by multiplying business income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three. (c) For purposes of this section, a "qualified business activity" means the following: (1) An agricultural business activity. (2) An extractive business activity. (3) A savings and loan activity. (4) A banking or financial business activity. (d) For purposes of this section: (1) "Gross business receipts" means gross receipts described in subdivision (e) or (f) of Section 25120 (other than gross receipts from sales or other transactions within an apportioning trade or business between members of a group of corporations whose income and apportionment factors are required to be included in a combined report under Section 25101, limited, if applicable, by Section 25110), whether or not the receipts are excluded from the sales factor by operation of Section 25137. (2) "Agricultural business activity" means activities relating to any stock, dairy, poultry, fruit, furbearing animal, or truck farm, plantation, ranch, nursery, or range. "Agricultural business activity" also includes activities relating to cultivating the soil or raising or harvesting any agricultural or horticultural commodity, including, but not limited to, the raising, shearing, feeding, caring for, training, or management of animals on a farm as well as the handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated. (3) "Extractive business activity" means activities relating to the production, refining, or processing of oil, natural gas, or mineral ore. (4) "Savings and loan activity" means any activities performed by savings and loan associations or savings banks which have been chartered by federal or state law. (5) "Banking or financial business activity" means activities attributable to dealings in money or moneyed capital in substantial competition with the business of national banks. (6) "Apportioning trade or business" means a distinct trade or business whose business income is required to be apportioned under Sections 25101 and 25120, limited, if applicable, by Section 25110, using the same denominator for each of the applicable payroll, property, and sales factors. (7) Paragraph (4) of subdivision (c) shall apply only if the Franchise Tax Board adopts the Proposed Multistate Tax Commission Formula for the Uniform Apportionment of Net Income from Financial Institutions, or its substantial equivalent, and shall become operative upon the same operative date as the adopted formula. (8) In any case where the income and apportionment factors of two or more savings associations or corporations are required to be included in a combined report under Section 25101, limited, if applicable, by Section 25110, both of the following shall apply: (A) The application of the more than 50 percent test of subdivision (b) shall be made with respect to the "gross business receipts" of the entire apportioning trade or business of the group. (B) The entire business income of the group shall be apportioned in accordance with either subdivision (a) or (b), or subdivision (b) of Section25128.525128.7 , as applicable.SEC. 15.SEC. 16. Section 25128.5 of the Revenue and Taxation Code is repealed.SEC. 16.SEC. 17. Section 25128.7 is added to the Revenue and Taxation Code, to read: 25128.7. (a) Notwithstanding Section 38006, for taxable years beginning on or after January 1, 2012, any apportioning trade or business, other than an apportioning trade or business described in subdivision (b) of Section 25128, shall apportion its business income in accordance with this section, and not in accordance with Section 25128. (b) Notwithstanding Section 38006, for taxable years beginning on or after January 1, 2012, all business income of an apportioning trade or business described in subdivision (a) shall be apportioned to this state by multiplying the business income by the sales factor. (c) The Franchise Tax Board is authorized to issue regulations necessary or appropriate regarding the administration of this section. (d) This section shall become operative on January 1, 2012.SEC. 17.SEC. 18. This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.