Bill Would Give Businesses 20 Years to Write Off Losses

A bad year in business may not sting as bad under a proposal in the state Legislature to spread the pain over several years.

SB 1994 would allow corporations to write off net operating losses against their taxes for up to 20 years. Business interests hail the legislation as a way to help companies ride out the large swings in gains and losses that often occur during the lifetime of most businesses.

Critics contend, however, that the legislation could break the state budget.

The bill would put California in sync with what the federal government allows, but state tax officials fear revenue would drop by $2 million in the first year of the law and by $116 million in 2002. Since 1987, the state has allowed businesses to carry over 50% of their operating losses for up to 15 years, but budget shortfalls kept lawmakers from expanding the tax breaks. Even with a rosier state economy, many are wary.

“Twenty years is way too long to carry forward losses,” said Lenny Goldberg, legislative advocate for the liberal California Tax Reform Assn., which opposes the legislation. “If they want this form of tax relief, they ought to figure out another corporate revenue source to offset the loss.”

Proponents of the bill, which is awaiting action by the Senate Appropriations Committee, claim the existing system puts California at a competitive disadvantage.

The state’s agricultural and high-tech industries could be among the biggest benefactors of the proposed change, they say, with business cycles exceeding the artificial one-year tax cycle.

That’s because farmers and high-tech firms are often willing to take an earnings hit one year in order to invest heavily in research and development, positioning themselves to reap the fruits of their labor down the road.

“The vast majority of other states have conformity to net operating loss carry-over. We think this will make us more competitive,” said Fred Maine of the California Chamber of Commerce.

“Now, when the economy is strong and creating new jobs, it’s the perfect time to readjust tax laws,” he said.