If you run a corporation, you already know that tax planning rarely involves a one-size-fits-all approach. But in 2026, the disconnect between federal and state tax laws is particularly stark when it comes to Net Operating Losses (NOLs).
If your business took a financial hit recently, you are likely looking to your accumulated NOLs to offset current-year income and lower your tax bill. However, what the IRS allows and what the California Franchise Tax Board (FTB) permits are currently two very different things.
Here is what corporate taxpayers need to know about navigating the federal and California NOL landscape for the 2026 tax year.
The Federal Landscape: The 80% Cap Continues
At the federal level, we are still operating under the framework established by the Tax Cuts and Jobs Act (TCJA). For 2026, the rules are relatively stable, but they remain restrictive compared to pre-2018 standards.
- The 80% Limitation: Federal NOLs arising in tax years after 2017 can only offset a maximum of 80% of your current year’s taxable income. You cannot wipe your federal tax bill down to zero using these newer losses.
- No Small Business Exceptions: Unlike many other tax provisions that offer relief to smaller companies (like the gross-receipts test for cash accounting), the IRS offers no small business exception for the 80% NOL limit. It applies to all standard C-corporations, whether you make $500,000 or $500 million.
- Carryforwards vs. Carrybacks: You can carry your losses forward indefinitely. However, the ability to carry losses back to secure refunds for taxes paid in prior years is strictly prohibited for most businesses (with narrow exceptions for certain farming and non-life insurance companies).
The California Curveball: A Full Suspension (With a Silver Lining)
While the IRS limits your deduction, California has slammed the brakes entirely. Facing significant state budget deficits, California enacted Senate Bill 167 in 2024, which drastically changed the state tax outlook.
- The Deduction Suspension: For tax years 2024, 2025, and 2026, California has completely suspended the NOL deduction. If you are subject to this rule, you cannot use any NOLs to offset your 2026 California taxable income. (Because of this, the state is extending the 20-year carryforward period by the number of years your deduction is suspended).
- The $1 Million Small Business Lifeline: Here, tax planning becomes critical. The California legislature built in an exemption to prevent this suspension from crushing smaller operations. The NOL suspension does not apply if your business income subject to California taxation is less than $1,000,000. If your apportioned net income falls below that $1 million threshold, you are fully exempt from the suspension and can use your NOLs to offset 100% of your California taxable income.
At a Glance: 2026 Corporate NOL Rules
| Feature | Federal (IRS) | California (FTB) |
| 2026 NOL Limitation | Deduction limited to 80% of taxable income. | 100% suspended (no deduction allowed). |
| Small Business Exception | None. The 80% limit applies to all standard C-Corps. | Yes. Exempt if CA taxable income is under $1,000,000. |
| Carryforwards | Indefinite. | 20 years (extended for any years suspended). |
| Carrybacks | Not allowed (except for farming/insurance). | Not allowed. |
Strategic Takeaways for 2026
This massive divergence means proactive tax planning is non-negotiable this year.
If your California income is hovering near $1,000,000, strategic decisions about timing deductions, recognizing revenue, or evaluating your state apportionment factors could be the difference between paying full state taxes and wiping out your CA tax liability entirely.
Meanwhile, on the federal side, you must ensure you have the cash flow to cover taxes on at least 20% of your net income, regardless of how massive your accumulated losses might be.
Don’t navigate this alone. If you have questions about how these federal and state NOL limitations impact your specific corporate tax strategy, reach out to our team today to schedule a consultation.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Tax laws are complex and frequently changing. Always consult with a qualified CPA or tax professional regarding your specific financial situation before making tax-related decisions.
