For each taxable year beginning on or after January 1, 2020, and before January 1, 2022, and on or after January 1, 2024, and before January 1, 2027, the total business credits otherwise allowable for the taxable year may not reduce the taxes imposed by more than $5,000,000. (AB 85, signed into law June 29, 2020, as amended by SB 113, signed into law February 9, 2022; SB 167, signed June 27, 2024) In other words, SB 113 repealed the limitation for 2022 and SB 167 brings back the limitation for years 2025 and 2026.

The 2025/2026 $5 million limitation on business credits includes the Passthrough Entity Elective Tax Credit but does not apply to the credit for low-income housing.

Any credit otherwise allowable that is not allowed due to the limitation will remain a credit carryover amount. The carryover period for any credit that is not allowed due to the limitation will be increased by the number of taxable years the credit or any portion thereof was not allowed.

SB 175, signed June 29, 2024, allows a taxpayer to make an irrevocable election on a timely filed original return for the year in which the $5 million credit limitation applies to treat the suspended credit amount as a refundable credit that would be claimed equally over a 5-year period that starts in the third tax year after the year the election is made.