Today, the California Legislature is scheduled to vote on a budget deal that could raise over $1.4 billion in new taxes for the 2026–27 fiscal year. There are two competing versions of the tax proposals included in the budget deal (AB/SB 122 vs. AB/SB 176), and at this stage it is unclear which will pass.
Both proposals would, if enacted:
- Impose sales and use taxes on purchases of digitally delivered prewritten software, which includes software as a service (SaaS; products such as Slack, Zoom, tax software, etc.), effective January 1, 2027;
- Reduce the annual tax imposed on new LLCs, limited partnerships, and limited liability partnerships from $800 to $400, but only for their first year of operation for the 2027 through 2029 tax years; and
- Impose a 100% tax on any settlement fund payments received by taxpayers during the 2026 through 2029 tax years from any anti-weaponization settlement fund established by the federal Department of Justice.
Both bills would also make permanent the $5 million cap on business credits, currently scheduled to expire at the end of the 2026 tax year, but in different forms:
- AB/SB 176 would enact a new permanent business credit cap equal to the greater of $5 million or 50% of the total taxes imposed, effective beginning with the 2027 tax year; and
- AB/SB 122 would, in contrast, extend the current $5 million business credit cap (without a percentage-based limit) through the 2029 tax year, and then impose a permanent business credit cap equal to the greater of $5 million or 70% of the total taxes imposed, beginning with the 2030 tax year.
Neither bill would extend the current NOL suspension. This means the NOL suspension continues to be scheduled to expire at the end of the 2026 tax year.
Not included in the budget deal is Governor Newsom’s proposal to conform to the federal tax treatment of Trump accounts. However, this may still be included in subsequent legislation.
Under the California Constitution, the Legislature must pass the budget by midnight tonight.
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