2022 Instructions for Form FTB 3809 Targeted Tax Area Business Booklet

References in these instructions are to the Internal Revenue Code (IRC) as of January 1, 2015, and to the California Revenue and Taxation Code (R&TC).

what’s New

Repeal of Credit Limitation – For the 2022 taxable year, the credit limitation has been repealed. For more information, see California Revenue and Taxation Code (R&TC) Sections 17039.3 and 23036.3 or get Schedule P (100, 100W, 540, 540NR, or 541), Alternative Minimum Tax and Credit Limitations, and Form 100S, S Corporation Tax Booklet.

Repeal of Net Operating Loss Suspension – For the 2022 taxable year, the net operating loss suspension has been repealed. For more information, see R&TC Sections 17276.23 and 24416.23 and get form FTB 3805V, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Individuals, Estates and Trusts or FTB 3805Q, Net Operating Loss (NOL) Computation and NOL and Disaster Loss Limitations – Corporations.

Principal Business Activity Codes – The Principal Business Activity (PBA) codes based on the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget have been updated in 2022.

For more information, see instructions for Standard Industrial Classification (SIC) and Principal Business Activity (PBA) Codes below.

General Information

In general, for taxable years beginning on or after January 1, 2015, California law conforms to the Internal Revenue Code (IRC) as of January 1, 2015. However, there are continuing differences between California and federal law. When California conforms to federal tax law changes, we do not always adopt all of the changes made at the federal level. For more information, go to ftb.ca.gov and search for conformity. Additional information can be found in FTB Pub. 1001, Supplemental Guidelines to California Adjustments, the instructions for California Schedule CA (540), California Adjustments – Residents, or Schedule CA (540NR), California Adjustments – Nonresidents or Part-Year Residents, and the Business Entity tax booklets.

The instructions provided with California tax forms are a summary of California tax law and are only intended to aid taxpayers in preparing their state income tax returns. We include information that is most useful to the greatest number of taxpayers in the limited space available. It is not possible to include all requirements of the R&TC in the instructions. Taxpayers should not consider the instructions as authoritative law.

Targeted Tax Area (TTA) Credits Carryover Period

The portion of any TTA sales or use tax credit or hiring credit remaining for carryover to taxable years beginning on or after January 1, 2014, shall be carried over only to the succeeding 10 taxable years if necessary, or until the credit is exhausted, whichever occurs first. Any hiring credits generated for employees hired on or before December 31, 2012, may be carried over to the succeeding 10 taxable years.

Repeal of Geographically Targeted Economic Development Area Tax Incentives

The California Legislature repealed and made changes to all of the Geographically Targeted Economic Development Area Tax Incentives. Enterprise Zones (EZ) and Local Agency Military Base Recovery Areas (LAMBRA) were repealed on January 1, 2014. The Targeted Tax Areas (TTA) and Manufacturing Enhancement Areas (MEA) both expired on December 31, 2012. For more information, get the applicable Economic Development Area (EDA) booklet.

Single-Sales Factor Formula

R&TC Section 25128.7 requires all business income of an apportioning trade or business, other than an apportioning trade or business under R&TC Section 25128(b), to apportion its business income to California using the single-sales factor formula. For more information, get Schedule R, Apportionment and Allocation of Income, or go to ftb.ca.gov and search for single sales factor. However, business income apportioned to the TTA continues to be apportioned based on the property and payroll factors.

Expired TTA

The TTA has expired as of December 31, 2012. Generally, no further TTA incentives can be generated after the expiration date. See below for a discussion on how each incentive expired:

• TTA Hiring Credit – Taxpayers can no longer generate/incur TTA hiring credits for employees hired on or after January 1, 2013. Taxpayers can claim the hiring credit carryover from prior years.
• TTA Sales or Use Tax Credit – For taxpayers engaged in a trade or business in an expired TTA, the sales or use tax credit is not available for assets purchased and/or placed in service on or after January 1, 2013. Taxpayers can claim the sales or use tax credit carryover from prior years.
• TTA NOL Carryover Deduction – Taxpayers can no longer generate/incur any TTA NOL for taxable years beginning on or after January 1, 2013. Taxpayers can claim an NOL carryover deduction from prior years.

Assignment of Credit

Credit earned by members of a combined reporting group may be assigned to an affiliated corporation that is an eligible member of the same combined reporting group. A credit assigned may only be claimed by the affiliated corporation against its tax liability.

For more information, see instructions for Schedule Z, Computation of Credit Carryover Limitations, Assignment of Credit, or get form FTB 3544, Assignment of Credit, or go to ftb.ca.gov and search for credit assignment.

Important: Affiliated corporations that received credits assigned under R&TC Section 23663, do not include the assigned credits received on this worksheet. Those credits are entered and tracked on form FTB 3544, Part B, List of Assigned Credit Received and/or Claimed by Assignee.

Pass-Through Entities

For purposes of this booklet, the term “pass-through entity” refers to an S corporation, estate, trust, partnership and limited liability company (LLC). References to “partnerships” include LLCs classified as partnerships.

Introduction

Economic Development Area (EDA) Tax Incentives

California established four types of EDAs that had related tax incentives. These incentives were established to stimulate growth and development in selected areas that were economically depressed. EDA tax incentives applied only to certain business transactions that were undertaken after an EDA had received final designation from the California Department of Housing and Community Development (HCD). Final designation was when the HCD designated an area to be an EDA. Tax incentives were available to individuals and businesses that operated or invested within the geographic boundaries of the following EDAs:

• Enterprise Zones (repealed on January 1, 2014)
• Local Agency Military Base Recovery Areas (repealed on January 1, 2014)
• Manufacturing Enhancement Areas (designation expired on December 31, 2012)
• Targeted Tax Areas (designation expired on December 31, 2012)

Additional information on other EDAs can be found in the following Franchise Tax Board (FTB) tax booklets:

• The EZ tax incentives, FTB 3805Z, Enterprise Zone Business Booklet.
• The LAMBRA tax incentives, FTB 3807, Local Agency Military Base Recovery Area Business Booklet.
• The MEA hiring credit, FTB 3808, Manufacturing Enhancement Area Business Booklet.

References in this booklet to the "TTA" are interpreted as "the boundaries of the former TTA as it existed on December 31, 2012."

Reporting Requirement

California statutes require the FTB to provide information to the California Legislature regarding the number of businesses using the EDA tax incentives, types of EDA tax incentives being used, and the EDAs in which the businesses are claiming the tax incentives.

Complete items A through H on Side 1 of form FTB 3809, Targeted Tax Area Deduction and Credit Summary, as applicable. This information will be used to meet the FTB’s statutory reporting requirement.

Purpose

This booklet provides specific information on the types of available former TTA tax incentives. Taxpayers operating or investing in a business located within a designated former TTA may be eligible for the following credit carryover and carryover deduction:

• Hiring credit carryover
• Sales or use tax credit carryover
• NOL carryover deduction

Use this booklet to determine the correct amount of credit carryovers and deductions that a business may claim for operating or investing in a business located within a designated former TTA. Complete the worksheets in this booklet for each credit carryover and deduction for which the business is eligible. Then enter the total credits and deductions on form FTB 3809.

Former Targeted Tax Area Designation

California established the TTA program to stimulate development in a selected economically depressed area of Tulare County. The program offered special tax incentives to entities and individuals located in the Tulare TTA and engaged in a trade or business within the selected Standard Industrial Codes.

All of the incorporated cities in Tulare County and portions of the unincorporated areas of Tulare County received final designation as the TTA effective November 1, 1998. The designation was binding for 15 years, commencing from January 1, 1998. Note: The TTA designation expired on December 31, 2012. The incorporated cities in Tulare County are:

• Cutler-Orosi
• Dinuba
• Earliment
• Exeter
• Farmersville
• Goshen
• Lindsay
• Pixley
• Porterville
• Traver
• Tulare
• Visalia
• Woodlake

For business eligibility or zone related information contact the HCD or the local zone program manager where the business is located. Go to hcd.ca.gov and search for enterprise zone.

For information that is zone-specific, but not tax-specific, you may contact the HCD. See HCD contact information.

Who Can Claim the Former TTA Tax Incentives?

The TTA hiring credit carryover, sales or use tax credit carryover, and NOL carryover deductions are available to individuals, sole proprietors, corporations, estates, trusts, and partnerships operating or investing in a business located within the designated former TTA.

How to Claim Deductions and Credit Carryovers

To claim any TTA NOL carryover deduction or credit carryover, attach a completed form FTB 3809 to your California tax return.

Attach a separate form FTB 3809 for each business you operate or invest in that is located within the former TTA. Also, complete the following schedule and/or worksheets to report credit carryovers and deductions incurred:

• Corporations: Complete Schedule Z and all the worksheets, except for Worksheet I, Income or Loss Apportionment – Targeted Tax Area, Section B.
• Sole proprietors: Complete Schedule Z and all the worksheets.
• Trusts, estates, and partnerships: Complete Worksheet I, Section A.
• Individual investors receiving pass-through former TTA credits: Complete Worksheet I, Section B and Schedule Z. All other investors complete Worksheet I, Section A and Schedule Z.
• Individual investors receiving a pass-through loss, and having an overall NOL carryover: Complete Worksheet I, Section B and Worksheet II, Computation of NOL Carryover and Carryover Limitations – Targeted Tax Area. All other investors complete Worksheet II.

Schedule Z is on Side 2 of form FTB 3809.

Claim TTA tax incentives on the following tax returns:

Form 540 filers:

Form 540, California Resident Income Tax Return, lines 43 through 45, as applicable.

Form 540NR filers:

Form 540NR, California Nonresident or Part-Year Resident Income Tax Return, lines 58 through 60, as applicable.

Form 100 filers:

Form 100, California Corporation Franchise or Income Tax Return, line 20, and lines 24 through 26, as applicable.

Form 100S filers:

Form 100S, California S Corporation Franchise or Income Tax Return, line 18, and lines 22 through 24, as applicable.

Form 100W filers:

Form 100W, California Corporation Franchise or Income Tax Return – Water’s Edge Filers, line 20, and lines 24 through 26, as applicable.

Form 109 filers:

Check the “Yes” box for the TTA question I at the top of Form 109, California Exempt Organization Business Income Tax Return, Side 1.

Keep all completed worksheets and supporting documents for your records.

Form FTB 3809 – Instructions for Items A through H

For corporations, estates, trusts, partnerships, exempt organizations, and sole proprietors who operate businesses in the former TTA, complete items A through H.

Investors of pass-through entities, complete items A through D.

Standard Industrial Classification (SIC) and Principal Business Activity (PBA) Codes

To qualify for the former TTA hiring credit, you must be engaged in a trade or business within the selected SIC code. Enter the SIC code of the establishment that qualifies you to take this credit on form FTB 3809, Side 1. If your business has more than one establishment, and if more than one of them qualifies you to take this credit, enter the SIC code that best represents your primary qualifying establishment.

The PBA codes are based on the North American Industry Classification System published by the United States Office of Management and Budget. If you are a business entity, get the PBA code from the 2022 tax booklet (100, 100S, 100W, 565, or 568) that you used to file your tax return. If you are an individual, get the PBA code reported on your federal Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship), line B. Enter the PBA code of your principal activities on form FTB 3809, Side 1.

Part I – Credit Carryover

Line 1a – Hiring Credit Carryover

The TTA has expired as of December 31, 2012. Generally, no further TTA incentives can be generated after the expiration date. Taxpayers can no longer generate/incur TTA hiring credits for employees hired on or after January 1, 2013. Although qualified taxpayers can no longer generate/incur TTA hiring credits for qualified employees hired prior to the TTA expiration date for wages paid or incurred within the 60-month period of the TTA hiring credit, they can claim the hiring credit carryover from prior years.

Credit Limitations

• The amount of hiring credit carryover claimed may not exceed the amount of tax on TTA business income in any year. Use Schedule Z on Side 2 of form FTB 3809 to compute the credit carryover limitation.
• The portion of any TTA hiring credit remaining for carryover to taxable years beginning on or after January 1, 2014, shall be carried over only to the succeeding 10 taxable years if necessary, or until the credit is exhausted, whichever occurs first.

Record Keeping

Retain a copy of VoucherCert 10-07 and the documentation given to the vouchering agency. In addition, for each qualified employee, keep a schedule of the first 60 months of employment showing (at least) the following:

• Employee’s name.
• Date the employee was hired.
• Number of hours the employee worked for each month of employment.
• Smaller of the hourly rate of pay for each month of employment or 150 percent of the minimum wage.
• Location of the employee’s job site and duties performed.
• Records of any other federal or state subsidies received for hiring the qualified employee.
• Total qualified wages per month for each month of employment.

Line 1b – Sales or Use Tax Credit Carryover

The TTA has expired as of December 31, 2012. Generally, no further TTA incentives can be generated after the expiration date. For taxpayers engaged in a trade or business in an expired TTA, the sales or use tax credit may only be generated for qualified property purchased on or before December 31, 2012, and placed in service on or before December 31, 2012. The sales or use tax credit is not available for assets purchased and/or placed in service on or after January 1, 2013.

You may claim a credit carryover for the sales or use tax paid or incurred on qualified property under R&TC Sections 17053.33 and 23633, only if a carryover is available from taxable years 1998 through 2012.

Credit Limitations

• The amount of sales or use tax credit carryover claimed may not exceed the amount of tax on the TTA business income in any year.
• The portion of any TTA sales or use tax credit remaining for carryover to taxable years beginning on or after January 1, 2014, shall be carried over only to the succeeding 10 taxable years if necessary, or until the credit is exhausted, whichever occurs first.

Part II – Portion of Business Attributable to the Targeted Tax Area

TTA tax credits are limited to the tax on business income attributable to operations within the former TTA. TTA deductions are limited to business income attributable to operations within the former TTA. If the business is located within and outside the former TTA, determine the portion of total business operations that are attributable to the former TTA. Each taxpayer must complete one form FTB 3809 for each zone, and therefore, must also compute the income limitation for each zone.

Business Income vs. Nonbusiness Income

Only business income is apportioned to the TTA to determine the incentive limitation.

Business income is defined as income arising from transactions and activities in the regular course of the trade or business. Business income includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations. Nonbusiness income is all income other than business income. See Cal. Code Regs., tit. 18 section 25120 for further references and examples of nonbusiness income.

For corporations and entities doing business in and outside of the former TTA, use Worksheet I, Section A, to determine the TTA apportionment factor to determine the amount of business income attributable to the former TTA.

Pass-through entities must report to their shareholders, beneficiaries, partners, and members the following items:

1. The distributive (or pro-rata for S corporations) share of the business income apportioned to the former TTA.
2. The distributive (or pro-rata for S corporations) share of the business capital gains and losses apportioned to the former TTA included in item 1.
3. The distributive (or pro-rata for S corporation) share of the TTA property and payroll to corporate partners, members, shareholders, beneficiaries.

Report these items as other information on Schedule K-1 (100S), Shareholder’s Share of Income, Deductions, Credits, etc.; Schedule K-1 (541), Beneficiary’s Share of Income, Deductions, Credits, etc.; Schedule K-1 (565), Partner’s Share of Income, Deductions, Credits, etc.; or Schedule K-1 (568), Member's Share of Income Deductions, Credits, etc.

For an individual, use Worksheet I, Section B to determine business income attributable to the former TTA. Business income includes, but is not limited to, California business income or loss from federal Schedules (Form 1040): C; D, Capital Gains and Losses; E, Supplemental Income and Loss; F, Profit or Loss from Farming; and California Schedule D-1, Sales of Business Property, (or federal Form 4797, Sales of Business Property, if California Schedule D-1 is not needed), as well as wages. Be sure to include casualty losses, disaster losses, and any business deductions reported on federal Schedule A (Form 1040), Itemized Deductions.

Generally, all income which arises from the conduct of trade or business operations of a taxpayer is business income.

If you elected to claim part or all of your current year disaster loss under IRC Section 165(i)(1) on prior year's tax return, do not include the amount of the loss that was claimed in your current year business income from the TTA.

Apportionment

Business income is apportioned to the former TTA by multiplying the total California business income of the taxpayer by a fraction. The numerator is the property factor plus the payroll factor, and the denominator is two. Loss is apportioned to the former TTA by multiplying the taxpayer’s total overall business loss by a fraction. If a taxpayer conducts business in more than one former TTA, the TTA apportionment factor and credit limitations are computed separately for each former TTA.

Property Factor

Property factor is defined as the average value of all real and tangible personal property owned or rented by the taxpayer and used during the taxable year to produce business income.

Property owned by the business is valued at its original cost. Original cost is the basis of the property for federal income tax purposes (prior to any federal adjustment) at the time of acquisition by the business, adjusted for subsequent capital additions or improvements and partial dispositions because of sale or exchange. Allowance for depreciation is not considered.

Rented property is valued at eight times the net annual rental rate. The net annual rental rate for any item of rented property is the total rent paid for the property, less total annual subrental rates paid by subtenants.

Payroll Factor

Payroll is defined as the total amount paid to the business’ employees as compensation for the production of business income during the taxable year.

Compensation means wages, salaries, commissions, and any other form of remuneration paid directly to employees for personal services.

Payments made to independent contractors or any other person not properly classified as an employee are excluded.

Compensation Within the Former TTA

Compensation is considered to be within the former TTA if any of the following tests are met:

1. The employee’s services are performed within the geographical boundaries of the former TTA.
2. The employee’s services are performed within and outside the former TTA, but the services performed outside the former TTA are incidental to the employee’s service within the former TTA.

   Incidental means any temporary or transitory service performed in connection with an isolated transaction.

3. If the employee’s services are performed within and outside the former TTA, the employee’s compensation is attributed to the former TTA if any of the following items are met:
   1. The employee’s base of operations is within the former TTA.
   2. There is no base of operations in any other part of the state in which some part of the service is performed, and the place from which the service is directed or controlled is within the former TTA.
   3. The base of operations or the place from which the service is directed or controlled is not in any other part of the state in which some part of the service is performed and the employee’s residence is within the former TTA.

      Base of operations is the permanent place from which employees start work and customarily return in order to receive instruction from the taxpayer or communications from their customers or other persons; to replenish stock or other material; to repair equipment; or to perform any other functions necessary in the exercise of their trade or profession at some other point or points.

Corporations Filing a Combined Report

When determining the income attributable to the former TTA, the business income of each corporation doing business in the former TTA is the business income apportioned to California as determined under combined report mechanics. For more information on combined reports, and entity income apportionment, get FTB Pub. 1061, Guidelines for Corporations Filing a Combined Report. Each corporation computes the income attributable to the former TTA by multiplying California business income by TTA apportionment factor computed in Worksheet I, Section A. The former TTA property and payroll factors used in the determination of TTA business income includes only the taxpayer’s California amounts in the denominator.

Example: Computation of former TTA business income assigned to each entity operating within the former TTA

Parent Corporation A has two subsidiaries, B and C. Corporations A and B operate within the former TTA. The combined reporting group operates within and outside California and apportions its income to California using Schedule R. Assume the combined reporting group’s business income apportioned to California was $1,000,000 and Corporation A and B’s share of California business income is $228,000 and $250,000 respectively. Corporation A and B’s separate TTA and separate California property and payroll factor amounts are shown as follows:

Business income apportioned to the former TTA was determined as follows:

Instructions for Worksheet I – Income or Loss Apportionment – Targeted Tax Area

If the business operates solely within the former TTA and all its property and payroll are solely within the former TTA, enter 100% (1.00) on Section A, line 4, column (c). Do not complete the rest of Worksheet I.

Section A – Income Apportionment

Use Worksheet I, Section A to determine the amount of business income apportioned to the former TTA. The apportioned TTA business income determines the amount of the tax incentives that can be used. A taxpayer’s TTA business income is its California business income multiplied by the specific TTA apportionment percentage computed in Worksheet I, Section A.

Property Factor

When determining the income apportioned to the former TTA, the numerator of the property factor is the average value of the real and tangible personal property owned or rented by the business and used within the former TTA during the taxable year to produce TTA business income. See Worksheet I, Section A, column (b). The denominator of the property factor is the average value of the taxpayer’s real and tangible personal property owned or rented and used during the taxable year within California. See Worksheet I, Section A, column (a).

Payroll Factor

When determining income apportioned to the former TTA, the numerator of the payroll factor is the taxpayer’s total compensation paid to the employees for working within the former TTA during the taxable year. See Worksheet I, Section A, column (b). The denominator of the payroll factor is the taxpayer’s total compensation paid to employees working in California. See Worksheet I, Section A, column (a).

Section B – Income or Loss Apportionment

Taxpayers filing Form 540 and Form 540NR, use Worksheet I, Section B to determine the amount to enter on the following:

• Worksheet II, line 1 and line 6
• Schedule Z, Part I, line 1 and line 3

Do not include disaster losses in any amounts used in the table.

Only California source business income is apportioned to the former TTA. A taxpayer’s TTA business income is its California apportioned business income computed using Schedule R, multiplied by the specific TTA apportionment percentage computed using Worksheet I, Section A.

The first step is to determine which portion of the taxpayer’s net income is “business income” and which portion is “nonbusiness income.” Only business income is apportioned to the former TTA. See Part II, Portion of Business Attributable to the Targeted Tax Area, for a discussion of business and nonbusiness income.

Business income or loss reported on federal Schedules (Form 1040): C, E, F, and other schedules are reported on line 6 through line 9. Line 11 and line 12 report business gains or losses reported on California Schedule D, California Capital Gain or Loss Adjustment, and Schedule D-1 (or federal Form 4797, if California Schedule D-1 is not needed). All business income and losses should be adjusted for any differences between California and federal amounts as shown on the Schedule CA.

Part I – Individual Income and Expense Items

Wages

Taxpayers with wages from a company located within and outside the former TTA must determine the TTA wage income by entering the percentage of time they worked within the former TTA in column (b). The percentage of time should be for the same period the wages entered on line 1 were earned. This percentage must be determined based on their record of time and events such as a travel log or entries in a daily planner.

Part II – Pass-Through Income or Loss

Individuals with a Schedule K-1

The individual partner, member, or shareholder completes Worksheet I, Section B, Part II, Pass-Through Income or Loss, and Schedule Z.

Multiple Pass-Through Entities

If you are a shareholder, beneficiary, partner, or member in multiple pass-through entities with businesses located within and outside the former TTA from which you received TTA tax incentives, see the example below for computing business income in the former TTA.

Part III – Taxpayer’s Trade or Business

Business Income or Loss

Use business income or loss from federal Schedules (Form 1040): C, E, and F, plus California adjustments from Schedule CA (540 or 540NR) for each trade or business. Also, include business capital gains and losses from California Schedule D and business gains and losses from Schedule D-1 (or federal Form 4797, if California Schedule D-1 is not needed) as adjusted on Schedule CA (540 or 540NR).

Income Computation

Located Entirely Within the Former TTA

Line 6 – Line 9

If your business operation reported on federal Schedules (Form 1040):C, E, F, or other schedule is entirely within the former TTA, enter the income or loss from this activity in column (a), and enter 1.00 in column (b).

Line 11 and Line 12

If the gain or loss reported on California Schedule D or Schedule D-1 as adjusted on Schedule CA (540 or 540NR) was attributed to an asset used in an activity conducted entirely within the former TTA, enter the gain or loss reported in column (a), and enter 1.00 in column (b).

Located Entirely Within California

Line 6 – Line 9

If your business operation reported on federal Schedules (Form 1040): C, E, F, or other schedule is entirely within California, enter the income or loss from this activity in column (a). To determine the apportionment percentage in column (b), complete Worksheet I, Section A. Enter the percentage from Worksheet I, Section A, line 4, column (c) on Worksheet I, Section B, column (b).

Line 11 and Line 12

If the gain or loss reported on Schedule D or Schedule D-1 as adjusted on Schedule CA (540 or 540NR) was attributed to an asset used in an activity conducted entirely within California, enter the gain or loss reported in column (a). To determine the apportionment percentage figure in column (b), complete Worksheet I, Section A. Enter the percentage from Worksheet I, Section A, line 4, column (c) on Worksheet I, Section B, column (b).

Located Within and Outside the Former TTA and California

Line 6 – Line 9

If your business operation reported on federal Schedules (Form 1040): C, E, F, or other schedule is within and outside the former TTA and California, get California Schedule R and complete line 1 through line 18b and line 28 through line 31. Enter the amount from Schedule R, line 18b and line 31 in column (a) of this worksheet. To determine the apportionment percentage in column (b), complete Worksheet I, Section A. Enter the percentage from Worksheet I, Section A, line 4, column (c) on Worksheet I, Section B, column (b).

When computing Schedule R, disregard any reference to Forms 100, 100S, 100W, 565, or 568. Also disregard any reference to Schedules R-3, Net Income (Loss) from the Rental of Nonbusiness Property; R-4, Gain (Loss) from the Sale of Nonbusiness Assets; or R-5, Computation of Interest Offset.

Nonresidents that have an apportioning business that operates within the former TTA should have already computed Schedule R, and can use those amounts when that schedule is referenced. Residents complete a Schedule R in order to determine their California source business income.

Line 11 and Line 12

If the gain or loss reported on California Schedule D or Schedule D-1 as adjusted on Schedule CA (540 or 540NR) was attributed to an asset used in an activity conducted within and outside the former TTA and California, get Schedule R and complete Schedule R-1. Multiply the gain or loss reported by the percentage on Schedule R-1, Part A, line 2 or Part B, line 5 and enter the result in column (a). To determine the apportionment percentage in column (b), complete Worksheet I, Section A. Enter the percentage from Worksheet I, Section A, line 4, column (c) on Worksheet I, Section B, column (b).

Line 14

If you are computing the TTA business income and the result on Worksheet I, Section B, line 14, column (c) is a positive amount and:

• You have TTA NOL carryovers, enter the amount on Worksheet II, line 1 and line 6 (skip line 2 through line 5).
• You have TTA credit carryovers, enter the amount on Schedule Z, Part I, line 1 and line 3 (skip line 2).

If the amount is negative, you do not have any business income attributable to the former TTA and you cannot use any TTA NOL carryover or credit carryover(s) in the current taxable year.

The average apportionment percentage shown on line 4 represents the portion of the taxpayer’s total business that is attributable to activities conducted within the former TTA. Factors with zero balances in the totals of column (a) will not be included in the computation of the average apportionment percentage. For example, if the taxpayer does not have any payroll within or outside the TTA, the average apportionment percentage would be computed by dividing line 3 by one instead of by two as normally instructed.

Part III – Net Operating Loss (NOL) Carryover and Deduction

The TTA expired as of December 31, 2012. Generally, no further TTA incentives can be generated after the expiration date. For taxable years beginning on or after January 1, 2013, taxpayers can no longer generate any TTA NOL. However, taxpayers can claim an NOL carryover deduction from prior years.

See instructions for Worksheet II, for more information on the suspension of the NOL carryover deduction for taxable years 2020 and 2021.

For NOLs incurred in taxable years beginning on or after January 1, 2008, California has extended the NOL carryover period to 20 taxable years following the year of the loss.

For taxable years beginning in 2002 and 2003, California suspended the NOL carryover deduction. Taxpayers continued to carryover an NOL during the suspension period. The carryover period for suspended losses was extended by two years for losses incurred before January 1, 2002, and by one year for losses incurred on or after January 1, 2002, and before January 1, 2003. The deduction for disaster losses was not affected by the NOL suspension rules.

See instructions for Worksheet II, for more information on the suspension of the NOL carryover deduction for taxable years beginning in 2008 through 2011.

The business cannot generate NOLs from activities within the former TTA before the first taxable year beginning on or after the date the TTA was officially designated.

Limitation

A TTA NOL carryover deduction can only offset business income attributable to operations within the former TTA.

Election

If you elected and designated the carryover category (general or specific, EZ, LAMBRA, or TTA NOL) on the original tax return for the year of a loss, file form FTB 3809 for each year in which a TTA NOL deduction is being taken. The election is irrevocable.

If you elected the TTA NOL deduction, you are prohibited by law from carrying over any other type of NOL (relating to TTA activities) from this year.

Alternative Minimum Tax

Taxpayers claiming a TTA NOL carryover deduction determine their NOL for alternative minimum tax purposes. Use Schedule P (100, 100W, 540, 540NR, or 541) to compute the NOL for alternative minimum tax purposes.

S Corporations

TTA NOLs incurred prior to becoming an S corporation cannot be used against S corporation income. See IRC Section 1371(b).

However, an S corporation is allowed to deduct a TTA NOL incurred after the "S" election is made. An S corporation may use the NOL carryover as a deduction against income subject to the 1.5 percent entity-level tax (3.5 percent for financial S corporations). The expenses (and income) giving rise to the loss are also passed through to the shareholders in the year the loss is incurred.

Combined Report

Corporations that are members of a unitary group filing a combined report separately compute loss carryover for each corporation in the group (R&TC Section 25108) using individual apportionment factors.

Unlike the NOL treatment on a federal consolidated tax return, a loss carryover for one member included in a combined report may not be applied to the intrastate apportioned income of another member included in a combined report.

Water’s-Edge Taxpayer

For any water’s-edge taxpayer, R&TC Section 24416(c) imposes a limitation on the NOL deduction, if the NOL is generated during a non-water’s edge tax year. The NOL carryover is limited to the lesser of the NOL or the re-computed NOL. The re-computed NOL carryover is determined by computing the income and factors of the original worldwide combined reporting group, as if the water’s-edge election had been in force for the year of the loss. R&TC Section 24416(c) serves as a limitation. If this section applies, the NOL carryover for each corporation may only be decreased, but not increased.

Instructions for Worksheet II – Computation of NOL Carryover and Carryover Limitations – Targeted Tax Area

Individuals, exempt trusts, and corporations with current year income and a prior year TTA NOL carryover complete Worksheet II.

Corporations For 2022, use Form 100, line 18, Form 100W, line 18, or Form 100S, line 15 (net of any adjustments on line 16 and 13) to determine the taxable income for the 2022 taxable year.

Individuals For 2022, use Schedule CA (540), Part I, Section B, line 3, line 4, and line 6, or Schedule CA (540NR), Part II, Section B, line 3, line 4, and line 6; the federal Schedule E (Form 1040), line 26, line 32, and line 40; and the federal Form 4797, line 9, using California amounts. Adjust the amounts on the Schedule CA (540) by Columns B (subtractions) and C (additions) to get your net business income. On the Schedule CA (540NR), use the amounts from Column E to determine your net business income. Modified adjusted gross income is reflected on the Form 540, line 13 and Form 540NR, line 13 without regard to the federal NOL carryover deduction.

For taxable years beginning on or after January 1, 2020, and before January 1, 2022, California suspended the NOL carryover deduction. Taxpayers continued to compute and carryover an NOL during the suspension period. However, taxpayers with taxable income of less than $1,000,000 or with disaster loss carryovers were not affected by the NOL suspension rules.

The carryover periods for any NOL or NOL carryover, for which a deduction was disallowed because of the 2021 – 2022 suspensions, were extended by:

• Three years for losses incurred in taxable years beginning before January 1, 2020.
• Two years for losses incurred in taxable years beginning on or after January 1, 2020, and before January 1, 2021.
• One year for losses incurred in taxable years beginning on or after January 1, 2021, and before January 1, 2022.

For taxable years beginning in 2010 and 2011, California suspended the NOL carryover deduction. Taxpayers continued to compute and carryover NOLs during the suspension period. However, taxpayers with net income after state adjustments (pre-apportioned income) (corporations) or with modified adjusted gross income (individuals) of less than $300,000, or with disaster loss carryovers are not affected by the NOL suspension rules.

The carryover periods for any NOL or NOL carryover, for which a deduction is disallowed because of the 2008 – 2011 suspension, are extended by:

• One year for losses incurred in taxable years beginning on or after January 1, 2010, and before January 1, 2011.
• Two years for losses incurred in taxable years beginning before January 1, 2010.
• Three years for losses incurred in taxable years beginning before January 1, 2009.
• Four years for losses incurred in taxable years beginning before January 1, 2008.

The TTA NOL carryover deduction is used to reduce current year income from the TTA. Use this worksheet to compute the TTA NOL carryover deduction for corporations, individuals, and exempt trusts.

For more information on NOLs, get form FTB 3805Q, or form FTB 3805V.

Line 1 – See Part II for a discussion of business and nonbusiness income.

Form 540 and Form 540NR filers:
Be sure to include casualty losses, disaster losses, and any business deductions reported on federal Schedule A (Form 1040), as itemized deductions.

Exception: If you elected to claim part or all of your current year disaster loss, under IRC Section 165(i)(1) on prior year's return, do not include the amount of the loss that was claimed in your current year business income for the TTA.

Line 2 – In modifying your income, deduct the capital losses only up to the amount of capital gains. Enter any net capital losses included in line 1 as a positive number.

Line 3 – Corporations reduce income by the disaster loss deduction and the deduction for excess net passive income.

Line 6 – This is your modified taxable income (MTI). Reduce this amount by your TTA NOL carryover deduction. The TTA NOL carryover deduction may not be larger than your MTI. If your MTI is a loss in the current year or if it limits the amount of NOL you may use this year, carry over the NOL to future years.

Line 7 – Enter the amount from line 6 in line 7, column (d). If this amount is zero or negative, transfer the amount(s) from line 8a through line 8n, column (b) to column (e). Go to line 9.

Note: Your NOL may be suspended. See the instructions for Worksheet II, for more information. If your NOL is suspended do not put any amounts in column (c). Carryover the column (b) amount(s) to column (e).

Line 8a through Line 8n – Enter the amounts on line 8a through line 8n as positive numbers.

In column (c), enter the smaller of the amount in column (b) or the amount in column (d) from the previous line.

In column (d), enter the result of subtracting column (c) from the balance on the previous line in column (d).

In column (e), enter the result of subtracting the amount in column (c) from the amount in column (b), as applicable.

Line 9 – Total the amounts in columns (b), (c), and (e). Enter the totals from column (b) and column (e) on form FTB 3809, Side 1, line 3a and line 3c, accordingly.

Your TTA NOL carryover deduction for 2022 is the total of column (c). Enter this amount on your California tax return or schedule as follows:

• Form 100, line 20
• Form 100S, line 18
• Form 100W, line 20
• Form 109, line 6
• Schedule CA (540), Part I, Section B, line 9b3, column B
• Schedule CA (540NR), Part II, Section B, line 9b3, column B