By Daniel Sabet · Cannabis CFO & Financial Advisor, GreenGrowth CPAs · Tax Strategy & Growth Planning · Los Angeles, CA | Published July 2026 | California Tax Advisory
The California tax changes 2026 delivered through Senate Bill 122 represent the largest single expansion of California’s tax base in years. Governor Newsom signed SB 122 on June 29, 2026 as part of the 2026-27 budget package. Every California business owner, high-net-worth individual, and tax advisor operating in the state will feel the impact heading into 2027. The biggest single change is a new sales tax on prewritten software and SaaS taking effect January 1, 2027. California’s 7.25% statewide rate plus local district taxes will now cover SaaS subscriptions and downloaded software. For a business spending $500,000 annually on software, that means $36,000 or more in new sales tax exposure at the base rate alone. SB 122 also extends the business credit cap, cuts the LLC first-year franchise tax for new entities, and confirms the NOL suspension will sunset as originally scheduled.
QUICK ANSWER
California’s SB 122 introduces four major tax changes effective January 1, 2027. A new 7.25% sales tax plus local district taxes applies to prewritten software and SaaS. SB 122 extends the $5 million business credit cap through 2029, then permanently caps it at the greater of $5 million or 70% of tax liability. The first-year LLC franchise tax is cut from $800 to $400 for entities formed in 2027 through 2029. The NOL suspension for taxpayers over $1 million in income remains in effect through 2026 and will sunset as scheduled, restoring NOL deductions for the 2027 tax year.
California Tax Changes 2026: At a Glance
- What SB 122 covers: The 2026-27 California budget trailer bill, signed June 29, 2026, restructures the state’s approach to sales tax on software, business credit utilization, LLC formation costs, and net operating loss deductions.
- Who this applies to: California business owners, high-net-worth individuals, tax advisors, software buyers and sellers, taxpayers over $1 million in income, and entrepreneurs planning new entity formations.
- Digital software tax: Effective January 1, 2027. Applies 7.25% state sales tax plus local district taxes to prewritten software and SaaS. Custom software remains exempt.
- Business credit cap: SB 122 extends the $5 million limit through 2029. From 2030, credits become permanently capped at the greater of $5 million or 70% of tax liability. The PTET credit is exempt.
- LLC first-year tax: SB 122 reduces the tax from $800 to $400 for new LLCs, LPs, and LLPs formed during 2027 through 2029.
- GreenGrowth’s role: We help California businesses and individuals model the specific SB 122 impact, evaluate software procurement decisions, and time entity formations for the reduced first-year tax. Explore GreenGrowth CPAs Tax Planning Services →
The California SaaS Sales Tax: The Biggest of the California Tax Changes 2026
Before SB 122, California was one of the last major state economies to exempt SaaS and electronically delivered software from sales and use tax. That exemption ends on January 1, 2027. From that date, California’s 7.25% statewide sales and use tax plus any applicable local district taxes will apply to sales of digital prewritten software regardless of how it is delivered. This includes downloaded software, software installed on tangible media, and remotely accessed cloud applications such as SaaS.
Custom computer software remains exempt from the new tax. Modifications to prewritten software qualify as custom only to the extent of the modification itself, and only if the charges for the modification are separately stated on the invoice. SB 122 also excludes several categories of digital products from the tax entirely, including digital audio and visual works, digital books, video games, streamed media, and cryptocurrency.
Revenue Impact and Business Planning Window
According to the California Legislative Analyst’s Office, the state estimates the software tax will generate approximately $450 million in general fund revenue in the partial-year 2026-27 window. Full-year projections rise to $900 million general fund and $1.1 billion local. Businesses spending significantly on software should review renewal cycles now. Accelerating longer-term software purchases into 2026 may avoid the new sales tax on those specific transactions, and vendor contract negotiation before December 31, 2026 may lock in pre-SB 122 pricing for the term.
💬 The Conversation Worth Having
Every California business owner we talk to right now asks the same question: should we accelerate software purchases before January 1, 2027? The answer is often yes, but only after modeling the actual dollar impact. A business spending $500,000 annually on software faces roughly $36,000 in new annual sales tax exposure at the base rate. Accelerating a three-year renewal into 2026 could preserve $108,000 in that exposure. Contract structuring and vendor negotiation before December 31, 2026 may lock in pre-SB 122 pricing for the duration of the term. This is a six-month window, not a strategy for Q1 2027.
Your 2026 software procurement plan may need to change before December 31. Let’s model your California SaaS tax exposure now.
California NOL Suspension: What the California Tax Changes 2026 Did Not Do
This point deserves clarification because the framing has been misreported in some places. The California NOL suspension was enacted in 2024 under Senate Bill 167. It applies to taxpayers with over $1 million in income for tax years 2024 through 2026. SB 122 did not eliminate the suspension. It also did not extend it. The suspension therefore remains in effect for tax years beginning before January 1, 2027, and will sunset as originally scheduled.
Extended Carryforward Periods for Suspension Losses
For tax years beginning on or after January 1, 2027, affected taxpayers can once again apply their NOL carryforwards against California taxable income. Carryforward periods have been extended proportionally for losses that could not be used during the suspension. Under the FTB’s framework, losses incurred before January 1, 2024 have their carryforward period extended by three years. Losses incurred in 2024 tax years are extended by two years. Losses incurred in 2025 tax years are extended by one year. See the FTB NOL guidance for the full framework.
▶ SB 122 Provisions Quick Reference
| Provision | Effective Date | Who It Affects |
|---|---|---|
| SaaS & software sales tax | January 1, 2027 | All California businesses purchasing or selling software |
| Business credit cap extension | Through 2029, permanent 2030+ | Businesses with California credit balances over $5M |
| LLC first-year tax cut | 2027-2029 formations | New LLCs, LPs, LLPs (not corporations) |
| NOL suspension sunset | Sunsets end of 2026 | Taxpayers with over $1M income |
Business Credit Limitations Extended Through 2029
California’s $5 million cap on business tax credit utilization was originally enacted under SB 167 for tax years 2024 through 2026. SB 122 extends this same limitation through tax years 2027, 2028, and 2029. The credit cap does not apply to the pass-through entity elective tax credit, which remains available without limitation for eligible taxpayers.
The 2030 Permanent Cap Structure
Beginning with the 2030 tax year, the structure changes materially. Business credits will be permanently limited to the greater of $5 million or 70% of the taxpayer’s tax liability. This is more favorable than the Governor’s original May Revision proposal, which sought a permanent cap at the greater of $5 million or 50% of tax liability. Even so, the permanent limitation represents a meaningful change from the pre-2024 unlimited utilization regime. Businesses holding significant California credit balances, particularly those with research and development credits, should model the impact across multiple years.
LLC Franchise Tax Cut: One of Two California Tax Changes 2026 That Reduce Tax
SB 122 delivers one temporary tax reduction. The first-year annual franchise tax of $800 imposed on newly formed LLCs, limited partnerships, and limited liability partnerships is cut to $400. This applies to entities that organize or register with the California Secretary of State during tax years 2027, 2028, and 2029.
From year two onward, the standard $800 minimum franchise tax applies. From tax year 2030 forward, unless the legislature extends the provision, the full $800 first-year tax returns for all newly formed entities. Corporations are not covered by this specific reduction and operate under separate first-year franchise tax rules under the California Revenue and Taxation Code.
For entrepreneurs currently planning to form an LLC before the end of 2026, this creates a specific timing question. Forming on or before December 31, 2026 means paying the full $800 first-year tax. Forming on or after January 1, 2027 means paying $400 for that first year, a $400 saving. For entrepreneurs planning to form multiple entities across cultivation, holding, and operating structures, the savings compound.
Does SB 122 Apply to My California Business or Personal Tax Situation?
Yes, in most cases. SB 122 affects nearly every California business, high-net-worth individual, and tax advisor operating in the state in at least one respect. Businesses that purchase or sell prewritten software or SaaS will face new sales and use tax obligations from January 1, 2027. Businesses and individuals with over $1 million in income will see the NOL suspension expire, potentially restoring valuable deductions. Entrepreneurs forming new LLCs, LPs, or LLPs in 2027 through 2029 qualify for the reduced first-year franchise tax. Businesses with significant California credit balances face extended and eventually permanent utilization limits.
KEY TAKEAWAYS
- ›The California tax changes 2026 delivered through SB 122 introduce four major provisions with the most significant provisions taking effect January 1, 2027.
- ›California’s 7.25% state sales and use tax plus local district taxes will apply to prewritten software and SaaS starting January 1, 2027, giving businesses approximately six months to adjust software procurement.
- ›The NOL suspension for taxpayers with over $1 million in income remains in effect through 2026 and will sunset as originally scheduled, restoring NOL deductions for the 2027 tax year with extended carryforward periods.
- ›The $5 million business tax credit cap is extended through 2029 under SB 122, then permanently limited to the greater of $5 million or 70% of tax liability starting in 2030.
- ›New LLCs, LPs, and LLPs formed in 2027 through 2029 pay $400 instead of $800 for their first-year annual franchise tax, though the standard $800 rate resumes in year two.
Frequently Asked Questions
When does the California SaaS sales tax take effect?
+
The California sales and use tax on prewritten software and SaaS takes effect January 1, 2027. Governor Newsom signed SB 122 into law on June 29, 2026, and the tax will apply to transactions occurring on or after the effective date at California’s 7.25% statewide rate plus applicable local district taxes.
Businesses have approximately six months from enactment to review software procurement, evaluate accelerated purchases before December 31, 2026, and update contracts and invoicing systems.
Which types of software are exempt from the new California tax?
+
Custom software prepared to the special order of a single customer remains exempt from the new tax. SB 122 also excludes several categories of digital products from the tax, including digital audio and visual works, digital books, digital video games, streamed media, and digital assets such as cryptocurrency.
Modifications to prewritten software qualify as custom only to the extent of the modification itself, and only if the modification charges are separately stated on the invoice. Additional CDTFA guidance is expected regarding how bundled software and service transactions will be treated.
Was the California NOL suspension eliminated by SB 122?
+
No. SB 122 did not eliminate the NOL suspension and did not extend it either. The suspension was enacted under Senate Bill 167 in 2024 and applies to taxpayers with over $1 million in income for tax years 2024 through 2026. It remains in effect for that period.
Because SB 122 did not extend the suspension, it will sunset as originally scheduled. For tax years beginning on or after January 1, 2027, affected taxpayers can once again apply their NOL carryforwards against California taxable income, with carryforward periods extended proportionally for losses accumulated during the suspension.
Does the LLC franchise tax reduction apply to corporations?
+
No. The SB 122 first-year franchise tax reduction from $800 to $400 applies specifically to limited liability companies (LLCs), limited partnerships (LPs), and limited liability partnerships (LLPs) formed during tax years 2027 through 2029.
Corporations, including C-corporations and S-corporations, are not covered by this provision and operate under separate first-year franchise tax rules under the California Revenue and Taxation Code. Entrepreneurs planning to form a corporation should review the specific rules that apply before assuming any first-year tax reduction.
What is the pass-through entity tax credit and why is it exempt from the credit cap?
+
California’s pass-through entity elective tax credit is a mechanism that allows owners of partnerships and S-corporations to work around the federal $10,000 SALT deduction cap. Under this election, the entity pays California tax at the entity level, and the owners receive a credit for their share of that tax on their personal returns.
SB 122’s $5 million business tax credit limitation explicitly does not apply to this credit, meaning eligible taxpayers can continue to utilize it without regard to the cap. This preserves one of California’s most valuable planning tools for pass-through entity owners even as other credit utilization becomes more restricted.
How does GreenGrowth CPAs help California businesses prepare for SB 122?
+
GreenGrowth’s California tax planning team reviews how SB 122 affects each client’s specific position, including evaluating software procurement decisions, modeling NOL carryforward availability, analyzing credit utilization strategy, and advising on entity formation timing for the reduced first-year franchise tax.
For businesses with significant software spend, we model accelerated purchase scenarios before the January 1, 2027 effective date. For taxpayers with accumulated NOLs from the suspension period, we prepare for restored deduction planning in the 2027 tax year. To discuss your California tax planning needs, book a free consultation with our tax team.
Know How SB 122 Affects Your California Tax Position for 2027
GreenGrowth CPAs helps California businesses, high-net-worth individuals, and their advisors model the specific SB 122 impact on their tax position, evaluate software procurement decisions, and time entity formations before the January 1, 2027 changes take effect.
KEY NUMBERS
Six Months to Prepare. Then SB 122 Changes Everything.
Book a California tax impact review. We will help you model your SaaS exposure, plan for restored NOL deductions, and time entity formations for the reduced 2027 franchise tax.
Book Your California Tax Review →
GreenGrowth CPAs · California Tax Planning Team
