California Enacts Small Business Jobs Tax Credit

The state of California enacted a jobs tax credit for small businesses that increase employment in the second half of this year. Taxpayers that qualify will need to act quickly to claim their share of the credit before the statewide credit cap is reached.

To reward small businesses that have increased jobs during COVID-19, California Governor Gavin Newsome signed Senate Bill No. 1447 on September 9, 2020, which creates a tax credit for qualifying small businesses creating jobs during the second half of 2020.

This credit is available to taxpaying “qualified small business employers” that (i) employed a total of 100 or fewer employees as of December 2019 and (ii) had a 50% decrease in gross receipts during the period of April to June 2020 as compared to gross receipts for the period April to June 2019. Taxpayers that are required to be included in a combined report do not qualify.

Qualifying small businesses can receive $1,000 for each net increase in qualified employees (i.e., an employee who receives California wages), up to a maximum tax credit of $100,000. The net increase of qualified employees is calculated by determining the average monthly full-time equivalent employees from April 1, 2020 through June 30, 2020 and subtracting that average from the average monthly full-time equivalent employees from July 1, 2020 through November 30, 2020.

Monthly full-time equivalent employees are determined by the total amount of hours worked for hourly employees and the total number of weeks worked for salaried employees. It is not necessary that the employee be full-time; therefore, if the taxpayer hires only part-time employees, they may still qualify for this credit.

The credit can be claimed only for tax year 2020 and may be used against corporate or personal income taxes, or both; however, a taxpayer may make an irrevocable election at the time it applies for the credit (as described below) to use the credit against sales/use tax. The rules provide details about how and when the credit can be used against sales/use tax, depending on the taxpayer’s filing frequency. Any unused credits can generally be carried forward for five additional years. Any credit remaining after the last allowed use period will be forfeited. The credit will not be refunded, so it is important for the taxpayer to determine the best option for taking full advantage of this credit, whether that is against income tax or sales/use tax.

A taxpayer that meets the credit requirements must file an application with the California Department of Tax and Fee Administration (CDTFA) between December 1, 2020 and January 15, 2021, in order to reserve a credit amount. Credits will be allocated on a first-come, first-served basis and there is an aggregate statewide credit cap of $100 million; therefore, it is vital that taxpayers determine eligibility as soon as possible after November 30, 2020, and apply early to ensure they receive all of their fully earned credit.

The application must include the net increase in qualifying employees and indicate whether the credit will be applied to corporate and/or personal income taxes or that the taxpayer irrevocably elects to apply the credit to sales/use tax. CDTFA will notify the taxpayer of the credit reservation within 30 days of the application.

Please contact Aprio’s SALT team for assistance in determining your eligibility and/or applying for this credit. We constantly monitor these and other important state tax topics, and we will include any significant developments in future issues of the Aprio SALT Newsletter.

Contact Kristen Mantilla, SALT Associate at kristen.mantilla@aprio.com or Jeff Glickman, partner-in-charge of Aprio’s SALT practice, at jeff.glickman@aprio.com for more information.

This article was featured in the October 2020 SALT Newsletter.