State Your Own Tax Credit Amount: California Competes Tax Credit
By Jeff Weinkle, SALT manager
California has established an incentive called the California Competes Tax Credit that can be awarded to businesses creating new jobs and/or making new capital investment in the state. The credit is a negotiable income tax credit where the taxpayer actually requests the amount of credits they want.
Credits are awarded using a three-step, competitive review process based on quantitative and qualitative factors. The quantitative factors include the estimated increase in payroll for new, full-time jobs over a five-year period, as well as the estimated investment in property over the same period.
California first narrows applicants using a cost-benefit analysis whereby the most competitive applications (using a ratio of the credit amount requested over the amount of planned new employee compensation and capital investment) are selected. Applications with the lowest ratios representing 200 percent of the available credits for the approval period move on to the next step.
Applicants selected during the first step are then subject to a qualitative evaluation of the business’ job creation benefits and economic importance, including the following factors:
The extent of unemployment or poverty where the business is located
The incentives available to the business in this state, including incentives from the state, local government and other entities
The incentives available to the business in other states
The duration of the business’ proposed project and the duration the business commits to remain in this state
The overall economic impact in this state of the business
The strategic importance of the business to the state, region or locality
The opportunity for future growth and expansion in this state by the business
The extent to which the anticipated benefit to the state exceeds the projected benefit to the business from the tax credit
Finally, applicants that have been chosen to receive credits after the qualitative analysis will negotiate the terms of the award which will specify the amount of the credit and the terms under which they may be claimed. Taxpayers that are awarded credits will be monitored by the state, and failure to meet the planned investment amounts or other terms of the award can result in loss of credits.
At least one-quarter of each year’s available credits must be assigned to “small businesses” which had gross receipts of greater than $0 but less than $2 million in the prior tax year. During California’s 2015 fiscal year, credits were approved for businesses creating as few as two new jobs and with no capital investment commitment.
For California’s current fiscal year ending June 30, 2016, the state has allocated over $200 million in credits to award through three application windows. The first window of the fiscal year 2016 application period is open from July 20 through Aug. 17, 2015, at which time the state will rank and evaluate existing applications for $75 million in available credits.
Businesses that are not selected as part of the first window of the 2016 fiscal year may edit and resubmit their application for consideration in the second and/or third application periods. The second period runs from Jan. 4 through Jan. 25, 2016 ($75 million in available credits), and the third from March 7 through March 28, 2016 ($50.9 million of available credits).
If not successful during this fiscal year, a business must prepare a new application for the first window of the following fiscal year. The law currently provides for $200 million of credits each year for the state fiscal years ending 2017 and 2018.
Businesses may submit an application online at the Governor’s Office of Business and Economic Development GOBiz website. Aprio’s SALT group can assist taxpayers with navigating the application process in order to maximize the chance of obtaining credits.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.