PSG | Tax Credit Services | California Enterprise Zone

California Economic Development Initiative

In July 2013 the California Legislature approved three new incentives to replace the state’s Enterprise Zone program, which they had repealed the previous month. The new initiative contained three distinct incentive programs: the California Competes Tax Credit; the New Employment Credit; and the Manufacturing Sales Tax Exemption.

California Competes Tax Credit

The CCTC is a discretionary income tax credit which companies may apply for annually on a competitive basis. Any business within the state may apply for a tax credit; successful applicants will demonstrate a commitment to locate or remain in California, invest in the state, and create or retain jobs. Credits are negotiated between the applicants and the Governor’s Office of Business and Economic Development (GO-Biz), and the agreements must then be approved by the newly created California Competes Tax Credit Committee. The Committee consists of five individuals: the state treasurer, the director of the Department of Finance, the director of GO-Biz, an individual appointed by the state Senate, and an individual appointed by the state Assembly.

The amount of CCTC credits available for the first several years is prescribed as follows: $30 million for FY 13/14; $150 million for FY 14/15; and $200 million each year for FY’s 15/16, 16/17, and 17/18. Application periods will be announced prior to each new fiscal year, and there may be more than one application period per year. Of the amount available each year, 25% is reserved for small businesses – defined as a company with less than $2 million in gross receipts the prior year.

Applications will be evaluated in a two-phase process. Successful applicants will be subject to recapture terms if the applicant fails to fulfill the terms and conditions of the agreement. The Franchise Tax Board will receive a copy of all negotiated agreements and have full access to the applications and any documentation submitted. Except for small businesses, the FTB will review the books and records of all approved applicants for compliance with the agreement.

CCTC credits, if unused by the applicant in the year they are awarded, may be carried forward for the succeeding six years. The credits are not refundable, and cannot reduce the company’s tax below tentative minimum tax.

Additional information is available at the GO-Biz website, www.business.ca.gov.

New Employment Credit

The New Employment Credit is a CA income tax credit for businesses located in former enterprise zones, as well as areas with high unemployment or poverty. It excludes temporary help agencies, retailers, and food services, unless those businesses have less than $2 million in gross receipts (small businesses).

Credits are generated when companies hire qualified net new employees each year. Qualified employees are those employees who:

  • are hired after January 1, 2014
  • receive starting wages that are at least 150% of the state’s minimum wage
  • are salaried full time employees or hourly employees working at least 35 hours per week
  • meet one of five conditions:
    • unemployed for six months or more, not having completed a degree or course of study more than 12 months prior to hire (unemployed means not receiving wages, not self-employed, and not a full-time student);
    • veteran, separated from the armed forces within the past 12 months;
    • recipient of the federal Earned Income Credit in the previous tax year;
    • ex-offender convicted of a felony; or
    • current recipient of CalWORKS or county general assistance (public assistance)

Employers are required to submit a Tentative Credit Reservation with the FTB within 30 days of complying with the EDD new hire reporting requirement for each qualified full-time hire. Credits may only be claimed on the number of new qualified hires which exceeds the company’s total employment number in the base year.

Credits are calculated based on the portion of wages paid that exceed 150% of the minimum wage but that do not exceed 350% of the minimum wage. For example, a full-time employee earning $15 per hour would have qualified wages of $3 per hour (150% of current $8 minimum wage is $12; $15-$12 = $3. The credit amount would then be the number of hours worked in the year multiplied by the $3 rate, multiplied by 35%. If the employee in this example worked 2,000 hours, the credit generated would be 2,000*3*.35 = $2,100. This example assumes that the company had at least one net new job created in the tax year; if not, no credit would be allowed.

Credits must be claimed on original, not amended, tax returns. Unused credits may be carried forward for five years, but the credits cannot reduce tentative minimum tax. Potential claimants of the New Employment Credit should also note that the FTB is required to provide the employer names, amount of credits claimed, and number of new jobs created as a searchable database on its website each year.

Manufacturing Sales Tax Exemption

Beginning July 1, 2014, manufacturers and certain research and developers may obtain a partial exemption of sales and use tax on certain manufacturing and R&D equipment purchases. Qualified industries generally include those primarily engaged in the business of all forms of manufacturing, or R&D in biotechnology or the physical, engineering, and life sciences. Qualified equipment includes but is not limited to:

  • machinery and equipment, including component parts, moving parts and operating structures
  • equipment or devices used to operate, control, regulate or maintain the machinery, including computers and software, together with all repair and replacement parts with a useful life of one or more years
  • tangible personal property used in pollution control
  • special purpose buildings and foundations used as an integral part of the manufacturing, processing, refining, fabricating, or recycling process, or that constitute a research or storage facility used during those processes.

The exempted sales tax amount is the state’s portion only, currently at 4.1875 percent. The law provides that a single tax payer or combined reporting unit cannot exceed $200 million in purchases subject to the partial exemption in a calendar year.