This fall, California enacted (in SB 1447) a small business hiring credit for taxable years beginning on or after January 1, 2020 and before January 1, 2021 to assist taxpayers affected by COVID-19. The credit may be claimed against corporate and personal income taxes. Alternatively, it can be applied against state and local sales and use taxes.
The credit amount is $1,000 for each net increase in qualified employees, up to a maximum credit of $100,000 per qualified small business employer. There are limited credits available (up to $100 million for all taxpayers) and the credits must be reserved between December 1, 2020 and January 15, 2021.
NOTE: As of December 1, 2020, the California Department of Tax and Fee Administration (“CDTFA”) began accepting online applications to reserve the credit. The credit is assigned on a first-come, first-served basis, so act now to reserve your credits before January 15, 2021. Please visit: www.cdtfa.ca.gov/taxes-and-fees/SB1447-tax-credit.htm.
Definitions and Eligibility
A “qualified small business employer” is a taxpayer that had:
- No more than 100 employees as of December 31, 2019; and
- 50% decrease in gross receipts, comparing April-June of 2020 with April-June of 2019.
The “net increase” in qualified employees is the difference between the average monthly “full-time equivalent” (“FTE”) employees from July-November 2020 and the average monthly FTE from April-June 2020. All employees of “related” businesses are treated as employed by a single qualified small business employer.
A monthly FTE is:
- For hourly employees, the total number of hours worked per month (no more than 167 hours per month) divided by 167; and
- For salaried employees, the total number of weeks worked per month divided by 4.33, multiplied by the fraction of full-time employment that the employee works (i.e., 50% for a half-time employee).
For example, suppose Employer X had an average of 10 monthly FTE employees from July 1, 2020 through November 30, 2020 and only an average of five monthly FTE employees from April 1, 2020 through June 30, 2020. Here, Employer X had a net increase of five qualified employees, and therefore will qualify for up to $5,000 in credits.
A “qualified employee” is an employee who is paid wages subject to withholding but does not include an employee whose wages are included in calculating any other California corporate or personal income tax credit. This credit does not apply to independent contractors. Taxpayers included in a combined report are not eligible for the credit.
Procedures to Reserve and Claim the Credit
As noted above, to reserve the credit, taxpayers must submit an online application to the CDTFA. When submitting the application, taxpayers should be prepared to choose which tax to claim the credit against.
The credits may be claimed against corporate or personal income tax on timely filed original returns for the 2020 tax year. If the credit exceeds tax due, then it may be carried forward for up to five years. To avoid double benefit, wage deductions must be reduced by the amount of credit claimed.
Alternatively, a taxpayer (such as a retail or restaurant business) may irrevocably elect to use the credit against sales and use taxes. The mechanics for making this election should be released in future guidance.
For more questions or information on this Tax Alert, please reach out to one or more of the following individuals:
Name: Javier Ramirez, Partner
Office: Irvine, CA
Phone: (949) 623-0466
Name: Peter Seidel, Director
Office: Los Angeles, CA
Phone: (310) 481-7472
Name: Meghan Andersson, Manager
Office: Irvine, CA
Phone: (949) 623-0542