Author: Terry Barrett, Tax Senior Manager | State and Local Tax Team
Last year, California created the “California Competes Tax Credit” to help attract new businesses and encourage investment by existing businesses. This was part of the Governor’s Economic Development package that also included a manufacturing partial sales tax exemption and a hiring tax credit.
This is the second fiscal year of the tax credit and deadlines loom for businesses looking to secure the credits. According to the California Governor’s Office of Business and Economic Development, “GO-Biz”, last fiscal year 28.9 million dollars in tax credits were awarded to 29 companies that are planning to create 6,000 jobs and invest more than 2 billion dollars in the state. This fiscal year (2014-2015), 151.1 million dollars in credits are available for award; 200 million dollars will be available for award in each of fiscal years 2015-16 and 2017-18. Twenty-five percent of the credits are for small businesses (those essentially with 2 million dollars in revenue last tax year).
The current application period runs from September 29 to October 27, 2014. Up to 45 million dollars in tax credits are available. There will be quarterly awards of credits and businesses may apply at a later date but businesses that act now need only apply once in the year to compete against the applicant pools for the other quarterly awards (however, they will be required to update their information in each of the application periods). The other quarterly periods when credits will be awarded are:
- January 5, 2015 through February 2, 2015 (75 million dollars available), and
- March 9, 2015 through April 6, 2015 (31.1 million dollars available plus any unallocated amounts from the previous application periods)
The credit applies only to income tax owed to the California Franchise Tax Board and the minimum tax credit that can be requested is 20,000 dollars.
Candidates for this credit include businesses that:
- Are already in California and looking to expand
- Considering a move to (or from) the state
- Anticipate growth in employment in the state over the next five years.
The credit is competitive – businesses apply and compete through an on-line application process. (See www.calcompetes.ca.gov for the application during the application period.) Applicants are evaluated based upon certain quantitative criteria, including, but not limited to the number of jobs created and retained; employee compensation; investment (in property, buildings, equipment, etc.); the overall economic impact of the project on the locality and state; and the extent the benefit to the state exceeds the tax credit provided. Applicants with the most advantageous cost benefit ratio (ratio of the income tax credit requested to the combined employee compensation and investment packages to be provided) as computed solely through the on-line process then move on to a qualitative analysis where factors such as job retention; the extent of unemployment/poverty in business area; the overall economic impact of the investment; the opportunity for future growth/expansion; etc., are considered.
Applicants passing the qualitative part of the analysis then negotiate a contract with GO- Biz which is approved or rejected by the GO-Biz Committee. Applicants who are awarded a credit must enter into a contract with the state that stipulates what the applicant will do (in terms of minimum employee compensation and retention, the timing of the credits to be taken). The contract provides for recapture provisions if the applicant does not meet its commitments.
GO-Biz offers online webinars that walk businesses through the application process. See www.business.ca.gov for information about the webinars and additional information regarding the California Competes Tax Credit.
Questions about the California tax credit? Contact your Keiter representative or 804.747.0000 | firstname.lastname@example.org