URGENT ACTION REQUIRED!
2013 will be the last tax year for which businesses may engage in qualified Enterprise Zone hiring or purchasing. Business should document as much Enterprise Zone tax credit as possible now to preserve credits for the eleven year carry forward period. » Contact us and MAXIMIZE your Enterprise Zone credits!
Governor Brown signed SB 90 and AB 93 today. These bills phase out California’s 28 year-old Enterprise Zone. The program, which provides tax credits to businesses in targeted areas if they purchase qualified equipment or hire qualified employees, will be replaced with Governor Brown’s new three-part economic development plan.
2013 will be the last tax year for which businesses may engage in qualified Enterprise Zone hiring or purchasing. Qualified employees will continue to generate a tax credit, and excess credit will be permitted to carry forward for up to eleven years to offset Enterprise Zone-allocable income. Other economic development programs such as Targeted Tax Areas, Manufacturing Enhancement Areas and Local Agency Military Base Recovery Areas (“LAMBRA’s) are similarly affected. Also eliminated will be the California New Jobs Credit, of which only $168M has been claimed of the $400M allocated since January 1, 2009.
Summary of Governor Brown’s Three-Part Economic Development Plan
Enterprise Zones and LAMBRA’s
Enterprise Zones will be re-zoned as “Former Enterprise Zones,” which include Enterprise Zones that were designated through 2012 and expansion areas effective through June of 2013. These Former Enterprise Zones will be re-zoned to exclude any areas in the lowest quartile of census data for unemployment and poverty (i.e. “wealthy” census tracts would be excluded from Former Enterprise Zones). Businesses in Former Enterprise Zones will be eligible for certain benefits under Governor Brown’s new three-part economic development plan. Additionally, those census tracts found to be within the highest quartile of census data for unemployment and poverty (i.e. the “poorest” census tracts) will be known as "Designated Census Tracts." LAMBRA’s are also grandfathered into Governor Brown’s program. Collectively, the Former Enterprise Zones and LAMBRA's are referred to as “Economic Development Areas.” It appears Former Enterprise Zones will expire on December 1, 2019; since, that is the date the Enterprise Zone hiring credit is repealed under AB 93 and thus by statute the new expiration date for Enterprise Zones. LAMBRA’s share similar language and likely sunset the same way.
Part 1 - Partial Sales Tax Credit Exemption for Qualified Equipment
Taxpayers may claim a partial sales tax exemption for the state portion of sales tax imposed on equipment purchases from July 1, 2014 through July 1, 2022 if used in the below-listed activities. An exemption certificate must be presented at the time of purchase.
|Qualified Activities:||Excluded industries and equipment:|
|▪ Manufacturing||▪ Banking businesses|
|▪ Processing||▪ Extractive businesses|
|▪ Recycling||▪ Agricultural businesses|
|▪ R&D as defined under section 174 of the Internal Revenue Code||▪ Non-capitalized equipment|
|▪ Maintenance of the above equipment|
|▪ Pollution control equipment|
Part 2 – Hiring Tax Credit
A new hiring tax credit for Designated Census Tracts and Economic Development Areas will replace the Enterprise Zone hiring tax credit. Full-time employees meeting one of the criteria listed below will be eligible. The credit will be available for tax years 2014 through 2020 inclusive and must be claimed on a timely-filed original return.
If an employer relocates to a qualified area, the employer must express an employment offer for the new location in writing to all employees from the old location for similar pay if employment in qualified areas increases in the same rolling twelve months as employment decreases in non-qualified areas to be eligible for the hiring tax credit. Small businesses, which the program defines as having less than $2M in gross receipts in the prior year, are excluded from this and several other requirements. An employer must make a tentative credit reservation in a manner to be prescribed by FTB for each qualified employee within thirty days of registering with EDD. Taxpayers must also provide annual data regarding these employees to FTB by the corporate tax filing deadline for their respective tax years.
Employer data will be publically presented on a website. There is a recapture provision, with exceptions, for employees terminated in the first 36 months of employment. The hiring credit has a five year carry forward provision, and is generated for five years from the date an employee is hired. Employees must still work at least half of a given taxable year within qualified areas and their starting wage must now be at least 150% of minimum wage. A qualified employee must be hired 2014 onward and work in a Former Enterprise Zone, or a qualified employee must be hired after the employee’s job-site becomes a Designated Census tract.
Commentary: Interestingly, the taxpayer must report whether the employee lives within a Targeted Employment Area (TEA) as defined under the Enterprise Zone program. The FTB is to process TEA-qualified applicants expeditiously, which is remarkable since the TEA was one of the major points of criticism of the Enterprise Zone program. TEA residence does not qualify an employee for the program.
Hiring Tax Credit Calculation (Amount & Formulae)
Hiring credit = applicable percentage multiplied by tentative credit amount
Applicable percentage = net increase in current year full-time equivalent employees over base year full-time equivalent employees divided by current year qualified employees
Base year = the year before the first qualified employee is hired
Qualified wage = amount in excess of 150% of minimum wage up to 350% of minimum wage, unless located in special Designated Pilot Areas in which case the floor is $10 per hour
Tentative credit = 35% multiplied by qualified wage
Full-time equivalent employees = California full-time employees prorated based on hours or weeks worked by full-time employees (35+ hours per week)
▪ Unemployed six months preceding date of hire
(higher education students must have graduated
12 months prior)
▪ Veteran unemployed since separation from service (1 year cap)
▪ Earned Income Tax Credit recipient in prior year
▪ Ex-offender previously convicted of a felony
▪ CalWORKS or Welfare recipients
|Industries not eligible unless meeting the small business $2M exclusion outlined above:
▪ Temporary staffing agencies
▪ Retail establishments
▪ Food service establishments
▪ Casinos (including casino hotels)
▪ Bars, lounges or other drinking establishments
▪ Live nude entertainment
(no small business exclusion)
Part 3 – California Competes Tax Credit Committee
Governor Brown’s Office of Business and Economic Development will receive a $600,000 budget allocation to negotiate tax credit contracts with businesses based on a series of factors listed below. The contracts will be approved or rejected by the California Competes Tax Credit Committee. These credits will be available for tax years beginning 2014 through 2024 inclusive and will be subject to recapture if the business fails to achieve the objectives outlined in the agreement. The program will budget $780M in tax credits to be spread from 2013 to 2018. No taxpayer may receive more than 20% of the allocation for a given state fiscal year and 25% shall be allocated for small businesses. The program is repealed in 2025.
Tax Preparer's Note: An interesting component of this program is that FTB is granted sweeping examination powers to examine and determine whether a taxpayer has met the terms of the tax credit contract
|Factors Considered by the California Competes
Tax Credit Committee
▪ The number of jobs to be created or retained in the state
▪ The amount of investment in California by the taxpayer
▪ Employee compensation
▪ Unemployment and poverty in the business’s location(s)
▪ Incentives available in California as opposed to other states
▪ Duration of commitment
▪ Economic impact
▪ Strategic importance
▪ Opportunity for future growth
▪ Cost benefit of tax credit
|Each Agreement Shall Contain:
▪ Job retention period
▪ Compensation levels
▪ Allocation and timing of tax credit
▪ Recapture upon failure to meet conditions