In July of 2013, Governor Jerry Brown signed bills AB93 and SB90 which eliminated the former Enterprise Zone Hiring Credit and replaced it with the “California New Employment Credit” as of 1/1/14. The new 35% credit may sound good since an employee could generate up to $56,000 over a five year period (as opposed to the EZ at approximately $38,000 over a five year period), however, the New Employment Credit is much harder to qualify for and requires the employer to jump through many hoops in addition to burdensome documentation.
An eligible business must meet all the following requirements:
- Be located within a Designated Geographic Area (“DGA”). These areas are determined by the CA Department of Finance. The new designated areas will include the old Enterprise Zones, plus other specified census areas encompassing the state’s highest unemployment areas
- Be in an industry including: Manufacturing, Biomedical, Aerospace, and technology sectors, among others.
- Have a “net increase in number of jobs” over a base year.
The following are not eligible for the program: Retailers, food service, temporary employment agencies, casinos, bars, and sexually-oriented businesses. Note that small business (revenue less than $2million) can qualify for the New Employment Credit even within these industries (with the exception of sexually-oriented businesses).
A qualified full-time employee must meet all the following:
- Performs at least 50% of their services for the employer in the DGA.
- Receives starting wages that are at least 150% of the State minimum wage, but not greater than 350%. (Note: On July 1, 2014, California’s minimum wage increased to $9 per hour. Based on $9 per hour, the California New Employment Credit would reimburse wages between $13.50 ($9 x 150%) and $31.50 ($9 x 350%) per hour.)
- Is hired on or after January 1, 2014.
- Is full time (at least 35 hours per week)
In addition, the employee must also meet one of the following:
- Individuals unemployed for the six months immediately preceding date of hire
- Veterans separated from the U.S. Armed Forces within the last 12 months.
- Recipients of the Earned Income Tax Credit in the previous taxable year.
- Recipients of CalWORKS or other general assistance.
- Ex-offenders convicted of a felony.
Employers have 30 days after completing the “new hire requirement” with the California Economic Development Department to then determine if an employee qualifies for the new credit and complete a “tentative new hire credit reservation” with the California Franchise Tax Board.
In comparison, the old Enterprise Zone hiring credit allowed individuals to qualify in many more categories (including those employees that were residents of areas of high unemployment at date of hire), and it did not require an increase in employment, or pre-certification. The California New Employment Credit is much more restrictive. The tentative credit reservation process will replace the prior vouchering requirement to qualified employees. Employers will also need to annually re-certify each qualified employee within two and half months after the end of the taxable year which was not a requirement before. In addition, the California New Employment Credit carries forward for only five years with a recapture period of 36 months as opposed to the former EZ Hiring Credit which carried forward indefinitely with a recapture period of 270 days. And to begin to even be allowed the credit, an employer must have an annual net increase in full-time employees statewide. Note that the California New Employment Credit must also be claimed on at timely filed (or properly extended) tax return. It cannot be claimed retroactively on an amended return. So taxpayers must plan accordingly.
In our opinion, qualification for the new credit is difficult it is burdensome on employers. Most businesses will be hard-pressed to jump all of the hurdles required – industry, increasing employment, within DGAs, limited qualified categories, and pre-certification. However it can be a valuable credit for companies with the right fact pattern. Miles Consulting is here to help! We can assist with determining your company’s preliminary qualification, verifying qualified employees, completing the reservation process, calculation of the credit, and re-certifying your employees annually. Please give us a call if you think you might qualify or would like some guidance in making that determination.
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects, including the California New Employment Credit. To learn more, contact us today at www.milesconsultinggroup.com