In 2014, California’s tax credit and incentive landscape changed significantly. As of 12/31/13, the state’s lucrative Enterprise Zone Program officially ended. The Enterprise Zone Program offered several tax credits, incentives and deductions for California businesses and financial institutions (note that benefits for the multi-year EZ Hiring Credit will continue to accrue for several years, and unused credits generated from the EZ program can be carried forward). In replacing the EZ program, legislators indicated that they wanted more focus on credits that would create economic growth and jobs within the state beyond enterprise zones. They also wanted to remedy some perceived abuses with the EZ program. We worked with the program for many years, and while it wasn’t perfect, it certainly benefited many of the state’s disadvantaged communities. Cynics of the legislative process in California (author included) might say these changes were purely political. As you will see from our discussion of the new employment credit below, this is NOT a program meant to spur widespread hiring in California via usable tax credits as it is too restrictive to provide benefits to a broad tax base.
The New Employment Credit
The money that was previously allocated towards the EZ program is now being redirected toward three new incentive programs – the Manufacturers’ Sales and Use Tax Exemption, the California Competes Tax Credit, and the New Employment Credit. Theoretically, the New Employment Credit replaces the previous EZ Hiring Credit. The New Employment Credit is for qualified employers who hire qualified full-time employees on or after January 1, 2014.
It presents itself as a very beneficial tax credit. Below is a breakdown of the benefits:
- Max Credit Amount: $56,000 per employee over a five year period (assuming an employee works 2,000 hours a year)
- Credit Amount: 35% per year
- Credit is based on wages above $13.50/hour and up to $31.50/hour (however, only wages within this range are qualified, so the credit base may actually be very small)
Who are Qualified Employers and Employees?
While the data above sounds good, in order to be considered a qualified employer and hiring qualified employees a long list of criteria must be met. And in our brief experience with this program as yet, it is VERY difficult for employees to qualify such that the credit provides significant value.
Businesses wishing to utilize this credit cannot be engaged in temporary help services, retail trades, and those primarily in food services, which excludes a significant number of employers that were previously eligible for the EZ program. There is an exclusion for these otherwise disqualified businesses if they are considered a “small business,” meaning their gross receipts from the production of business income is less than $2 million. The employer must submit a Tentative Credit Reservation, for purposes of computing the credit, within 30 days of reporting the new hire to the EDD’s New Employee Registry. Further, this credit is only for those businesses located within a designated geographic area (DGA). DGA’s consist of the following:
- Regions that have the highest unemployment and highest poverty rates
- Former Enterprise Zones (excluding regions within the zones that have low unemployment and poverty levels)
- Former Local Agency Military Base Recovery Areas (LAMBRA)
Qualified employees must perform 50% of their services for the employer in the DGA. They must also receive starting wages that exceed 150% of the state minimum wage and work at least 35 hours. In addition, a qualified employee must meet one of the following five conditions, and be able to provide substantiating documentation to his/her employer:
- Unemployed for the six months immediately preceding hire
- Veteran separated from the U.S. Air Force in the preceding 12 months
- Recipient of the Earned Income Tax Credit in the previous taxable year
- Ex-offender convicted of a felony
- Current recipient of CalWORKS or general assistance in accordance with the applicable sections of the Welfare and Institutions Code
Once these criteria are met, a business can claim the credit only if they create a net increase in the amount of jobs over a base year. Thus, qualification for the New Employment Credit is extensive and far more complex than for the EZ Hiring Credit. We expect that the amount of companies that can take advantage of this credit will be significantly lower than the number that used the EZ Hiring Credit, and again, putting on our cynic hat, we believe that that is exactly what the legislature and Governor had in mind in creating this credit. That said, for a few select companies that have the right fact pattern and the willingness to jump through administrative hoops, this can be a beneficial credit. If your company is significantly expanding its workforce in areas that are now classified as DGAs, give us a call to perform an analysis on your fact pattern.