California’s New Tax Incentives
California Manufacturing Exemption
The California Manufacturing Exemption begins July 1, 2014 and allows certain manufacturing and biotech companies to exempt from sales and use tax purchases of manufacturing and research and development (R&D) equipment. Purchased equipment or machinery must be used 50% or more during the manufacturing process. Equipment and machinery purchased and used for R&D qualifies as well. In any given calendar year, the combined amount of purchase must not exceed $200 million dollars. Any purchases beyond the $200 million threshold will not qualify. In addition, only part of the state tax portion of the sales tax is exempt. The exemption amounts to 4.1875% of the purchase price of qualified property. Since the exemption is partial, recordkeeping will be key!
Companies benefitting from the California Manufacturing Exemption are those whose line of business falls into a qualifying NAICS code. (Qualified NAICS codes are 3111 to 3399, 541711, or 541712.) Proposed regulations 1525.4 will provide a more detailed definition of a “qualified person.” The NAICS codes indicate the line of business the qualified company is primarily engaged in. “Primarily engaged” is also defined in the proposed regulation as, “50% or more of gross revenues, including intra-company charges, are derived from manufacturing or R&D activities for the financial year of the purchaser preceding the purchase of the property.” For more information, check out our blog post about this benefit—link below.
California Competes Tax Credit
The California Competes Tax Credit is a recently enacted income tax credit available to businesses that plan to relocate to the Golden State OR for companies already in the state planning to expand California operations. There is a multi-phase process by which applications will be accepted and analyzed to determine which opportunities best meet the state’s objectives for economic development and to allocate funds to companies that best carry out those objectives. Funding has been set as follows: $30M in fiscal year 2013/2014; $150M in fiscal year 2014/2015, and $200M each in the next 3 fiscal years (through 2017/2018). The benefits are available to any business, in any industry. While many states have had various tax credits and negotiated incentives available for years, this kind of tax incentive is new for California.
Companies interested in applying for the California Competes Tax Credit start by answering a series of questions via an on-line application process. The on-line questionnaire qualifies companies based upon the factors considered for ultimate qualification for the credit including, but not limited to, the number of jobs the business will create and retain in the state, the amount of investment in this state by the business, the extent of poverty or unemployment in the area where the business is located or expanding into, the overall economic impact in California of the business, and the incentives available to the business in other states. By answering these questions during the on-line Phase I, the company enters a pool of applicants that will then be vetted to move on to a Phase II (or not), depending upon the answers. (For more information, check out our blog post about this benefit.)Top ˆ
California New Employment Credit
The “California New Employment Credit” is available to qualified taxpayers as of 1/1/14. The new 35% credit can generate up to $56,000 over a five year period for hiring qualified employees, however, the credit requires the employer to meet many qualifications that the former EZ Hiring Credit did not.
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 $2 million) can qualify for the New Employment Credit even within these industries (with the exception of sexually-oriented businesses).Top ˆ
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.
Qualification for the new credit is difficult. However it can be a valuable credit for companies with the right fact pattern. Miles Consulting can assist with determining a company’s preliminary qualification, verifying qualified employees, completing the reservation process, calculation of the credit, and re-certifying employees annually.
To find out more about the California New Employment Credit, visit our blog.Top ˆ
California Enterprise Zones
California Enterprise Zones - General
Miles Consulting has many years of experience with the California enterprise zone program, including all of the areas detailed below: EZ Hiring Credit, EZ Sales/Use Tax Credit and EZ Net Interest Deduction for Lenders. We keep current on all issues surrounding the zones and make sure that our clients claim all the benefits to which they are entitled. We are members of the California Association of Enterprise Zones, regularly attend open forum discussions by the Department of Housing and Community Development (HCD), and track legislation affecting the EZ programs.
Note: In June 2013, the California legislature passed (and the Governor signed) AB93 which effectively eliminates the enterprise zone program. Credits and deductions are still available through 12/31/13, and the EZ Hiring Credit continues to be calculated on qualified employees hired through 12/31/13 and properly vouchered. For more information, visit our blog. We will continue to assist companies in obtaining these benefits for all open and qualified tax years. Please contact us for additional information.
Note: EZs expired 12/31/13 - use for general information onlyTop ˆ
CA Enterprise Zone Hiring Credit
Companies with locations in California enterprise zones and program areas are permitted a credit against the income/franchise tax for hiring certain categories of qualified individuals through 12/31/13. The credit equals 50% of qualified wages paid to such individuals for the first year of employment, 40% in the second year, 30% in the third year, 20% in the fourth year, and 10% in the fifth year. Based upon current minimum wage rates, an employer could expect to receive hiring credits of over $37,000 if a qualified, full time employee is retained for 5 years, or over $20,000 if the employee is retained just 2 years. Benefits can be found not only on a current year tax return, but can be claimed retroactively to open tax years.
Client Value: Miles Consulting helps clients identify and claim qualifying EZ credits that provide dollar for dollar tax benefits. Miles Consulting has a proven methodology to quickly and accurately identify qualifying employees, enabling our clients to maximize the amount of credit available, thereby reducing their California income/franchise tax.
- Companies with one or more locations in one of California’s 42 enterprise zones.
- Companies in a variety of industries including, but not limited to, manufacturing, technology, banking, utility, etc.
CA Enterprise Zone Sales/Use Tax Credit
Companies with locations in California enterprise zones and program areas are permitted a credit against the income/franchise tax for purchasing and placing into service qualified machinery in the EZ through 12/31/13. The EZ sales/use tax credit is equal to the amount of sales tax paid on the qualified equipment, but is claimed on the income/franchise tax return. Qualified machinery includes machinery or parts used to manufacture, process, or assemble a product. The definition also includes data processing and communications equipment, including computers, copy machines, telephone systems, and faxes. Corporations may claim a credit equal to the sales or use tax paid or incurred to purchase the first $20 million of qualified machinery.
Client value: Miles Consulting has a process to quickly and accurately identify qualifying property and compile supporting documentation necessary to substantiate the credit under audit. The benefit can be in excess of 8% of the cost of the equipment.
- Companies located in one or more of California’s 42 enterprise zones and placing into service qualifying equipment used exclusively within the zone.
- Companies in a variety of industries, including but not limited to manufacturing, software development, etc.
CA Enterprise Zone Net Interest Deduction for Lenders
Banks are permitted a deduction from California taxable income for “net interest” received from loans made to customers engaged in a trade or business located in one of California’s 42 enterprise zones through 12/31/13. It is not necessary for the lender to be located within the boundaries of the enterprise zone to take advantage of the deduction. Net Interest Deduction benefits can be found not only on a current year tax return, but can be claimed retroactively to open tax years.
Client Value: Miles Consulting has a proven methodology to quickly and accurately identify loans qualifying for the CA EZ net interest deduction. We review loan documents to ensure audit sustainability while maximizing benefits. By providing our clients with our process, they know exactly how we arrived at the deduction—an added benefit in today’s regulatory environment.
- Banks headquartered in California with most of their activities conducted within California. Banks located in or near cities with designated enterprise zones are likely to have even more benefit.
- Banks headquartered outside of California, but with several locations in the state.
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Los Angeles Enterprise ZonesLos Angeles area zones include:
- LA ( large parts )
- Long Beach
- Santa Ana
- San Bernardino
- Santa Clarita
Bay Area Enterprise Zones
- San Francisco Enterprise Zone
- San Jose Enterprise Zone
- Oakland Enterprise Zone
- Richmond, Stockton areas
Central Valley Enterprise Zones
- Fresno Enterprise Zone
- Stanislaus County
- San Joaquin County