CALIFORNIA TAX INCENTIVES


California Manufacturing Exemption

The California Manufacturing Exemption allows certain manufacturing and biotech companies to exempt manufacturing and research and development (R&D) equipment purchases from sales and use tax.

  • Purchased equipment or machinery must be used 50 percent or more during the manufacturing process.
  • Equipment and machinery purchased and used for R&D qualifies.
  • 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.
  • Only part of the state tax portion of the sales tax is exempt. The exemption currently amounts to 3.9375 percent 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 (3111 to 3399, 541711, or 541712), plus after January 1, 2018, those businesses engaged in business in NAICS codes 22111-221118 inclusive, and 221122.

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 percent 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.”
In order to claim the partial exemption for qualified purchases made, the purchaser must provide the seller with a timely executed Form CDTFA-230-M to obtain the reduced rate.

Note that this partial exemption can be retroactive (i.e. subject to refund) to companies that may not have taken advantage of the reduced benefit at the time they purchased qualified equipment. If a company has directly paid use tax to the state on the amount of property purchased, it can go back (subject to the statute of limitations) and request a refund directly from the CDTFA. In the event where a company paid sales tax to a vendor, the process is a little more complicated in that the company would have to reach out to the vendor for the refund. Do you find this a little confusing? We can help with that!

For more information, check out our blog post about this benefit (link below) and the CDTFA’s website.

How to Navigate the California Manufacturer's Sales Tax Exemption

California Competes Tax Credit

The California Competes Tax Credit is an 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.

Companies interested in applying for the California Competes Tax Credit start by answering a series of questions through an online application process. The 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.
  • The incentives available to the business in other states.

By answering these questions, the company enters a pool of applicants that will then be vetted to move on to the next phase (or not), depending upon the answers.

Every year, the state’s ’GoBiz office accepts applications during specified time periods. Click here for the upcoming application periods.

For more information, check out our blog post about this credit-link below.

The California Competes Tax Credit Program

California New Employment Credit

The California New Employment Credit is a 35 percent credit available to qualified taxpayers that can generate up to $56,000 over a five-year period for hiring qualified employees.

An eligible business must meet the following requirements:

  • Be located within a Designated Geographic Area (DGA). These areas are determined by the CA Department of Finance.
  • Be in a specific 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 businesses with revenue less than $2 million can qualify for the New Employment Credit even within these industries (with the exception of sexually-oriented businesses).

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 this credit is quite difficult. However, it can be a valuable credit for companies with the right fact pattern. Learn more information from the California Franchise Tax Board.

Questions? Give us a Call!

408.266.2259