California’s governor signs Senate Bill 1447, the Small Business Hiring Tax Credit, to provide financial relief to qualified small businesses for the 2020 economic disruptions that have resulted in unprecedented job losses.
Did you know that the recent Small Business Hiring Tax Credit bill let’s California businesses offset district taxes and use the taxes with the credit? It might sound too good to be true, but it is good, and it’s also true. With millions of people out of work in California, Governor Gavin Newsom recently signed a law giving tax breaks to small businesses that hire more workers over the next several weeks.
According to this article published by the NBC website for the Bay Area, California lost 2.4 million jobs in April. More jobs were lost this year than during the Great Recession a decade ago! Though the state has recovered nearly 1/3rd of those jobs since then, the unemployment rate is still at a whopping 13.3 percent — a percentage that’s higher than what was experienced during the Great Recession that happened from 2007 to 2009.
How to determine if your small business qualifies for the small business hiring credit
Sometimes referred to as the “Main Street Hiring Credit,” there’s been recent clarification that this bill allows taxpayers and small business owners the opportunity to use the credit against income taxes, or can make an irrevocable election to apply the credit against sales and use taxes. More specifically, the law will offer businesses of 100 employees or less a credit of $1,000 on their state tax bills for each new employee that’s hired by December 1st of 2020.
According to the official website of the Franchise Tax Board (FTB), the credits are allocated by CDTFA on a “first-come, first-serve basis” until the credits are “exhausted at $100 million” statewide or $100,000 for each business. Keep in mind that businesses get the credit only if they hire employees, not contractors. And small businesses that are owned by large companies are not eligible.
To qualify for the credit, taxpayers (employers) must:
- Have 100 or fewer employees on December 31, 2019 (all employees, including part-time employees).
- Have experienced a 50 percent decrease in gross receipts from April to June of 2020, compared to the gross receipts from April to June of 2019.
- Apply for a tentative credit reservation from CDTFA during the period of December 1 of 2020 through January 15 of 2021.
- Not be required or authorized to be included in a combined report.
What is the amount of credit that will be given, how can I claim my hiring credit as a small business owner, and what info do I need to know about the CDTFA
The amount of credit that can be received is up to $1,000 for each net increase in the monthly average number of employees, as measured in full-time employee equivalents. We know this is a lot of math (and not everyone’s a fan of math) so if you need more information on computing the credit, make sure to visit the official CDTFA website; the website has resources readily available that can help you break down the calculations.
In order to qualify to claim your credit, the following must apply:
- Must be paid wages by the employer (subject to California Unemployment Insurance Code).
- Cannot receive wages that are used in the calculation of any other tax credit.
- Is not paid as an independent contractor.
Small business owners need to do the following in order to claim the credit (keep in mind that unused credits may be carried over for 5 years or until exhausted):
- File your income tax return.
- Include a separate Small Business Hiring credit (FTB 3866) (coming soon) to claim this credit.
- Provide the certificate numbers when claiming these credits.
- Use credit code 240 when claiming the credit.
- Visit Instructions for FTB 3866 for more information.
As mentioned earlier, it’s clarified that applications will be accepted by the CDTFA beginning December 1 of 2020, and ending January 15 of 2021. Applications can be submitted at any earlier date when the maximum cumulative total allocation limit is reached but will not be accepted after January 15 of 2021. The CDTFA will:
- Notify the applicant of the tentative credit reservation amount no more than 30 days after the application is received; and
- Allocate the credit reservations on a first-come, first-serve basis, not to cumulatively exceed $100 million.
The CDTFA will allow a qualified small business employer that received a tentative credit reservation and made an irrevocable election to apply the hiring credit against qualified sales and use taxes imposed on the employer, as follows:
- for monthly filers, the credit will apply to amounts due and payable for the month of March 1, 2021, and due April 30, 2021;
- for quarterly filers, the credit will apply to amounts due and payable for the January through March 2021 quarter and due April 30, 2021; and
- for annual filers, fiscal year filers, or a qualified small business owner on any other reporting basis, the credit will apply to amounts due and payable on the first return due on or after April 30, 2021.
Any excess credit will be carried over and will not be refunded. When the credit amount exceeds the sales and use taxes due and payable, the CDTFA will apply the excess credit against amounts due and payable for periods following those above (i.e., monthly, quarterly, and annual filers) on returns due and filed on or before April 30, 2026. Any remaining excess credit amount after April 30, 2026 will not be refunded and will be forfeited.
What makes this bill different than others that have been signed in the past
In that same NBC report quoted at the outset of this article, Governor Newsom called the Small Business Hiring Tax Credit “one of the most significant tax credits in our state’s history” because of the provisions that restrict the benefits to small businesses impacted by the pandemic. He explained that when it comes to open-ended tax credits, they often go to a handful of well-resourced companies; the small businesses that need the tax credits the most are left with, well, nothing.
Thus, unlike most tax breaks, small businesses can also use the credit to lower the amount of sales taxes they have to send to the state. The goal with this is to help retailers that don’t pay much in income taxes but collect a lot of sales taxes.
“There was a commitment among all of us to make sure that our small businesses come back,” one senator commented. And one of the most tangible ways to support this commitment is by providing small businesses with the same open-ended tax credits that larger companies had the privilege of experiencing in the past.
This bill, authored jointly by several senators, including assembly members, expands California’s assistance programs for small businesses during the COVID-19 pandemic by establishing this $ 100 million small business hiring tax credit program.
Sabrina Cervantes, who chairs the Assembly Committee on Jobs, Economic Development, and the Economy, further explains the significance of this bill for small business owners in California. “California small businesses and their workers are among the hardest hit in the COVID-19 pandemic,” said Cervantes. “Research shows that between March and April of this year, private employment in the US fell by 15.2%. For small firms, however, they experienced a 21.5% loss of jobs, while businesses with over 1,000 employees experienced the fewest job losses (13.3%). […] Addressing employment losses among small businesses is crucial to the state’s economic recovery.”
The impact of signing the small business hiring tax credit and other financial recovery programs for small business owners now and in the future
During these unprecedented crises, the State has prioritized supporting small businesses and the individuals that those businesses employ. Why? Because small businesses make up the backbone of our economy. And, quoted from this article, small businesses can be a great engine to decrease statewide record unemployment. Senate Bill 1447 will put people back to work and allow small businesses that have suffered declining revenues to start hiring again. This means all you small businesses that are looking for opportunities to keep your doors open and your employees paid have options now for relief and future success. Closing your doors for good doesn’t need to be the final resort.
Other recovery programs that have already begun to support small businesses include a one-year, zero-interest extension on sales and use tax liabilities of up to $50,000, as well as a $150 million expansion of the loan guarantee programs administered by the California Infrastructure & Economic Development Bank (I-Bank), as approved by the Legislature in the 2020 Budget Act.
With the government actively looking for ways to support small businesses financially as we push through this economic downturn, it’s important to stay updated. It’s also important to seek the guidance of professionals to ensure your business is making the right decisions at the right time for long-term success. Be sure to review the links below for additional assistance: