The California Franchise Tax Board has issued a series of answers to frequently asked questions (FAQs) concerning Gov. Jerry Brown’s economic development initiative that was enacted by A.B. 93, Laws 2013, and modified by S.B. 90, Laws 2013 (TAXDAY, 2013/09/12, S.6), and that:
— repealed the geographically targeted economic development area (G-TEDA) tax incentives, including the enterprise zone (EZ), local agency military base recovery area (LAMBRA), targeted tax area (TTA), and manufacturing enhancement area (MEA) credits against personal income and corporation franchise and income taxes;
— replaced the existing new employee credit with a revised new employment credit against personal income and corporation franchise and income taxes beginning with the 2014 tax year; and
— enacted a new California competes credit against personal income and corporation franchise and income taxes.
Repeal of G-TEDA Credits
The FAQs clarify the following:
— The EZ and LAMBRA hiring credit can be generated for qualified employees hired prior to 2014, whereas the MEA and TTA hiring credits may only be claimed for qualified employees hired prior to 2013. [CCH Note: This is because the 15-year designation period for the MEA and TTA areas expired at the end of 2012.]
— The hiring credits may be claimed for the full 60-month period for employees hired prior to 2014 (2013 for MEA and TTA credits), however the credit may only be claimed against business income apportioned to the economic incentive area in which the credit is associated.
— The EZ, LAMBRA, TTA, and MEA hiring credits may still be claimed on an amended return as there is no requirement that these credits be claimed on an original filed return.
— The EZ and LAMBRA sales and use tax credit and business expense deduction will expire on January 1, 2014, and may only be claimed for property purchased and placed in service prior to 2014, whereas the MEA and TTA sales and use tax credit and the TTA business expense deduction expired on January 1, 2013, and may only be claimed for property purchased and placed in service prior to 2013.
— The credit carryover period for the portion of any G-TEDA credit remaining for carryover to taxable years beginning after 2013 is limited to the succeeding 10 taxable years.
— The EZ net interest deduction is allowed only for interest payments received or accrued prior to 2014.
— The EZ employee credit, which is available for wages employees earned while working within the boundaries of an EZ, cannot be generated after 2013, but may still be claimed on a 2013 tax year return.
Furthermore, the EZ or LAMBRA net operating loss (NOL) is allowed for losses attributable to the taxpayer’s business activities within the EZ and LAMBRA through December 31, 2013, without regard to the ending date of the taxpayer’s taxable year. For a taxpayer with a taxable year on a fiscal year basis, this loss is calculated by computing the EZ or LAMBRA NOL as if the EZ or LAMBRA had remained in existence the entire year. This full year loss is then prorated by the number of days the taxpayer operated in an EZ for the taxable year over the total number of days in the taxable year. The TTA NOL expired on December 31, 2012, and is therefore not impacted by the legislation.
New Employee Credit
The FAQs for the new employee credit address a variety of topics including, but not limited to, basic eligibility issues, examples of how to calculate the credit, and how related taxpayers are treated for purposes of the credit. Highlights of the new take-aways from the FAQs include the following:
— For purposes of determining whether a business qualifies for the $2 million small business classification, and thus qualifies for less-restrictive eligibility criteria, gross receipts from both the taxpayer’s business and nonbusiness income are combined.
— Two or more part-time employees cannot be treated as equivalent to a qualified full-time employee if together they work a total of at least 35 hours in a week. A qualified full-time employee must work an average of at least 35 hours a week.
— The credit may not be claimed for a part-time employee whose hours are increased to full-time employment in a subsequent tax year. An employee must be a full-time employee at the date of hire.
— A tentative credit reservation application will be available on the FTB’s website beginning on January 1, 2014. Applications may only be submitted online.
— The amount of the credit is based on the actual wages paid, so that if an employee receives a raise during the tax year, the credit is calculated based on the increased wages and is not limited to the employee’s starting wage.
— The credit may be applied against all of a taxpayer’s California taxable income. Unlike the EZ credits, the credit is not limited to the income attributable to a particular designated area.
— All employers that are treated as related under IRC §267, 318, or 707 are treated as if employed by a single taxpayer, as are unincorporated businesses that are under common control. The credit allowable for each related trade or business is allocated on a pro-rata basis depending on its proportionate share of the expense for the qualified wages.
California Competes Credit
The FAQs concerning the California competes credit (a.k.a. the “Go-Biz credit” ) address issues concerning eligibility criteria, how the credit is claimed, and credit audits and recapture. The FTB will audit a taxpayer’s books and records to ensure that a taxpayer is complying with the agreement entered into between the taxpayer and the Governor’s Office of Business and Economic Development (GO-Biz). These reviews are separate from the FTB’s normal tax return audits and do not preclude the FTB from auditing a taxpayer’s tax return for other items. The FTB will report possible agreement breaches to the California Competes Tax Credit Committee, which will then determine if the credit will be recaptured and the amount of the recapture. Any recapture will be treated and assessed as a mathematical error appearing on the taxpayer’s return and will be added to the tax otherwise due by the taxpayer for the taxable year in which the Committee’s recapture determination occurred.
There is nothing to prohibit a taxpayer from claiming both the new employee credit and the California competes credit provided that the taxpayer meets the qualifications for the new employee credit and is awarded a California competes credit by GO-Biz.
Repeal of Geographically Targeted Economic Development Area Tax Incentives, California Franchise Tax Board, September 13, 2013, ¶405-939; New Employment Credit—Frequently Asked Questions, California Franchise Tax Board, September 13, 2013, ¶405-940; Frequently Asked Questions—California Competes Credit, California Franchise Tax Board, September 13, 2013, ¶405-941