A new California tax credit provides some relief to small businesses for the economic disruptions caused by COVID-19. The credit is available for the 2020 tax year. Qualified small business employers may apply the credit against:
Who May Claim the Credit?
To qualify for the credit, employers must:
- have 100 or fewer employees on December 31, 2019;
- have a 50% decrease in gross receipts from April to June 2020, compared to April to June 2019;
- apply for a tentative credit reservation from the California Department of Tax and Fee Administration (CDTFA) between December 1, 2020, and January 15, 2021; and
- not be required or authorized to be included in a combined report.
How Much Is the Credit?
The credit is $1,000 for each net increase in qualified employees. But, the credit cannot exceed $100,000 for any employer. Also, the total amount of credit available for all employers is $100 million. The CDTFA will allocate the credit on a first-come, first-served basis.
Net Increase in Qualified Employees
The net increase in qualified employees is the difference between the average monthly full-time equivalent employees employed during:
- the five-month period from July to November 2020; and
- the three-month period from April to June 2020.
A qualified employee is an employee:
- who is paid wages subject to withholding; and
- whose wages are not included in calculating any other corporate or personal income tax credit.
How to Claim the Income Tax Credit
To claim the income tax credit, employers must:
- timely file a tax return;
- use credit code 240;
- include FTB 3866, Small Business Hiring Credit (coming soon); and
- provide tax credit certificate numbers.
They must reduce any deduction otherwise allowed for qualified wages by the amount of the credit allowed. They may carry over unused credit for up to five years.
How to Claim the Sales and Use Tax Credit
Employers claiming sales and use tax credit must apply the credit as follows:
- for monthly filers, to amounts due and payable for March 2021 that are due on April 30, 2021;
- for quarterly filers, to amounts due and payable for January through March 2021 that are due on April 30, 2021; and
- for annual filers, fiscal year filers, or those on any other reporting basis, to amounts due and payable on the first return due after April 30, 2021.
They may carry over unused credit to subsequent periods on returns due and filed on or before April 30, 2026. Any credit remaining after that date is nonrefundable and forfeited.
The hiring credit is just one form of relief California provides to struggling small businesses. The state also announced in April 2020 that it would allow small businesses to defer payment of up to $50,000 of sales and use taxes interest-free for up to 12-months.
By Carolyn Kwock, J.D.
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