California Incentivizes Small Businesses Impacted by the COVID-19 Pandemic

California Governor Gavin Newsom signed S.B. 1447 recently to offer up to $100 million in hiring credits to small California businesses impacted by the COVID-19 pandemic. To claim this credit, businesses must hire qualified employees by the end of November 30, 2020. The potential maximum benefit per employer is $100,000, and the hiring of independent contractors does not qualify.

This credit can be taken to offset individual income and corporation franchise or income taxes for the 2020 tax year, or for sales and use tax liabilities over a five-year reporting period, but it is nonrefundable, and any remaining excess credit after April 30, 2026, will be forfeited. For S corporations and LLC pass-through entities, credits are generally computed at the entity level and then applied to the shareholders and members.

Which California Employers Qualify for the Small Business Hiring Credit?
Small business employers who qualify:

• Had 100 or fewer employees on December 31, 2019 (including all employees, and part-time employees)
• Experienced a 50% decrease in gross receipts from April-June 2020, compared to gross receipts in April-June 2019
• Must not be required or authorized to be included in a combined report. (Generally, two or more C corporations engaged in a unitary business are required to file a combined report.)

What Is the Benefit of the Hiring Credit?
The credit is equal to $1,000 for each net increase in qualified full-time equivalent employees, as measured over defined periods discussed below, not to exceed $100,000.

The credit can be used against personal income and corporation franchise or income taxes for tax years beginning on or after January 1, 2020, but before January 1, 2021. Alternatively, businesses can make an irrevocable election to apply the credit against sales and use taxes for reporting periods from January 1, 2021, to April 30, 2026.

How Is the Benefit Computed?
The first thing to do is calculate the net increase in average monthly full-time equivalent qualified employees for the three-month period from May through June, and then calculate the same employee equivalent for the five-month period from July through November. The increase is determined by subtracting (1) from (2):

1. Total average monthly full-time equivalent qualified employees from April 1, 2020, to June 30, 2020
2. Total average monthly full-time equivalent qualified employees from July 1, 2020, to November 30, 2020

In the case of a qualified employee paid hourly qualified wages, “monthly full-time equivalent” means the total number of hours worked per month. For this purpose, that total cannot exceed 167 hours per qualified employee divided by 167.

In the case of a salaried qualified employee, “monthly full-time equivalent” means the total number of weeks worked per month divided by 4.33, then multiplied by the time base the qualified employee worked. The time base is the fraction of full-time employment that the qualified employee works.

An Example

Company A had 10 qualified salaried employees that worked all weeks for the three-month period from April-June 2020. By November 30, 2020, Company A increases to 12 qualified salaried employees that worked all weeks within the 5-month period.

The average monthly full-time equivalent for the 3-month period is 30/3 = 10

The average monthly full-time equivalent for the 5-month period is 60.4/5 = 12

The net increase is two full-time equivalent qualified employees, which qualifies for a tentative credit of $2,000.

How Do California Employers Apply for The Hiring Credit?
Employers will submit applications for a tentative credit reservation to the California Department of Tax and Fee Administration (CDTFA). The application should contain:

1. The net increase in qualified employees.
2. Whether the credit will be applied against the personal or corporation franchise or income taxes.
3. Whether the employer is making an irrevocable election to apply the credit to sales and use taxes instead of against income taxes.

When Can Employers Apply?
Businesses must apply for a tentative credit reservation from the CDTFA during the period beginning December 1, 2020, through January 15, 2021. The CDTFA will accept applications through a reservation system available on the department’s website at www.cdtfa.ca.gov beginning on December 1, 2020. The credit reservations will be allocated on a first-come, first-served basis.

What Should Employers Do Now?
Employers in the state of California should first determine whether they qualify for the hiring credit. If they do, qualified small business employers should consider how the hiring credit would benefit their business and act accordingly with the hiring of qualified employees by November 30, 2020.