On Sept. 9, 2020, California Governor Gavin Newsom signed Senate Bill 1447, which established the Small Business Hiring Credit. The bill seeks to provide financial relief to certain small businesses impacted by the unprecedented economic disruptions and job losses that have occurred in 2020.
The credit is available against personal income and corporate income taxes for tax years beginning on or after Jan. 1, 2020 and before Jan. 1, 2021 to qualified employers. Employers that receive a tentative credit reservation may make an irrevocable election to apply the credit against qualified sales and use taxes during reporting periods beginning on Jan. 1, 2021 and until April 30, 2026.
Any credits are on a first-come, first-served basis until the total $100 million allocation is exhausted.
To qualify for the credit, an employer must:
- Have 100 or fewer employees as of Dec. 31, 2019 (including part-time employees);
- Have experienced at least a 50-percent decrease in gross receipts for the second quarter of 2020, compared to the second quarter of 2019;
- Apply for a tentative credit reservation from the California Department of Tax and Fee Administration (CDTFA); and
- Not be required or authorized to be included in a combined report
Employers are entitled to $1,000 of credit for each additional full-time equivalent employee net increase in the monthly average number of employees, as measured in full-time employee equivalents. The net increase is the average monthly full-time equivalent employees from July 1, 2020 through Nov. 30, 2020, less the average monthly full-time equivalent employees from April 1, 2020 through June 30, 2020.
Further, a qualified employee:
- Must be paid wages by the employer that are subject to the California Unemployment Insurance Code;
- Cannot receive wages that are used in the calculation of any other tax credit; and
- Cannot be paid as an independent contractor
Each employer may claim the credit up to a maximum of $100,000.
Claiming the Credit
The credit will be claimed on a regularly filed income tax or sales and use tax return. An employer will be required to include a separate Form 3866 (forthcoming). Any unused credits will be carried forward for up to five years.
Tax rules are complex and nuanced; if you have any questions regarding the California Small Business Hiring Credit or its impact on you or your business, please contact the tax advisors at GHJ.