California is generally considered a business unfriendly state due to its high taxes and strict regulatory environment. Over the last few years, businesses have taken their operations to more friendly states, think Jamba Juice’s move to Texas and Tesla choosing Nevada instead of California for its Gigafactory. California has had an enterprise zone tax break program since 1984, however, the State felt that the program did not provide the growth it was intended to create. California sensing that it was losing opportunities for job growth, because in part to its high State income tax, decided to establish a modern credit program to help persuade companies to invest in operations located within the golden state. This new credit program is known as the California Competes Tax Credit (CCTC) and is governed by the Governor’s Office of Business and Economic Development or GO-Biz for short.
The CCTC is a negotiated credit that offsets California’s state income or franchise tax and is designed to help businesses continue or expand their operations in California. The main focus of the program is to reduce unemployment and increase the number of good paying jobs in the State. The tax credit is available to companies of all sizes and across industries, and unlike the former enterprise zone credit, the credit is available statewide. Each fiscal year through the 2017/2018 fiscal year, the CCTC Committee has up to $200 million to award to California businesses. The State has reserved 25% of the total credit amount for small businesses that had less than $2 million in gross income in the prior year. Any credit amount not awarded during the application period will carry over to the next application period.
The application process begins with an online application and may be completed by the applicant or an authorized representative. The application must describe in detail what the investment project will be, how many employees will be hired and what the employee wages will be. Once the online application is submitted to GO-Biz, it’s subject to a two-phase review process. In phase one of the review process, GO-Biz takes a high-level look at the applications and determines which projects have the most potential contribution to reduce California’s unemployment and increase capital investments.
In phase two, GO-Biz evaluates applications based on more narrow factors that relate to the extent of unemployment or poverty in the area where the applicant’s project is proposed. GO-Biz may request financial statements and other relevant business documents related to the project to confirm or verify any information provided during phase one.
Applicants that are selected for the tax credit will be contacted by GO-Biz to negotiate the terms and conditions of the tax credit. The agreement between GO-Biz and the applicant will describe the amount of tax credit allocated, the tax year or years for which the credit is allowed, as well as the wage level and minimum job retention period for each employee.
GO-Biz will publish on its website the details of each signed agreement within five business days. The Franchise Tax Board (FTB) will receive a copy of all negotiated agreements and have full access to the applications. The FTB will review the books and records of all approved applicants for compliance with the agreement, except for small businesses. For small businesses, the review of the books and records will be made at the discretion of the FTB. This review is not an audit of tax returns, but is used to determine if the applicant has breached the written agreement. If there has been a breach, the FTB will notify GO-Biz and provide detailed information regarding the breach. If GO-Biz approves a recapture, GO-Biz will notify the FTB to commence the recapture of the tax credits awarded.
If you are interested in applying for the California Competes Tax Credit and would like advice or assistance with the application process, the attorneys at Calone & Harrel Law Group, LPP can help.
– Jason W. Harrel is a Partner at Calone & Harrel Law Group, LLP who concentrates his practice in all manners of Taxation, Real Estate Transactions, Corporate, Partnership and Limited Liability Company law matters. He is a certified specialist in Taxation. Mr. Harrel may be reached at 209-952-4545 -or- jwh@caloneandharrel.com