California Offers ERC-type Tax Credit: Limited Time to Apply for the Main Street Small Business Tax Credit II
California announced a new tax credit, similar to the federal Employee Retention Credit (ERC), for qualifying small business employers that added jobs in 2021, despite declines in gross receipts in 2020.
From November 1, 2021 through November 30, 2021, California Qualified Small Business Employers that suffered gross receipts declines in 2020, but that had net job increases in 2021, are eligible to apply for a state tax credit equal to $1,000 per employee. The maximum credit is $150,000 per employer.
Taxpayers may elect to use the credit against 2021 California personal or corporate income taxes or make an irrevocable election to apply the credit against sales and use tax liabilities in 2022. The program has been funded with $70 million. Reservations for this credit are allocated on a first-come, first-served basis.
California Qualified Small Business State Tax Credit Eligibility
Qualified Small Business employers eligible for the program must:
- Have 500 or fewer full- or part-time employees on December 31, 2020;
- Have experienced a decrease of 20% or more in California gross receipts;
- Have a net increase in qualified California employees in 2021;
- Apply for a tentative credit reservation from CDTFA during the period of November 1, 2021, through November 30, 2021, and receive a tentative credit reservation; and
- Not be required or authorized to be included in a combined report.
Net Increase in Qualified California Employee Calculation
The credit is calculated based on monthly, full-time equivalent (FTE) qualified employees. The net increase in qualified employees will be the amount equal to B minus A.
- The average monthly FTE employed during the three-month period April 1, 2020, through June 30, 2020. The average monthly FTE is determined by adding the total monthly FTE equivalent qualified employees employed for all three months dividing the total by three.
- The lesser of either the following:
- The average monthly FTE employees employed during the 12-month period July 1, 2020, through June 30, 2021.The average monthly FTE is determined by adding the total monthly FTE employees employed for all 12 months and dividing the total by 12.
- The average monthly FTE employees employed during the three-month period April 1, 2021, through June 30, 2021. The average monthly FTE is determined by adding the total FTE employees employed for all three months and dividing the total by 3.
Gross Receipts Rules
- Calendar year filers compare gross receipts for 2020 to gross receipts for 2019.
- Fiscal year filers can choose to a) compare gross receipts for fiscal year 2019-20 to the gross receipts for fiscal year 2018-19; or b) compare the gross receipts average for fiscal year 2019-20 and fiscal year 2020-21 to the gross receipts for fiscal year 2018-19.
- New businesses that commenced operations after January 1, 2019, but on or before January 1, 2020, can test qualification by comparing gross receipts from January 1, 2020, through February 28, 2020, multiplied by 1.5 to gross receipts for the period of April 1, 2020, and ending on June 30, 2020.
- Tentative credit reservation amounts will be reduced by credit amounts reserved or received under the first Main Street Small Business Tax Credit program. Upon review by the California Department of Tax and Fee Administration, the employer will be notified if a credit has been allocated and the amount of the credit.
- The program is only available to employers that have a valid California EDD Employer Account or Employer Payroll Tax Account. This account number is issued by the California Employment Development Department (EDD).Qualified employees are employees reportable for California unemployment tax purposes.
- S Corporations or other pass-through entities may not pass any of the credit through to company owners.
- Wages used for other California tax programs, such as the R&D tax credit or New Employer tax credit, may not be used in the calculation for this credit.
Cherry Bekaert can assist California employers apply for this tax credit by:
- Scoping employer eligibility for the program
- Calculating and documenting the declines in 2020 California gross receipts
- Calculating the net increase in number of qualified California employees
- Assisting the employer to apply for a tentative credit reservation from November 1 through November 30, 2021.
Taxpayers interested in exploring the California Main Street Small Business Tax Credit or the ERC, should reach out to their Cherry Bekaert advisor or contact Anne Yancey, Martin Karamon or Dan Mennel.