California has not been known as the most business friendly tax environment. While other states have tried to court businesses with competitive incentive programs, California has long been content to allow the many other benefits of its economy to do its talking. When Gov. Edmund G. “Jerry” Brown signed Assembly Bill 93 and Senate Bill 90 into law, everything changed.
California made a bold commitment to aggressively pursue expanding businesses, establishing a new office responsible for economic development and creating significant new tax incentives for businesses locating or expanding in California.
Smart Business spoke with Evan Stephens, tax manager at Sensiba San Filippo LLP, to find out more about two of the most significant new incentives, the California Competes Credit and the New Employment Credit.
What is the Governor’s Office of Business and Economic Development?
The Governor’s Office of Business and Economic Development (GO-Biz) is a new office that was created to be California’s point of contact for all economic development and job creation efforts.
GO-Biz has a range of objectives that include attracting, retaining and expanding California businesses. It provides resources to assist with site selection, permit streamlining, clearing of regulatory hurdles and small business assistance. It is also responsible for the administration of tax incentives, including the California Compete Credit and the New Employment Credit.
What is the California Compete Credit and how can businesses qualify?
The California Compete Credit is a credit against state income taxes for businesses locating or expanding in California.
Businesses must first apply for the California Compete Credit before applications are evaluated through a two-phase review process. Phase I is an objective evaluation where a cost-benefit analysis of each proposal will be performed. Applicants with the lowest cost to benefit ratios will be engaged to move forward to the next phase.
During phase II, GO-Biz will perform an in-depth subjective evaluation of each proposal. It will consider a number of factors including economic impact, strategic importance and the location of the proposed expansion. GO-Biz is authorized to negotiate specific terms and conditions of tax credit agreements. The agency has $151.1 million available for the California Compete Credit in fiscal year 2014/2015.
How can the New Employment Credit bring value to California businesses?
The New Employment Credit is more objective and straightforward than the California Compete Credit.
To qualify for the New Employment Credit, a business must first be located in a designated geographic area. These initial areas include pilot areas in Fresno, Merced and Riverside.
Credits will be awarded to applicants based on wages paid to ‘qualified employees’ during the credit year. New Employment Credits are equal to 35 percent per year for wages between 150 percent and 350 percent of the state minimum wage. The credits may be claimed for wages paid for 60 months from the original hire date. It should be noted that these credits can add up very quickly for qualifying businesses.
Location-based restrictions will exclude many companies from taking advantage of the New Employment Credit, but companies located within the designated geographic areas, whether large or small, could benefit substantially.
Implementing a system for identifying and qualifying new hires for New Employment Credits will allow for maximum benefit. California businesses should look closely at both the California Compete Credit and the New Employment Credit to determine eligibility. Applying for these credits is relatively simple and painless, especially when compared with the potential benefits.
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