Action Required On December 1, 2020
In September 2020, California enacted Senate Bill 1447, the Small Business Hiring Tax Credit (SBHTC) to provide financial relief to qualified businesses and encourage hiring and retaining employees. The tax credit is $1,000 per increase in full-time equivalent (FTE) employee up to a maximum credit of $100,000 per employer. Unlike most tax credits, this credit can benefit unprofitable businesses that do not have an income tax liability as the credit can also be applied to offset the payment of sales and use tax deposits. The credit will be administered by the California Department of Tax and Fee Administration (CDTFA) which is requiring employers to reserve an allocation of the credit beginning December 1, 2020.
To qualify for the SBHTC, a taxpayer must:
- Have 100 or fewer employees on December 31, 2019
- this includes part-time employees
- Have experienced at least a 50% decrease in gross receipts from April to June 2020, compared to the same period in 2019
- Not be required or authorized to be included in a combined report
The SBHTC will provide a $1,000 tax credit for each net increase in the monthly average number of FTE between the base period (April 1 to June 30, 2020) and the qualified period (July 1 to November 30, 2020). Businesses that were closed during 2020-Qtr 2 and reopened during Quarter 3 rehiring laid-off employees may get a significant benefit from this credit.
All employees working in California are eligible to qualify the employer for this credit. Full-time, part-time, temporary, hourly, and salaried employees are qualified and are included in the required FTE calculations.
Credits for the SBHTC will be administered and allocated by the CDTFA on a first-come, first-served basis until the credits are exhausted at $100 million. The application window begins December 1, 2020, and ends January 15, 2021. We suggest applying as soon as possible as it is anticipated that all credits will be allocated prior to the end of the application period. Additional information, calculation examples, and the application to reserve credits can be found here.
As part of the application process, taxpayers will make an irrevocable election to claim the credit against either income tax or sales/use tax. The credit can be claimed on the taxpayer’s 2020 income tax return or beginning with the first sales tax return due on or after April 30, 2021.
Other items of note:
- Unused credits may be carried forward for 5 years
- Employers need to reduce their deduction for the qualified wages by the amount of the credit
- Employers cannot use the qualified wages to claim any other California tax credit
- Employees from related trades or businesses will be treated as employed by a single qualified small business employer
If you want to learn more about how this credit can benefit your business please contact us as soon as possible since action is required on December 1, 2020.