California is generally considered a business unfriendly state because of 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 the program did not provide the intended growth.
Sensing that it was losing opportunities for job growth, partly because of its high state income tax, California established a modern credit program to help persuade companies to invest in operations within the golden state. This new credit program, established in 2013, is known as the California Competes Tax Credit 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 operations in California. The program’s goal 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. Unlike the former enterprise zone credit, the credit is available statewide.
Each fiscal year through 2017-18, the CCTC Committee has up to $200 million to award to California businesses. The state has reserved 25 percent 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 carries over to the next application period.
Businesses apply online. Applications may be completed by the business owner 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, GO-Biz takes a high-level look at the applications it received and determines which projects have the most potential 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 are contacted by GO-Biz to negotiate the terms and conditions of the tax credit. The agreement between GO-Biz and the applicant describes 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 publishes on its website the details of each signed agreement within five business days. The Franchise Tax Board receives a copy of all negotiated agreements and has full access to the applications.
The FTB reviews the books and records of all approved applicants for compliance, except for small businesses. For small businesses, the reviews are made at the discretion of the FTB. That 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. If GO-Biz approves a recapture, GO-Biz notifies the FTB to commence the recapture of the tax credits awarded.
The next application period is March 6-27. 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.