California’s New Employment Tax Credit Proposal

On February 14, Assembly Member Carlos Villapudua (D-Stockton) introduced Assembly Bill 2035 to make important changes to California’s existing New Employment Credit (NEC). Under existing law, in both the Personal Income Tax Law and the Corporation Tax Law, there is a tax credit, the NEC, for tax years 2014 through 2025. The NEC is a credit to a qualified taxpayer that hires a qualified full-time employee within a designated census tract or economic development area and that receives a tentative credit reservation for that qualified full-time employee.

Under the NEC, a qualified full-time employee is defined as an individual who meets certain requirements and satisfies at least one of two specified conditions relating to the number of hours the employee works and is paid. In addition, certain employers that are primarily engaged in certain services, including food services, are excluded from claiming the NEC.

AB 2035 would expand the definition of qualified taxpayer by permitting a taxpayer that is primarily engaged in food services to claim the NEC. For purposes of meeting the definition of qualified full-time employee, the bill would permit an employee to be paid qualified wages by the qualified taxpayer for services not less than an average of 25 hours per week. The bill would also define “high unemployment” for purposes of designated pilot areas.

Section One of the bill would amend Revenue and Taxation Code Section 17053.73 in the Personal Income Tax Law to add to the “base year” definition that the business receives a tentative credit reservation from the Franchise Tax Board (FTB) for any qualified full-time employee. It would also add the following as qualified employers:

For employers that are primarily engaged in providing services, as described in Code 711110, 722410, 722511, 722513, 722514, or 722515 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget, 2012 edition, is paid qualified wages by the qualified taxpayer for services not less than an average of 25 hours per week.

In addition, the bill would delete the limitation on employers that are primarily engaged in providing food services and those listed in the above NAICS Codes. The bill would also define the term “high unemployment” to mean an average unemployment rate greater than the state average unemployment rate during the preceding calendar year of the date of designation or averaging over 10,000 unemployed individuals during the preceding calendar year of the date of designation based on information from the Labor Market Information Division of the Employment Development Department.

Finally, the bill would extend the applicable period for the designation of a designated pilot area from December 31, 2020 to December 31, 2025. All the other myriad rules of the NEC would remain in effect.

Section Two of the bill would amend Revenue and Taxation Code Section 23626 in the Corporation Tax Law to add to the “base year” definition that the business receives a tentative credit reservation from the Franchise Tax Board (FTB) for any qualified full-time employee. It would also add the following as qualified employers:

For employers that are primarily engaged in providing services, as described in Code 711110, 722410, 722511, 722513, 722514, or 722515 of the North American Industry Classification System (NAICS) published by the United States Office of Management and Budget, 2012 edition, is paid qualified wages by the qualified taxpayer for services not less than an average of 25 hours per week.

In addition, the bill would delete the limitation on employers that are primarily engaged in providing food services and those listed in the above NAICS Codes. The bill would also define the term “high unemployment” to mean an average unemployment rate greater than the state average unemployment rate during the preceding calendar year of the date of designation or averaging over 10,000 unemployed individuals during the preceding calendar year of the date of designation based on information from the Labor Market Information Division of the Employment Development Department.

Finally, the bill would extend the applicable period for the designation of a designated pilot area from December 31, 2020 to December 31, 2025. All the other myriad rules of the NEC would remain in effect.

Section Three of the bill specifies that it is a tax levy and would go into immediate effect once the bill is enacted. The bill is expected to receive its first policy committee hearing in late March or early April.