At the end of the 2020 Legislative Session, Senate Bill (SB) 1447, jointly authored by Senators Steve Bradford and Anna Caballero, as well as Assembly Member Sabrina Cervantes, was passed and signed into law to create a tax credit for small businesses. SB 1447 added Sections 6902.7, 2902.8, 17053.72, and 23627 to Revenue and Taxation Code. As a tax levy, it took effect upon the Governor’s signature on September 9.
SB 1447 allows a credit against either personal income or corporate income taxes due for one calendar year to a qualified small business employer that receives a tentative credit reservation for claiming the credit. On December 1, California’s Department of Tax and Fee Administration (CDTFA) began taking applications for this tax credit, referred to as the Main Street Hiring Tax Credit or the Small Business Hiring Tax Credit.
The bill’s authors intend for the tax credit to provide financial relief to California small businesses during the COVID-19 pandemic. Qualified small businesses can apply through an online portal administered by the California Department of Tax & Fee Administration
For purposes of SB 1447, “Qualified small business employer” means a taxpayer that meets both of the following requirements:
(i) As of December 31, 2019, employed a total of 100 or fewer employees.
(ii) Has a 50-percent decrease in gross receipts determined by comparing gross receipts for the three-month period beginning on April 1, 2020, and ending June 30, 2020, with the gross receipts for the three-month period beginning on April 1, 2019, and ending June 30, 2019, if it would have met the requirement of having a significant decline in gross receipts for that quarter as determined under Section 2301(c)(2)(B)(i) of Public Law 116-136.
The amount of the credit is $1,000 for each net increase in qualified employees, up to a maximum of $100,000 per qualified small business employer. The employer makes an irrevocable election to apply the credit against qualified sales and used taxes imposed for the reporting period January 1, 2021 through April 30, 2026.
The small business employer is required to submit an application to the Department of Tax and Fee Administration for a tentative credit reservation. CDTFA is required to allocate the credit reservations on a first-come, first-served basis up to a total of $100 million. The application to CDTFA must be made between December 1, 2020 and January 1, 2021.
Section One of the bill added Section 6902.7 to the Revenue and Taxation Code. It defines the terms “qualified small business employer,” “credit amount,” and “qualified sales or use taxes.” CDTFA is required to allow a qualified small business employer that received a tentative credit reservation and who made an irrevocable election to apply the small business hiring credit amount against their qualifies sales and use taxes between January 1 or March 1, 2021 (depending on the type of filer) and April 30, 2021. Any excess credit is carried over, but is not refunded to the taxpayer.
Section Two of the bill added Section 6902.8 to the Revenue and Taxation Code. A qualified small business employer is required to submit an application to CDTFA in the form and manner prescribed by CDTFA for a tentative credit reservation amount. The application must include specified information, such as net increase in qualified employees, whether an irrevocable election to apply the credit against sales and use taxes is made, as well as any other information that CDTFA believes is necessary.
CDTFA must promptly notify (no more than 30 days is allotted) the applicant of the tentative credit reservation amount. CDTFA must report periodically on its website regarding the aggregate credit reservation amounts and the remaining credit amount available for allocation. CDTFA must provide the Franchise Tax Board any information by each applicant.
Section Three of the bill added Section 17053.72 to the Revenue and Taxation Code. This is the personal income tax law section. It allows for each taxable year beginning on or after January 1, 2022 and before January 1, 2021 a small business hiring credit against “net tax” to a qualified small business employer that receives a tentative credit reservation in an amount of $1,000 for each net increase in qualified employees. The credit cannot exceed $100,000 for any qualified small business employer.
Any excess credit may be carried over to reduce the “net tax” in the following year and succeeding four years until the credit is exhausted. Any deduction allowed for qualified wages must be reduced by the amount of the credit allowed. A credit allowed is only for credits claimed on timely filed original returns. This provision of law remains in effect until December 1, 2021 and then it is repealed.
Section Four of the bill added Section 23627 to the Revenue and Taxation Code. This is the corporate income tax law section. Section Four contains the same language that is in Section Three of the bill.
Information on eligibility, frequently asked questions, and the application can be found at: https://www.cdtfa.ca.gov/taxes-and-fees/SB1447-tax-credit.htm
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