SB 1447 Budget Trailer Bill Would Provide a New Hiring Tax Credit

On August 27, Senate Bill 1447 was gutted-and-amended from a bill dealing with mortgages to a bill on small business tax credits. SB 1447 is jointly authored by Senators Steve Bradford and Anna Caballero, as well as Assembly Member Sabrina Cervantes. SB 1447 would add Sections 6902.7, 2902.8, 17053.72, and 23627 to Revenue and Taxation Code to create a tax credit for small businesses.

SB 1447 would allow a credit against either personal income or corporate income taxes for one calendar year to a qualified small business employer that receives a tentative credit reservation for claiming the credit. The amount of the credit would be $1,000 for each net increase in qualified employees, up to a maximum of $100,000 per qualified small business employer. The employer would allow an irrevocable election to apply the credit against qualified sales and used taxes imposed for reporting period January 1, 2021 through April 30, 2026.

The small business employer would be required to submit an application to the Department of Tax and Fee Administration (CDTFA) for a tentative credit reservation. CDTFA would be required to allocate the credit reservations on a first-come, first-served basis up to a total of $100 million. The bill would also create a Small Business Hiring Credit Fund for the purpose of applying the credits allowed under this bill against qualified sales and use taxes.

Section One of the bill adds 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.

The Small Business Hiring Credit Fund is also created in the State Treasury for the sole purpose of applying the small business hiring credits allowed by this law. Any remaining monies as of June 1, 2026 are transferred to the General Fund.

Section Two of the bill adds 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.

The application to CDTFA must be made between December 1, 2020 and January 1, 2021. The aggregate amount of tax credits that may be allocated cannot exceed $100,000,000. CDTFA must allocate the tentative credit reservations on a first-come, first-served basis. The tentative credit reservation amount must be equal to the net increase in qualified employees reported on the application multiplied by $1,000 per employee. The total amount cannot excess $100,000 per qualified small business employer.

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 adds 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.

It defines “monthly full-time equivalent,” “qualified employee,” “qualified small business employer,” “qualified wages,” and “time base”. “Qualified small business employer” means a taxpayer who, as of December 31, 2019, employed 100 or fewer employees and has a 50% decrease in gross receipts for the three-month period from April 1, 2020 through June 30, 2020 versus the same three-month period in 2019. A small business employer does not include any taxpayer who is required to be included in a combined report.

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 adds 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.

Section Five of the bill provides language to comply with Section 41 of the Revenue and Taxation Code to provide evaluation criteria for the credit. The purpose of this credit is “to provide financial relief for the economic disruptions resulting from COVID-19 that have resulted in unprecedented job losses.” In order to measure whether the credits achieve their intended purposes, there are specified performance indicated. By April 1, 2022, the FTB must report to the Legislature information related to the credits claimed.

Section Six of the bill provides that the bill is a tax levy and goes into immediate effect once it is signed into law by the Governor.