Are you a California small business eligible for the Small Business Hiring Tax Credit? On September 9, California enacted Senate Bill 1447 to provide financial relief for small businesses affected by the COVID-19 pandemic. The bill includes a highly beneficial tax credit which, unlike most tax credits used against state income taxes, is unique in that employers can make an irrevocable election to use it against either income or sales and use taxes.

Qualified employers will receive a $1,000 credit for each net increase in qualified employees hired during the pandemic, capped at $100,000. A qualified employee is an employee who is paid wages for services performed in the state of California for a qualified employer. A qualified employee does not include an employee whose wages are used in the calculation of any other income or franchise tax credits, such as the California Research Credit, or the New Employment Credit.

To calculate the net increase in the number of employees, compare the average full-time equivalent qualified employee count during the 3-month period of April 1 through June 30, 2020 to the 5-month period of July 1 through November 30, 2020.

The California Department of Tax and Fee Administration (CDTFA) began accepting applications on December 1, 2020 for tentative small business hiring credit reservations. These credit reservations will be allocated on a first-come, first-served basis through January 15, 2021 or until the $100 million is exhausted.

To be eligible for the credit, employers must:

• Have 100 or fewer employees on December 31, 2019 (all employees, including part-time employees).
• Have experienced a 50% decrease in gross receipts from April to June 2020, compared to the gross receipts in April to June 2019.
• Apply for a tentative credit reservation from CDTFA during the period of December 1, 2020 through January 15, 2021.
• Not be required or authorized to be included in a combined report.

During the application process, businesses will be required to make an election on how the credit will be applied — against either California income taxes (personal or corporate) or sales and use taxes. This election is irrevocable and cannot be changed once the application is submitted. Geffen Mesher is here help businesses review their options regarding this election decision. Additional information can be found here.

In addition, California Governor Gavin Newsom announced on November 30 that the state of California will be offering additional assistance to businesses impacted by COVID-19. Please contact one of our tax professionals for details.

Our expert team of state and local tax professionals at Geffen Mesher is ready and prepared to help navigate this credit for your business and can be reached at SALT@gmco.com.