On September 9, 2020, Senate Bill 1447 was signed into law and created a new tax credit aimed at providing relief to struggling small businesses. SB 1447 provides certain small businesses with a $1,000 tax credit for each net increase to full-time employees. Applications are allocated on a first-come, first-served basis, and are being accepted from December 1, 2020, through January 15, 2021. Applications must be submitted electronically on the California Tax and Fee Administration (“CDTFA”) website (link here).
Eligible Small Business
A small business must satisfy several criteria to qualify for the tax credit. First, the business must meet the definition of a “qualified small business employer,” which means that the business must:
- Have 100 or fewer employees as of December 31, 2019; and
- Experience a 50% decrease in gross receipts during the three-month period beginning on April 1, 2020, through June 30, 2020, compared to the same period in 2019. (Gross receipts are generally all income less returns and allowances.)
This definition limits tax credits to relatively small businesses that experience significant revenue losses in early 2020 immediately following the Covid-19 outbreak.
Increase to Full-Time Equivalent Employees
A qualified small business must also have a “net increase” in qualified employees in the latter part of 2020. The increase in employment is measured by determining the average number of full-time employees during the three-month period beginning April 1, 2020, and ending on June 30, 2020, compared to the average full-time employees over the five-month period beginning July 1, 2020, and ending November 30, 2020.
For each net increase in the average number of employees from the first period to the second period, the small business is eligible to receive either an income tax credit or a sales and use tax credit of $1,000 per employee. This will benefit employers who were forced to lay off workers and subsequently re-hired employees or hired new employees.
The application process begins on December 1, 2020, and ends at the latest on January 15, 2021, or earlier if the maximum cumulative allocation of $100 million is reached before the January deadline. Because of this cap on total credits issued, employers interested in applying for the tax credits should do so as early as possible.
Applications must be submitted to the CDTFA. The CDTFA issues “tentative credit reservations” of $1,000 for each net increase in qualified employees. The credits are capped at $100,000 per small business.
The application is available on the CDFTA website along with frequently asked questions and other information: https://www.cdtfa.ca.gov/taxes-and-fees/SB1447-tax-credit.htm