California passed Senate Bill 1447 on September 9, 2020 which created the California Main Street Small Business Tax Credit. The credit can be used towards California state income taxes or sales and use taxes for qualifying businesses. The catch? You need to apply for it right now! The California Department of Tax and Fee Administration (CDTFA) began accepting applications for this credit on December 1st. They will continue to accept these applications through January 15, 2021 on a first come, first serve basis.
In order to be eligible for this credit, you must be a California small business that:
- Employed 100 or fewer employees as of December 31, 2019 AND
- Had a decrease in revenue of at least 50% in Q2 2020 as compared to Q2 2019
For these purposes, revenue is defined as gross revenue less discounts and refunds on the same basis of accounting as your tax return. So, if your business is a cash basis taxpayer, revenue would be the net cash received from customers less any refunds paid out during the quarter.
If your business is eligible for the tax credit, you will receive $1,000 per net employee hired during July 1, 2020 through November 30, 2020. In order to determine the net employees hired, you will need to subtract the monthly full-time-equivalent employees (FTE) during the aforementioned period from the number of FTEs you had in Q2 2020. A Full Time Equivalent employee is 167 hours per month. And this is without regard to the number of actual, real people it took to work those 167 hours. The calculation is nuanced, but there is a great example on the CDTFA website to help explain how it works. The credit caps out at $100,000 per employer.
You will be notified by the CDTFA within 30 days of your application as to whether a tentative credit reservation has been allocated to your business.
If you’re using your California Main Street Small Business Tax Credit for income taxes, you can use it to pay personal California state income tax and/or corporate franchise tax for tax year 2020. You must reduce your salaries and wages deduction by the amount of the tax credit. If you can't use the entire credit in 2020, you'll be able to use the remaining credit for the next 4 years.
If you’re using your credit for sales and use taxes, you'll first utilize the credit on the following tax returns:
- Monthly & Quarterly Filers: The period ending March 31, 2020 (due on April 30, 2020)
- Annual Filers: first return due on or after April 30, 2021
Any unused tax credits will carry forward to all future returns until April 30, 2026.
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