United States: California Competes Tax Credit Available To Qualified Employers

On September 10, the California Governor's Office of Business and Economic Development (GO-Biz) announced the first application period of the 2014-2015 fiscal year for the California Competes Tax Credit (CCTC) is starting on September 29, 2014, with $45 million in tax credits available.1 The deadline to submit applications is October 27, 2014 at 11:59PM (Pacific Time), after which the online application Web site will automatically close. The CCTC program is designed to offer a special tax incentive to encourage companies to locate, expand or retain operations in California. Effective January 1, 2014, the CCTC, along with some other credits and exemptions, replaced the California Enterprise Zone (EZ) program and credits.2

Overview

The purpose of the CCTC is to attract and retain high-value California employers in industries with high economic multipliers that provide their employees competitive wages and benefits.3 The CCTC agreements are negotiated by GO-Biz and approved by the "California Competes Tax Credit Committee," consisting of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, and one appointee each by the Speaker of the Assembly and Senate Committee on Rules.4

Eligibility

The CCTC application process is open on a statewide basis to any business in any industry and is available for both large and small businesses.5 The state specifically has reserved 25 percent of the available credit each fiscal year for small businesses.6 Furthermore, the state has imposed additional limitations of CCTC awards such that in any fiscal year, a single taxpayer may not receive an award greater than 20 percent of the aggregate amount of the credit allocated to that fiscal year.7 Although there are no minimum requirements on employment and capital investment, the CCTC awards will be made on a competitive basis. Applicants for the CCTC are not required to have an existing signed lease or purchase agreement, though applicants should have an idea of the general location in California.8 Applicants should also be able to demonstrate the financing mechanism(s) intended for funding.9 For purposes of the CCTC, a full-time employee is defined as an individual that is paid wages for services in the state of at least 35 hours per week. 10

Application Process

Applications for the CCTC are accepted online during open application periods.11 The process takes approximately 90 days, which includes the period when applications will be reviewed and presented to the CCTC Committee for approval.

The evaluation process has two phases.12 Phase I of the application process consists of an objective assessment of an applicant's project based on multiple factors including a quantitative cost-benefit analysis of the applicant's credit request divided by the sum of its aggregate investment and aggregate employee compensation.13 Phase II of the application process includes consideration of a variety of qualitative factors, including but not limited to, local unemployment and poverty, competing incentives, economic impact, and industry outlook.14

GO-Biz may move an application to Phase II if the owner, president, chief executive officer, chief financial officer or other equivalent person of the applicant certifies to GOBiz that absent the award of the credit the applicant's project will occur in another state or the applicant will terminate or relocate all or a portion of its employees to another state. At the conclusion of the application process, the applicant will enter into an agreement with GO-Biz that will specify the terms and conditions of when the tax credits may be claimed.15

Amount of Credit

The amount of the credit is negotiated, and not based on any set formula. The CCTC award depends on several factors including, but not limited to, the following factors:

  • The number of jobs the business will create or retain and the compensation paid to its employees;
  • The extent of unemployment or poverty in the targeted area of the proposed project;
  • The applicant's specific industry;
  • The amount of investment in California by the business;
  • The amount of credit allocation available as well as the ratio of tax credit requested in proportion to the capital investment plan; and
  • The estimated economic impact in California.16

The amount of the credit is negotiated with GO-Biz. However, as mentioned above, no applicant can receive more than 20 percent of the allocated credit award in the given fiscal year. Additionally, credit utilization may be negotiated with GO-Biz to include a payment over a number of years. If the credit exceeds the applicant's tax liability, the excess credit may be carried forward to the succeeding five years.17

Commentary

In the revised CCTC regulations, recently adopted August 18, 2014, language regarding the 20 percent limitation per applicant was removed.18 Though some professionals have interpreted this revision to the regulation as a removal of the 20 percent limitation, the relevant statutes authorizing the CCTC still clearly mandate the 20 percent limitation of awards to an applicant.

The CCTC may provide lucrative tax credits to businesses considering significant capital investments and job creation within California. The CCTC is a highly discretionary incentive and there is no guaranteed rate of return on the opportunity. As part of the evaluation process, GO-Biz requires the applicant to request a certain level of tax credit as it evaluates the ratio between the total capital investment and job creation as a proportion of the credit request. While the CCTC may be highly discretionary, eligible taxpayers should consider applying for the credit.

Footnotes

1 Pursuant to CAL. CODE REGS. tit. 10, § 8020, the announcement was made on the GO-Biz Web site at www.business.ca.gov.

2 Ch. 69 (A.B. 93), Laws 2013.

3 An "economic multiplier" represents the amount of additional economic activity produced by a given level of governmental spending. For example, $6 of additional economic activity may result from each $1 of a tax credit.

4 CAL. REV. & TAX. CODE § 18410.2(a).

5 CAL. CODE REGS. tit. 10, § 8000(g).

6 CAL. REV. & TAX CODE §§ 17059.2(g)(2); 23689(g)(2). Small businesses are those with less than $2 million of gross receipts, less returns and allowances, in the prior tax year. CAL. CODE REGS. tit.

10, § 8000(dd).

7 CAL. REV. & TAX. CODE §§ 17059.2(g)(3); 23689(g)(3).

8 Applicants may be asked to provide the location and number of full-time employees affected by the project, and the location, number and nature of part-time employees employed or that will be employed by the applicant. CAL. CODE REGS. tit. 10, § 8030.

9 Id.

10 CAL. CODE REGS. tit. 10, § 8000(u).

11 The Web site is www.calcompetes.ca.gov.

12 CAL. CODE REGS. tit. 10, § 8030(f).

13 CAL. CODE REGS. tit. 10, § 8030(g)(1).

14 CAL. CODE REGS. tit. 10, § 8030(g)(2).

15 CAL. CODE REGS. tit. 10, § 8040(f).

16 CAL. CODE REGS. tit. 10, § 8030(k).

17 CAL. REV. & TAX. CODE §§ 17059.2(e); 23689(e).

18 CAL. CODE REGS. tit. 10, §§ 8000–8040.

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