California Competes Tax Credit (“Cal Competes”): This discretionary program offers corporate income tax credits to businesses that create new jobs and make capital investments. The credits apply only to income tax owed to the Franchise Tax Board. The credits are non-refundable and non-transferrable; they are available for five years but may be carried forward for up to 6 additional years.
Cal Competes tax credits are awarded via a three-phase competitive application process administered by GO-Biz, (the Governor’s Office of Business and Economic Development). Companies are permitted to apply during designated application periods held three times a year. Those businesses that can demonstrate a project will provide an attractive cost-benefit ratio to the state (defined as the amount of credit requested divided by employee compensation and capital investment over a five-year period) are more likely to be approved for incentives. Projects that provide a less attractive cost-benefit ratio may still be considered for tax credits in the following scenarios: existing jobs are at risk of being eliminated or relocated out of California; California is competing against another state for a new or expanded business operation; at least 75% of the new positions to be created in California will be located in an area of high unemployment or high poverty. Program restrictions limit the amount of tax credits claimed by any single business to no more than 20% of all credits awarded during a fiscal year. The minimum award is $20,000.
March 26, 2018 marked the deadline to apply for the final round of Cal Competes credits in fiscal year 2017 - 2018. The program is expected to be reauthorized in the Governor’s budget no later than June 15, 2018. In the unlikely event Cal Competes is not reauthorized, businesses will have no further opportunities to submit applications and the incentive will sunset (current awardees can continue to claim credits, however).
Governor Brown has proposed extending Cal Competes through fiscal year 2022-23 but at a somewhat reduced level ($180 million of credits per year). If, as expected, the legislature approves his request by mid-June, 2018, the newly-funded program is expected to again take applications and award tax credits three times each year, most likely adhering to the established July / January / March timeframes.
BLS & Co. is monitoring these changes and will keep our clients and friends up to date as important developments occur.
New Employment Credit (NEC): This program is available to businesses that create net new jobs with hourly wages between 1.5 and 3.5 times the state minimum wage. Businesses must be located in a Designated Geographic Area (DGA). A DGA includes census tracts with the state’s highest poverty and unemployment rates, former Enterprise Zones (low poverty zones are ineligible) and former Local Agency Military Base Recovery Areas (LAMBRAs). Businesses that locate in PILOT areas (select locations within the DGA certified by the State) are subject to a lower wage threshold to qualify for the program. The value of the New Employment Credit is determined by multiplying the qualified wages for all eligible employees by 35. The maximum credit is $56,000 per employee over 5 years. To receive the tax credit, businesses must hire employees that meet the following criteria:
• Unemployed for six (6) months before hire
• Veterans within one-year of separation from U.S. Armed Forces
• Earned Income Tax Credit recipients
• Ex-offenders convicted of a felony
• Recipients of CalWorks and/or other welfare assistance programs
Tax credits are non-transferable and non-refundable. Unused credits may be carried forward for 5 years or until the credit is exhausted, whichever occurs first.
California Research and Development Tax Credit: This incentives provides a non-refundable tax credit of 15% against corporate income or franchise tax liability for qualified in-house research expenses and a 24% credit for basic research payments to outside organizations. An alternative incremental rate may be selected, as well. Unused credits can be carried forward until none remain, and may also be assigned to an affiliated corporation.
Manufacturing and R&D Partial Sales and Use Tax Exemption: All manufacturers and businesses primarily engaged in R&D related to the physical, engineering, and life sciences are eligible for a partial exemption in state sales and use tax (3.9375%). The partial exemption only applies to the state’s portion of the sales tax rate (7.25%) – businesses are still subject to local sales tax. California caps the amount of equipment that a business may exempt from state sales tax to $200 million of equipment per year.
CAEATFA Sales and Use Tax Exclusion: The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) provides a full sales and use tax exclusion of the state 7.25% sales and use tax for advanced manufacturers, manufacturers of alternative source, advanced transportation products, components or systems, and projects using recycled feedstock. Applicants must submit an application to the CAEATFA documenting equipment purchase and other taxable components for processing and/or facility construction. Applications may be submitted monthly and are heard by panel two months following applications submittal.
Ad Valorem Tax Abatements: Property tax abatements are rarely offered in CA as property tax is just 1% of building value at inception.
Sales Tax Rebate: Local jurisdictions in California are empowered to rebate up to 30% of the local portion of the state Sales and Use Tax (typically one percentage point) for businesses whose goods or services are subject to sales tax and where the point of sale is within the local jurisdiction.
Rate Discounts: Electric power rate discounts, typically between 12% and 30% over five years, are offered by Pacific Gas and Electric (PG&E) and Southern California Edison (SCE), depending on whose service territory in which the facility locates. Discounts are available to new companies bringing new loads of 200kW or more, and new jobs. Existing California companies that are expanding, or considering relocations out of California also are eligible for the program (such companies must sign an affidavit that without the incentive they would most likely leave the state). The higher amounts are available in areas of high unemployment. As of June 2018, both PG&E and SCE are in rate hearings with the California Public Utilities Commission (PUC) which could result in some changes to the rate discounts. Some areas in California’s central valley have local irrigation districts which can provide cheaper power but do not offer rate discounts. Gas is not included in rate discount programs.
Workforce Training: Local Workforce Development Boards can offer On-the-Job Training (OJT) contracts where there is a need for training on new equipment or process. This incentive is typically available for lower skilled positions/employees. Workforce development boards usually reimburse up to 50% of wages over a 3-6 month training period, depending on the job. Funding is typically exhausted before the end of the fiscal year.
Employment Training Panel (ETP): Through a competitive application process the ETP will issue contracts for training, typically geared towards higher skills or specialized positions, the maximum benefit has been $750,000 per project. The program is designed to cover training needs that are not part of the OJT program. Applications may be submitted monthly and will be evaluated based on the number of employees being trained; the level of training and curriculum; average wages; and industry cluster (manufacturing is a priority). Companies can apply annually for five years.
California Food Production Investment Program: Beginning in FY 2018 – 19 The California Energy Commission will start offering grants to the state’s food and beverage companies to reduce greenhouse gas emissions. Funding will be awarded through a competitive grant application process (anticipated Aug-Sept 2018). Grant funds for commercially-available energy efficient equipment (e.g., boilers) could be as high as 65% of the purchase cost. For cutting edge technologies grant awards could reach 85% of equipment costs.
Last updated: June 2018