The California Legislature passed, and the governor signed, Senate Bill 1447 (click here for FTB Bill Analysis) into law creating a new small business hiring credit (SBHC) for small businesses impacted by economic disturbances in 2020. The Small Business Hiring Credit is also referred to as the “Main Street Hiring Credit”.

Overview

Taxpayers can use the credit against income taxes (personal income tax, corporation franchise or income taxes), or can make an irrevocable election to apply the credit against sales and use taxes. The credit is equal to $1,000 for each net increase in “Qualified Employees” (as outlined below), as measured in monthly full-time employee equivalents (FTEs). The total amount of credit for each employer cannot exceed $100,000.

Taxpayers must get a tentative credit reservation from the California Department of Tax and Fee Administration (CDTFA) beginning December 1, 2020.  Tentative credit reservations will be allocated to qualified small business employers on a first-come, first-served basis. When applying for the reservation, taxpayers must specify whether they are making an irrevocable election to apply the credit to sales and use taxes instead of against income taxes.

To qualify for the credit, employers must:

• Have 100 or fewer employees on December 31, 2019 (this includes all employees, including part-time employees).
• Have 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 in the following period: December 1, 2020, through January 15, 2021.
• Not be required or authorized to be included in a combined report.

Terms Defined in AB 1447

This bill defines the following terms and phrases:

“Monthly Full-Time Equivalent” means either of the following:

• In the case of a “qualified employee” paid hourly “qualified wages”, the total number of hours worked per month for the “qualified small business employer” by the “qualified employee”, not to exceed 167 hours per month per “qualified employee”, divided by 167.

• In the case of a salaried “qualified employee”, the total number of weeks worked per month for the “qualified small business employer” by the “qualified employee” divided by 4.33 multiplied by the “time base” the “qualified employee” worked.

“Qualified Employee” means an employee who is paid “qualified wages” by a “qualified small business employer”, and shall not include an employee whose wages are included in calculating any other credit allowed under the Personal Income Tax Law (PITL) or Corporation Tax Law (CTL). In other words, a “Qualified Employee”:

• Must be paid wages by the employer (subject to the California Unemployment Insurance Code)
• Cannot receive wages that are used in the calculation of any other tax credit
• Is not paid as an independent contractor

“Qualified Small Business Employer” means a taxpayer that meets both of the following requirements:

• As of December 31, 2019, employed a total of 100 or fewer employees.

• Has a 50% decrease in gross receipts determined by comparing gross receipts for the three-month period beginning on April 1, 2020, and ending June 30, 2020, with the gross receipts for the three-month period beginning on April 1, 2019, and ending June 30, 2019, if it would have met the requirement of having a significant decline in gross receipts for that quarter as determined under §2301(c)(2)(B)(i) of Public Law 116-136.

“Qualified Small Business Employer” does not include a taxpayer required to be included in a combined report under §25101 or 25110, or authorized to be included in a combined report under §25101.15.

“Qualified wages” means wages subject to Division 6 (commencing with §13000) of the Unemployment Insurance Code.

“Time base” means the fraction of full-time employment that the “qualified employee” works.

How to Claim the Credit

• File your income tax return
• Include a separate Small Business Hiring Credit (FTB 3866) (not yet available) to claim this credit

• • Provider the certificate numbers when claiming these credits
  • Use credit 240 when claiming the credit

• Refer to the FTB 3866 Instructions (not yet available) for more information
• Unused credits may be carried over for 5 years or until exhausted

Other Information

• Any deduction otherwise allowed for qualified wages must be reduced by the amount of the credit allowed.
• All employees of the trades or businesses that are treated as related under IRC §267, §318, or §707 shall be treated as employed by a single qualified small business employer.

CDTFA Resources

The California Department of Tax and Fee Administration (CDTFA) has made available an informative page on their website containing the following:

• Overview of the Small Business Hiring Tax Credit (SB 1447)
• Link to request Tentative Credit Reservation Online (available 12/1/20 @ 8:00 AM)
• Detailed list of information needed to make your reservation
• General FAQs
• Calculation FAQs
• Calculation Example

FTB Resource

• Small Business Hiring Credit webpage

(This is Blog Post #924)