For California Business, Out with the Old, and in With the New; Real Help to Create New Jobs



By Gary Wartik
April 1, 2014

Really, the legislature and governor actually came up with what promises to be an effective tax credit program designed to encourage out-of-state companies to relocate to California, to assist new companies to open here and existing California companies to expand in the Golden State.

The new California Competes Tax Credit program replaces the more controversial and challenging California Enterprise Zones program.  The Zones were designated geographic areas with lower wages and higher poverty in which local businesses purportedly could obtain tax credits for adding to their job base by adding local residents to their payrolls.  Perhaps good in concept, the program was generally viewed as a failure in many areas, in part due to eligibility issues for many jurisdictions to qualify for Enterprise Zone designation, and an inability to confirm that tax credits actually contributed to hiring more workers where the Zones were created.

During the 2013 legislative session, the Governor’s Office of Business and Economic Development (GoBiz) obtained legislative support to replace Enterprise Zones with the new California Competes tax credit program.  During the current fiscal year, $30 million in credits will be available, and during its second year of operation, the program will make available $150 million.  In the years 2015, 2015 and 2017, $200 million will be available annually, so this is a rather robust program.

While space in this article does not lend itself to a full report, here are the three key components of the new law:

California Sales Tax Exemption – businesses that purchase equipment and equipment parts in California for manufacturing, and as part of research and development in biotechnology, engineering and the sciences, will be eligible to apply for a waiver of the state portion of the sales tax on the new equipment.  On a $100,000 purchase, this could mean a tax savings of more than $4,500.  Up to $200 million in purchases by a company may be credited in one year, saving the company, at the maximum level; more than $100,000 in sales taxes.  Some manufacturing real estate transactions are also eligible for tax credits.

California Income Tax Credits – will be available based upon the number of full-time jobs a company creates, the compensation and benefits paid to those employees, the amount of investment the new and/or expanding business invests here, the overall impact of the business to the state, region or other local jurisdiction, and the opportunity that the company has for future growth and expansion in a given jurisdiction.  The poverty and local unemployment levels will also be factors in determining eligibility.  While the goal is to help grow California business, it is really about putting people back to work by creating new jobs, especially in areas hardest hit by the effects of the Great Recession.

Business Plan – applicants will need a business plan that reflects on how the tax credit funds will be applied, and how the company otherwise plans to grow within California.  This is key to helping determine whether an applicant has planned well to develop and grow its business.  Of course, whether a company is applying for a tax credit or not, having a solid business plan is always a good business practice.

The California Competes program will have what amounts to quarterly open application periods.  The first one ends in mid-April for the application approval by July 1, 2014. Then, in July the second round of applications will be eligible for review by GoBiz, for funding approval in September.

All applications for tax credits are subject to negotiation between the applicant company and a GoBiz approval committee.  Thirty-five percent of the funds will be available for small business, those with less than $2 million in annual gross sales, with the balance of the funds available for medium to larger companies.  The application process is somewhat involved, but may be done on line, and help is available through GoBiz (visit www.business.ca.gov).  Help is also available through most local economic development collaborative offices, local Small Business Development Centers, as well as through various consultants, including Vision Economics.

For more information, contact Vision Economics

 

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