California Provides New Tax Credits for Investment and Job Creation
By: William F. Bresee, Esq.
On November 27, 2013, the Governor’s Office of Business and Economic Development (“GO-Biz”) released draft proposed regulations on the recently enacted California Competes Tax Credit. These regulations provide the procedures implementing the economic incentives for development of California employment and investment of Assembly Bill (“AB”) 93, which was signed into law by Governor Brown in July 2013. (AB 93 provides for exemption from California’s sales and use tax for purchases of manufacturing-related equipment and a targeted income and franchise tax hiring credit as well as the California Competes Credit.)
For taxable years beginning on and after January 1, 2014 and before January 1, 2025, a credit against California income and franchise tax — the California Competes Credit (“CCC”) — is allowed against the net tax due in an amount allocated by the California Competes Tax Credit Committee (the “Committee”). Unused CCC may be carried over to reduce the net tax in the following taxable year and succeeding five taxable years, but may not be used to reduce tax below the tentative minimum tax. The CCC or carryover of the CCC earned by members of a combined reporting group may be assigned to an affiliated corporation that is a member of the same combined reporting group that is an eligible assignee.
The aggregate amount of CCC that may be allocated in any fiscal year is as follows:
• Fiscal Year 2013-2014: $30 million
• Fiscal Year 2014-2015: $150 million
• For each fiscal year thereafter, until Fiscal Year 2018-2019: $200 million
No allocation has been established for fiscal years after 2018-2019. The above limits will be increased by unallocated amounts of CCC from the preceding fiscal year, if any, plus the amount of any previously allocated CCC that has been recaptured. The limits will be decreased as necessary to keep the aggregate of the new sales and use tax manufacturing exemption, the new income tax hiring credit, and the CCC to $750 million for either the current fiscal year, or any of the three succeeding fiscal years. Twenty-five percent of the aggregate CCC allocations in each fiscal year are set aside for small businesses, and no more than twenty percent of those allocations can be allocated to a single taxpayer.
To qualify for an allocation of the CCC, a taxpayer must enter into a written agreement with GO-Biz and that agreement has to be approved by the Committee. The Committee’s approval or rejection of the CCC allocation in an offered agreement will be by resolution in a duly-noticed public meeting under the Bagley-Keene Open Meeting Act (Government Code, Section 11120 et. seq.). The amount of CCC to be allocated to a taxpayer is based upon:
• The number of jobs the taxpayer will create or retain in California,
• The compensation paid or proposed to be paid by the taxpayer to its employees, including wages and fringe benefits,
• The amount of investment in California by the taxpayer,
• The extent (according to the U.S. Census) of unemployment or poverty in the area in which the taxpayer’s project or business is located,
• The incentives available to the taxpayer in California, including from state and local governments and other entities,
• The incentives available to the taxpayer in other states,
• The duration of the proposed project and the duration the taxpayer commits to remain in California,
• The overall economic impact in California of the taxpayer’s proposed project or business,
• The strategic importance of the taxpayer’s project or business to California, the region, or locality,
• The opportunity for future growth and expansion of the taxpayer’s business in California,
• The extent to which the anticipated benefits to California exceed the projected benefit to the taxpayer from the Credit.
California Revenue and Taxation Code Sections 17059.2(a)(3) and 23689(a)(3) provide that the written agreement between the taxpayer and GO-Biz shall include:
(i) Terms and conditions for minimum compensation levels and job retention periods,
(ii) Provisions indicating whether the CCC is to be allocated in full upon approval, or in increments based on mutually agreed upon milestones achieved by the taxpayer, and
(iii) Provisions that allow the Committee to recapture the CCC in whole or in part if the taxpayer fails to fulfill the terms and conditions of the written agreement. If the taxpayer fails to fulfill the terms and conditions of the agreement, GO-Biz may recommend recapture of the CCC to the Committee; California’s Franchise Tax Board (“FTB”) must also review the books and records of taxpayers allocated CCC and must notify GO-Biz of a possible breach of the written agreement.
Pursuant to California Revenue and Taxation Code Sections 17059.2(c) and 23689(c), GO-Biz is to:
(i) Give priority to a taxpayer whose project or business is located or proposed to be located in an area of high unemployment or poverty,
(ii) Negotiate with a taxpayer the terms and conditions of a proposed written agreement setting forth the CCC to be allocated to said taxpayer,
(iii) Provide the negotiated written agreement to the Committee for its approval,
(iv) Inform the FTB of the terms and conditions of the written agreement, upon approval by the Committee,
(v) Inform the FTB of any recapture of a previously allocated CCC, upon approval of the recapture by the Committee, and
(vi) Post on its website:
a. The name of each taxpayer which is allocated a CCC,
b. The estimated amount of the investment by each taxpayer,
c. The estimated number of jobs created or retained,
d. The amount of CCC allocated to a taxpayer, and
e. The amount of CCC recaptured from a taxpayer, if applicable. The amount of tax resulting from recapture of the CCC is added to the tax otherwise due by the taxpayer for the taxable year in which the Committee’s recapture determination occurred.
This Client Alert is not intended to fully analyze tax considerations or to provide tax advice in any particular business situation and cannot be used or relied upon for those purposes. Leech Tishman, however, looks forward to assisting our clients in such reviews or in answering questions regarding the effects of the California Competes Credit.
William F. Bresee is a partner at Leech Tishman, is a member of the firm’s Corporate and Construction Practice Groups, and chairs the firms’ Energy and International Practice Groups. Bill can be reached at 412.261.1600 x 261 or firstname.lastname@example.org. For any further analysis of how the California Competes Credit may affect your interests, or if you have any questions about this article, please feel free to contact Bill or a member of Leech Tishman’s Taxation Practice Group.
Leech Tishman is a firm dedicated to providing full-service commercial legal services to individuals, businesses, and institutions. We combine a deep understanding of our clients and their businesses with skilled legal counsel to find solutions. We offer legal services in alternative dispute resolution, bankruptcy & creditors’ rights, construction, corporate, employment, energy, environmental, safety & toxic torts, estates & trusts, government relations, insurance coverage & corporate risk mitigation, intellectual property, international legal matters, litigation, real estate, and taxation. Leech Tishman has offices in Pittsburgh, PA, Chicago, IL, New York, NY, Los Angeles, CA and Wilmington, DE. For more information call 412.261.1600 or visit www.leechtishman.com.