California Competes Credit Offers an Incentive to Keep Businesses in the State
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Are you looking to start a business in California or considering whether or not to keep your business in California? In an effort to retain current businesses and attract new ones, the State of California has developed the California Competes Credit. The tax credit will be available for taxable year beginning on January 1, 2014 and will apply to the income tax owed to the Franchise Tax Board of California (FTB).
The agreements for the California Competes Credit will be handled by the Governor’s Office of Business and Economic Development (GO-Biz) and approved by the California Competes Tax Credit Committee. The Committee is composed of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, one appointee from the Senate and one appointee of the Assembly.
According to the FAQ produced by GO-Biz, the tentative amount of credits that will be available each year are:
- $30 million in fiscal year 2013/14
- $150 million in fiscal year 2014/15
- $200 million in each fiscal year 2015/16 through 2017-18
This credit is not only available to large businesses, but small businesses are welcome to apply as well. In fact, 25% of the credits available each year are allocated for small businesses, which are defined as a business with less than $2 million in gross receipts during the previous tax year. Additionally, applicants will receive no more than 20% of the total available credit per fiscal year.
It is important to note that if the credit allowed exceeds the tax, it can be carried forward up to five years to reduce the tax in the following years. Additionally, the credit or carryover can be assigned to an affiliated corporation if it is a member of the same reporting group and meets eligibility requirements. In order to ensure that the terms of the agreement made with GO-Biz are being followed, the FTB will review the records of large businesses. For small businesses, the FTB can review the businesses records at their discretion. The tax credit agreement will also include terms that allow for the credit to be revoked in whole or partially should the applicant not meet the terms of the agreement made with GO-Biz.
The application process includes a two-phase evaluation, followed by the negotiation and award phase. Phase I is an automated online application process that moves the most competitive applicants into Phase II. To help determine the most competitive applicants, Phase I includes a cost-benefit ratio of the tax credit being requested to the total package proposal. In certain cases, applicants may be moved directly into Phase II. According to GO-Biz, if the owner, president, CEO, CFO or other equivalent person on behalf of the business certifies that if it is not considered for the credit, the company may be at risk of terminating or relocating its employees to another state. In Phase II, GO-Biz may ask for additional documentation to support and verify the application.
There are eleven factors that will determine the amount of the credit, including the number of jobs that will be created or retained in California, the opportunity for future growth in California and the incentives available to the business in other states. Therefore, in order to qualify, the company must have plans to expand (create jobs or new investment) or be at risk to leave California. There is no minimum number of jobs that must be created, but the credit will be awarded on a competitive basis. If an applicant isn’t awarded, a credit during an application period they will be considered during the next period within the same fiscal year. Once a new fiscal year begins companies will have to reapply to be considered for the credit.
The Director of GO-Biz sets the application period each fiscal year. For fiscal year 2013-14, there is one application period from March 19 through April 14, 2014. Applications must be completed online at http://business.ca.gov/Programs/CaliforniaCompetes.aspx.
This credit is a great opportunity for entrepreneurs who would like to start a business in California and for established companies that want to stay here. Please feel free to contact me at (805) 963-7811 or jsheffield@bpw.com should you have any questions about the California Competes Credit.