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Changes Anticipated in 2014 for California Economic Development Area Tax Incentives


7/10/13

Synopsis:
 
If enacted, Assembly Bill 93 essentially repeals California’s current economic development area (EDA) credits and incentives, replacing them with two new credits and a new sales and use tax exemption. It is anticipated that Governor Jerry Brown will sign the bill.
 
Repeal of Credits:
 
The bill repeals four tax incentives for businesses located in enterprise zones, targeted tax areas, local agency military base recovery areas, and manufacturing enhancement areas:

  • Full-time employment hiring credit against personal income and corporation franchise and income taxes
  • Personal income tax employee wages credits
  • Personal and corporate income tax hiring credit
  • Sales and use tax credit for qualified purchases
     

Although these incentives and credits would generally not be available to taxpayers for post-2013 tax years, unused credits can generally be carried forward for ten years unless a shorter carry over period applies.
 
The bill also repeals increased expense deductions and expanded net operating loss deductions for businesses in EDAs as well as the investment interest deduction for investors making loans to enterprise zone businesses.
 
New Credits and Incentives:

New Hiring Credit
 
The bill creates a new credit for qualified employers hiring qualified full-time employees to work in designated census tracts or former enterprise zones. The credit, which becomes available July 1, 2014 through July 1, 2021, will be equal to 35 percent of “qualified wages” paid to each “qualified employee.” “Qualified wages” are defined as wages that range from 150 to 350 percent of the minimum wage.  “Qualified employees” must meet specific eligibility requirements and the number of qualified employees will be determined by the overall increase in employees statewide as compared to the “base year.” To claim the credit, qualified taxpayers must comply with a number of new administrative filing requirements set forth in the legislation and must claim the credit on an original return that was filed on time. Recapture provisions apply in certain situations.
 
GO-Biz Credits
 
The bill also creates a new “GO-Biz credit” that begins in tax year 2014 and ends in tax year 2024. The credit will be awarded on a competitive basis to businesses that apply to the Governor’s Office of Business and Economic Development. The total credit pool will be $30 million in the 2013-14 fiscal year, increasing to $150 million in 2014-15 and $200 million beginning in 2015-16.
 
Applicants will be evaluated for credit eligibility based on the number of jobs created, compensation paid, investment made in the state, and other economic factors. The taxpayer and the state will enter a written agreement specifying the obligations of both parties.
 
Sales and Use Tax Exemption
 
The bill also creates an exemption from California sales and use tax for the gross receipts from the sale, storage and/or use of qualified property purchased for use in a designated census tract. The following uses, if made by qualified purchasers, are eligible for the exemption:

  • Manufacturing, processing, refining, fabricating or recycling tangible personal property
  • Primary use (50 percent or more) in research and development (R&D)
  • Maintaining, repairing, measuring, or testing qualified tangible personal property
  • Contractors who purchase property to fulfill a construction contract for a qualified person, who will use the property
     

As with the new credit provisions, the sales tax exemption would be effective July 1, 2014 through July 1, 2021.


What Does CohnReznick Think?
Taxpayers looking to expand their business operations within California should consider these proposed rules in determining potential locations, evaluating the potential benefits available, and to ensure that they comply in a timely manner with any new reporting requirements that must be met to qualify for the benefits outlined above.


Contact:
 
For more information, please contact Patrick Duffany, Partner and State and Local Tax Practice Leader, at 860-368-3607.
 
To learn more about CohnReznick’s state and local tax services, please visit our webpage.


Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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