California New Employment Credit

The California New Employment Credit (“NEC”), an income tax credit, was passed in 2013 as part of a compromise legislation that eliminated the California Enterprise Zone (“CA EZ”) tax credit. In addition to the elimination of the CA EZ program as of Dec 2013, individual’s CA income tax rates went up (this temporary tax increase is still in effect 8 years later). To pass the legislation and prevent a 2/3 vote requirement the NEC, Partial Sales Tax Manufacturing/R&D Exemption, and the CA Competes programs were created. This allowed the CA EZ elimination bill to be “scored” as revenue neutral and only necessitated a simple majority vote for approval. A vote which was obtained towards the end of the legislative session The NEC program was extended in 2018 until 2026.

What is the NEC?

The NEC is a CA statutory income tax credit. It can be used to offset CA individual or corporate income taxes. It has a strict set of six requirements based on:

• Geography

• Industry

• Specific Point of Hiring Categories

• Employee Growth

• Full Time Employees

• Min Wage Requirements

One qualified individual may generate over $100,000 in credit over a five-year period.

When can a business apply for the NEC?

To be eligible for the credit upon hiring a qualified full-time employee a qualified business needs to request a NEC tentative credit reservation (a voucher) from the Franchise Tax Board within 30 days of complying with the Employment Development Department’s new hire reporting requirement.

How much can an applicant apply for?

There is no limitation on the amount of credit a taxpayer may generate. However, many taxpayers find it very difficult to meet all the 6 requirements plus the vouchering requirement. In general, the credit is calculated by taking 35% of the qualified wages over 150% of the California minimum wage. As an example, an individual who makes $62,400 ($30 per hour) could generate over $5,460 in credit a year for up to 5 years for a total of $27,300 in credit. $30 – [$22.5 (150% of $15)] = $7.5, $7.5 * 2080 = $15,600, $15,600 * 35% = $5,460, $5,460 * 5

= $27,300

How does a business claim an NEC?

You can apply for a voucher through the state sponsored portal. After obtaining a voucher, the requisite documentation, and calculating the credit, a business can claim the NEC credit on Form FTB 3554 which is incorporated into the CA personal or corporate income tax return. The credit reduces an individual’s / corporation’s CA income tax obligation.

Qualifications/Eligibility Requirements for the ERC

The Applicant must meet specific requirements in each of the six areas listed above to claim the credit.

Eligible Uses of Fund

You can claim the nonrefundable CA income tax credit against your personal or corporate CA income tax liability for qualified employees hired on or after January 1, 2014 and before January 1, 2026. Any unused credit may be carried over for 5 taxable years after the year the credit was generated.

GEOGRAPHY : An employer must be within a Designated Geographical Area (“DGA”) to claim the credit. You can determine if your business is within a DGA at the following state sponsored web site.

http://maps.gis.ca.gov/gobiz/dga/default.aspx

INDUSTRY : The following industries are excluded from taking a NEC. The NAICS is used to identify excluded businesses. The following are excluded, unless they are considered to be a small business:

• Temporary Help — NAICS 561320

• Retail Trade Services — NAICS Sector 44-45

• Primarily Theater Companies and Dinner Theater — NAICS 711110

• Primarily Food Services — NAICS 722511, 722513, 722514, and 722515

• Primarily Casinos and Casino Hotels — 713210, 721120

• Primarily Drinking Places (Alcoholic Beverages) — NAICS 722410

A business should select the NAICS code that represents its primary line of business. NAICS classification is determined on a separate company basis.

A small business is defined as a trade or business that has aggregate gross receipts, less returns and allowances reportable to this state, of less than $2,000,000 during the previous taxable year. The determination of whether or not a business is considered "small" is made separately for each taxable year. Due to the pandemic, many businesses that historically were not considered “small” may now be eligible for the NEC due to a drop in gross receipts in 2020.

HIRING CATEGORIES: A new hire must meet at least ONE of the following qualification categories at the time of hire:

• Unemployed for the previous 6 months or more

  • Unemployed means not receiving wages, not self-employed, and not a full-time student

  • If the employee completed a college or similar program, the completion date must have been at least 12-months prior to date of hire

• Veteran, separated from the U.S. Armed Forces within the previous 12 months

• Received the federal Earned Income Tax Credit in the previous taxable year

• Ex-offender convicted of a felony

• Current recipient of CalWORKS or county general assistance

OTHER REQUIREMENTS: There is an additional requirement that the employer experience growth from its “base year” to generate credit each year. To qualify for the program the employee must be full time and start with an initial compensation that is 150% of the state’s current minimum wage.

HOW CAN WE HELP:

Claiming the NEC touches multiple parts of an organization including but not limited to income tax, payroll, accounting, operations and legal. We at Perceptive Tax Advisory Group (“PTAG”) are former principals and directors of Big 4 accounting firms, industry professionals, CPAs, and lawyers with a breadth of knowledge and expertise in all these areas. Our experience can help your company navigate its way through securing this valuable opportunity.

Our process includes the following:

• DETERMINE ELIGIBILITY : determine whether your company is eligible for the NEC including documentation that you are in the correct industry (or considered a small business) and that you have the requisite employee growth from your base year.

• VOUCHER EMPLOYEES : Document qualification category – submit requisite documentation to state portal.

• SECURE REQUISITE DOCUMENTATION : Use time tested methods to support the qualifying categories for submitted vouchers

• CALCULATE AND TRACK : Calculate and track NEC including assisting claiming the NEC on a CA income tax return.

• DEFEND : Assist your business with any inquiries and challenges from the FTB.