With a goal of spurring the economy and helping businesses thrive in California, the state has created several incentives and other opportunities for businesses to greatly reduce their tax burdens. These lucrative opportunities—which are often overlooked by business taxpayers—include the California Competes Tax Credit, grants for training employees, and the partial sales and use tax exemption for manufacturing and R&D equipment.
California Competes Tax Credit
Designed to attract and retain business, the California Competes Tax Credit is available to organizations that would like to come, stay, or grow in California. Eligible businesses may use the credit against their state income or franchise taxes. For fiscal year 2017-2018, the state has made over $230 million available through the California Competes Tax Credit, with 25 percent reserved for small businesses (defined as those with less than $2 million in revenue). As a result, businesses of all sizes may save tens or hundreds of thousands of dollars through this credit.
Applying for the California Competes Tax Credit is a competitive process, and eligibility is based on certain milestones related to hiring and investment activities. GO-Biz, the agency that negotiates the tax credit agreements, examines applicants based on 11 different factors, including the number of jobs that an applicant creates or retains, employee compensation, and the applicant’s opportunities for future growth. Recipients of the California Competes Tax Credit are subject to required reporting and oversight by GO-Biz.
The upcoming application periods for 2018 are as follows:
- January 2 through January 22, 2018
- March 5 through March 26, 2018
California Training Grants
Another way in which California supports the success of in-state businesses is by providing grant funding to offset the costs of training new and existing employees. Small businesses may receive $26 per training hour, while larger businesses are eligible for grants of $18 per hour. Qualifying training includes many activities that businesses perform in the course of their normal operations, such as classes, learning luncheons, and new employee onboarding.
To receive a training grant, a business must have a non-voluntary turnover rate of less than 20 percent, and employees must earn at least $15.50 per hour after their training is complete. The Employment Training Panel (ETP) gives preference to businesses that:
- Have fewer than 100 employees
- Request $100,000 per year or less
- Are manufacturers, technology firms, or technical professional firms
- Are facing out-of-state competition
Sales Tax Exemption for Manufacturing and R&D Equipment
Since July 1, 2014, California has allowed manufacturers and certain businesses engaged in research and development (R&D) activities to obtain a partial exemption on the sales and use taxes associated with the purchase or lease of manufacturing or R&D equipment. With the partial exemption rate currently set at 4.1875 percent, qualifying equipment is taxed at 3.3125 percent as opposed to the statewide rate of 7.5 percent—a difference that can save businesses millions of dollars.
In July 2017, Governor Jerry Brown signed into law AB 398, which has expanded the sales tax exemption and extended it through June 30, 2030. This new law extends the exemption to taxpayers engaged in certain types of conventional and renewable electric power generation, distribution, and storage, as well as some agricultural businesses.
To benefit from this exemption, a business must:
- Be a “qualified person” primarily engaged in certain types of business, including manufacturing and R&D in biotechnology or the physical, engineering, or life sciences
- Purchase “qualified property,” such as equipment and machinery
- Use the qualified property for permitted purposes, such as R&D activities, any stage of the manufacturing process, or other purposes enumerated by the law
As an incentive and tax advisory firm, Capital Review Group offers the in-depth knowledge needed to help California businesses or their tax professionals maximize savings through these opportunities. We can assist you with determining eligibility, completing the application process, ensuring compliance, and more. Contact CRG to learn more or schedule a pro bono analysis!