The first of three application periods that were announced for the 2021/2022 fiscal year for the California Competes Tax Credit opens on July 26, 2021 and closes at midnight on August 16, 2021. California taxpayers who plan to stay and grow their business in California through job creation and capital investment are eligible to apply for this tax credit which is awarded via a competitive process. Currently, there is $180 million in income tax credits available for allocation to California taxpayers who are selected to receive a credit in this fiscal year. Per Assembly Bill 150 that Governor Newsom is expected to sign, the California Competes Tax Credit is expected to receive an additional $110 million for the 2021/2022 fiscal year for a total allocation of $290 million. Since the funding law hasn’t yet been signed, the exact allocation of credit expected to be available during the July/August application period is yet to be determined. The other application periods in the 2021/2022 fiscal year will occur as follows:
Overview
The California Competes Tax Credit is administered by the Governor’s Office of Business and Economic Development (GO-Biz). It is a non-refundable income tax credit with a six-year carryforward period. Once awarded, if a taxpayer meets its agreed-to milestones of job creation and investment, credit amounts are generally taken in equal installments over five years. There is some flexibility to request a different installment schedule over the five-year agreement period if a taxpayer expects to not have income tax liability in the earliest years of the agreement.
Application Process
To apply, interested taxpayers need to first determine the following items as part of the project they’ll be presenting in their application for the California Competes Credit:
Applicants will also request a credit amount as a percentage of the sum of their aggregate employee compensation and investment over the next five years. Applicants also must complete a Proposed Project narrative that describes their business, their plans to grow in California, and specifically how the amount of credit being requested will enable or incentivize the business to create new full-time jobs that might not otherwise exist in California.
Phase I
During the first phase of evaluation, applications are looked at strictly on a quantitative basis with GO-Biz evaluating the amount of credit requested as a percentage of the following three factors:
The applications that are most advantageous to the state; i.e., those having the lowest ratio of credit requested to overall aggregate investment are selected to move forward to Phase II. Applications may be moved directly to Phase II, regardless of the ratio, if the applicant certifies that if the credit is not awarded that the applicant’s project may/will occur in another state, or the applicant may/will terminate or relocate all or a portion of its employees to another state. Alternatively, applicants may be moved directly to Phase II if at least 75% of the applicant’s net increase in full-time employees will work at least 75% of the time in an area of high unemployment or poverty.
Phase II
If a taxpayer makes it to the second phase of evaluation, GO-Biz reviews applications using the following qualitative factors –
Agreements
After Phase II of the application process, tax credit agreements for successful applicants are negotiated by GO-Biz and approved by a Committee that includes the State Treasurer, the Director of the Department of Finance, two legislative appointees, and the Director of GO-Biz. GO-Biz is required to post on its website a list of all awardees, including the amount of credit received, as well as the number of jobs to be created and capital expenditures as detailed in the application. The process from application to award is usually three to four months, if approved. After receiving a credit, taxpayers will need to file an annual statement indicating they are in compliance with the job creation and investment milestones in order to claim the tax credit each year during the five-year award period.
Application to Your Business
The California Competes Tax Credit enables California businesses that expect to grow to request income tax credits to offset some of the costs of their increased payroll and capital investment. It allows California businesses to remain competitive with businesses in other states, while creating and keeping valuable jobs in the communities where they are located. If your business is expected to grow and make investments in California, this could be an opportunity to receive income tax credits over the next five years. If you believe that this tax credit may apply to your business, please contact one of the following HCVT state and local tax team members for assistance.
Douglas Andersen | 562.216.5512 | douglas.andersen@hcvt.com
Brett Johnson | 310.566.1971 | brett.johnson@hcvt.com
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