Frequently Asked Questions – California Competes Credit
The Governor’s Office of Business and Economic Development (GO-Biz) administers the California Competes Tax Credit (CCTC). Applications for the credit are available to businesses that want to locate or stay and grow in California. Tax credit agreements are negotiated between taxpayers and GO-Biz and are approved by the California Competes Tax Credit Committee (Committee). The Committee consists of the State Treasurer, the Director of the Department of Finance, the Director of GO-Biz, and one appointee each by the Speaker of the Assembly and Senate Committee on Rules. For more information on how to obtain a credit agreement, visit the GO-Biz website.
Businesses will commit to certain employment or project investment requirements, we refer to as “milestones,” as part of the credit agreements. The legislation that enacted this credit requires us to review certain businesses books and records to ensure that businesses are in compliance with the agreed upon milestones.
We designed these Frequently Asked Questions (FAQs) to assist businesses with the credit and our review process. The GO-Biz website has additional FAQs available.
General Credit Information
- What taxable years is the credit available?
- Can the credit reduce tax below tentative minimum tax?
- Is this credit refundable?
- Can my business carry the credit forward to future years?
- Can my business assign the credit to an affiliated corporation under R&TC Section 23663?
- The credit agreement requires my business to meet the project milestones before it earns a credit. How do I report the credit?
- How does my business claim the credit on its tax return?
- Once my business obtains a credit agreement from GO-Biz, what is FTB’s role?
- Which businesses will be subject to a review?
- What is a “small business” for CCTC purposes?
- Is the CCTC Review the same as when your Department audits my business tax return?
- My business provided GO-Biz with a lot of information when it applied and will continue to provide it to them during the entire agreement period. Will your Department have access to this information?
- What is the purpose of the review?
- What are some examples of acceptable records to show that my business met the milestones?
- What procedures and guidelines will your Department follow for these reviews?
- Will your Department perform a review only once or multiple times?
- How will your Department contact me for a review?
- What happens during a review?
- Will the information I provide to your Department during the review remain confidential?
Breaches and Recapture
- What happens if your Department determines that my business is not in compliance with the credit agreement?
- What does GO-Biz consider a breach?
- What happens after your Department notifies GO-Biz of a possible breach?
- Who decides on a credit recapture?
- How does my business report a recapture on its tax return?
General Credit Information
- What taxable years is the credit available? It is available for all taxable years that begin on and after January 1, 2014, and before January 1, 2025.
- Can the credit reduce tax below tentative minimum tax? Yes.
- Is the credit refundable? No.
- Can my business carry the credit forward to future years? Yes, the carry forward period is 6 years.
- Can my business assign the credit to an affiliated corporation under R&TC Section 23663? Yes, get more information about credit assignment.
- The credit agreement requires my business to meet the project milestones before it earns a credit. How do I report the credit? In general, if your business meets the milestones for a taxable year as specified in the credit agreement, then the credit for that year is earned and may be claimed on its tax return. If the milestones for a taxable year are not met, the credit is not earned for that taxable year.
- How does my business claim the credit on its tax return? They use credit code 233 to claim it.
- Once my business obtains a credit agreement from GO-Biz, what is FTB’s role? We may review your business’ books and records to determine compliance with the credit agreement. We call this review activity a “CCTC Review” or “review.”
- Which businesses will be subject to a review? We must review every business that receives a credit agreement, unless it is a small business. We may review a small business when it is appropriate.
- What is a “small business” for CCTC purposes?In general, it is a trade or business with less than $2 million gross receipts. GO-Biz specifies if a credit agreement is for a small business.
- Is the CCTC Review the same as when your Department audits my business tax return?No. The CCTC review is to determine if your business is in compliance with the credit agreement. It is not an income tax audit. Your business tax return remains subject to audit.
- My business provided GO-Biz with a lot of information when it applied and will continue to provide it to them during the entire agreement period. Will your Department have access to this information? The information you provide to GO-Biz is available to us. We use it during our review to determine if your business is in compliance with the credit agreement.
- What is the review’s purpose?The review’s purpose is to determine credit agreement compliance. The credit agreement has yearly milestones for California full-time employment, salary levels, and project investment. Our primary focus is to verify these milestones.
- What are some examples of acceptable records to show that my business met the milestones? Employment and Compensation Levels
Payroll reports and records to support:
- Hire dates, hours, or weeks worked.
- Wages and salary levels for new employees and compensation paid.
- Authorization for expenditures, invoices, deeds, contracts, lease/rental agreements etc.
- Project documents, timelines, capitalized costs, schedule of project costs etc.
- Summary analysis of changes in property, plant, and equipment.
- Depreciation records.
- General ledger records.
The above is not all inclusive. Acceptable records depend upon the specific project. We may also consider alternative documents.
- What procedures and guidelines will your Department follow for these reviews?We will follow the procedures and guidelines in FTB Notice 2014-02.
- Will your Department perform a review only once or multiple times?In general, the credit agreements are for 5 years with an additional 3 years to maintain employment increases and salary levels. Since the credit agreement period may be up to 8 years, we may conduct a review once or multiple times.
- How will your Department contact me for a review?We will send you a contact letter to begin a review. It will include the reviewer and supervisor contact information.
- What happens during a review?We will request information to determine if your business is in compliance with the credit agreement. When we finish the review, we will send you a letter that states whether your business is in compliance with the credit agreement or there is a possible breach.
- Will the information I provide to your Department during the review remain confidential?Yes. We consider any information that you provide during the review confidential. However, in the event that we determine that your business is not in compliance with the credit agreement, we will provide GO-Biz with information that explains the basis for our determination.
Breaches and Recapture
- What happens if your Department determines that my business is not in compliance with the credit agreement? We would consider this a possible breach. We will provide information to you and GO-Biz that explains the basis for our determination.
- What does GO-Biz consider a breach? A breach includes one or more of the following:
- Failure to furnish us or GO-BIZ with information.
- Material misstatements in any information your business provided to GO-Biz.
- Failure to materially satisfy or maintain the milestones.
- What happens after your Department notifies GO-Biz of a possible breach?In general, GO-Biz will contact you and allow you some time to resolve it. If you are unable to resolve the breach, GO-Biz may recommend a recapture to the Committee.
- Who decides on a credit recapture?GO-Biz will recommend a credit recapture to the Committee. If the Committee makes the decision to recapture a credit, GO-Biz will notify you and us about the recapture and the amount.
- How does my business report a recapture on its tax return? Your business will report it on its tax return for the taxable year the Committee makes the recapture decision. If your business does not report it on its tax return, we will send you a bill.
If I have questions about our CCTC review process, who do I contact?
Email us at: GEDI@ftb.ca.gov
If you have suggestions or comments, send us an email to: firstname.lastname@example.org
The United States Tax Court recently determined that certain refundable tax credits issued by New York in connection with economic development activities (EZ Credits) constituted taxable income to the recipients for federal tax purposes. Maines v. Comm’r, 144 T.C. No. 8 (Mar. 11, 2015). In reaching this determination, the Court noted that the characterization of certain of the EZ Credits as refundable taxes for New York purposes “is not necessarily controlling for federal tax purposes;” instead, the Court looked at the substance of the EZ Credits and determined that the credits were not actually a refund of previously paid state taxes, and, instead, the credits were a taxable accession to wealth since they were “just transfers from New York to the taxpayer—subsidies essentially.” The Court also considered one other refundable tax credit (the QEZE Credit), which was a credit against income tax liability for the amount of real property taxes paid, and determined that, while the amount of QEZE Credits refunded did not constitute a “taxable accession to wealth” as did the EZ Credits, the application of the tax benefit rule mandated that the refundable portion was subject to federal taxable income.
The taxpayers received the EZ Credits from New York for engaging in specific economic development activities in the state through their pass-through business entities. As the Court noted, New York labels the EZ Credits “credits” and treats them as refunds for “overpayments” of state income tax; the taxpayers in Maines received refunds of their state income tax based on their claim for the EZ Credits. Despite New York’s characterization of the EZ Credits, the Commissioner asserted that they were nothing more than cash subsidies, and thus should be treated as taxable income to the taxpayers. On the other hand, the taxpayers argued that New York’s label of the EZ Credits as overpayments was binding for purposes of federal law. The Court, noting President Lincoln’s famous quip that “if New York called a tail a leg, we’d have to conclude that a dog has five legs in New York as a matter of federal law. . . . Calling the tail a leg would not make it a leg,” agreed with the Commissioner, observing that federal law looks to the substance of legal interests created by state law, not to the labels the state affixes to those interests.
As for the QEZE Credit, the Tax Court agreed that it did not result in a taxable accession to wealth since it was really a refund of real property taxes that the taxpayer had paid to the state. However, the Court still determined that the refunded amounts would be taxable due to the tax benefit rule to the extent that a deduction had been claimed for the real property taxes paid. Under the tax benefit rule, to the extent a taxpayer obtains a refund of payments for which it received a tax benefit (such as a deduction), such refund should be taxable.
The Maines decision is one of the first Tax Court decisions to address the taxability of refundable state tax credits. After the issuance of this decision, taxpayers should analyze the effect that a refundable state tax credit will have on their federal taxable income. In making such an analysis, a taxpayer must pay careful attention to how the credit operates and not to the labels that a state uses. In addition, in determining the benefit of any potential state tax credit, taxpayers should consider the result of this decision and determine whether they lose some of the anticipated benefit they were expecting.
The California Competes Tax Credit is an income or franchise tax credit available to businesses that come to California or stay and grow in California.
Applications for the California Competes Tax Credit will be accepted at calcompetes.ca.gov from March 9, 2015, until April 6, 2015.
Go to business.ca.gov for more information on the California Competes Tax Credit.
Recent Announcements of Credit/Incentives Packages for;
Arizona and California
States’ Evaluation and Review of Credit and Incentive Programs for;
Maryland, New York and New York City
Legislative, Regulative and Gubernatorial Update for;
Illinois and Michigan
Case Law Update;
European Union v. Washington
Click here for more details: http://www.hmblaw.com/3447.aspx#.VQDlhE102Hp
Over the past several decades, more and more states have been offering tax credits and incentives to encourage economic development in their jurisdictions. Accordingly, a business should prepare an incentives analysis every time it considers making a capital investment or growing jobs. This applies to every material capital outlay in any type of real estate, machinery or equipment. That is, the business should investigate and evaluate whether the federal, state and local governments where the investment will be located (or could be located) will partner with them by providing financial and other incentives to encourage the businesses to locate (or relocate) within their boundaries. Oftentimes, businesses can overlook these opportunities because the proposed acquisition has to be kept confidential, or time is of the essence and there is not sufficient leeway to negotiate incentives. Even so, factoring the potential for obtaining financial assistance from state and local governments could prove worth the time and trouble.
Click here to continue reading: Credit and Incentives
Credits and Incentives
Transferability of Wisconsin Economic Development Tax Credits Creates New Opportunities for Taxpayers
In a departure from its prior policy regarding credits and incentives, Wisconsin earlier this year enacted an enhancement to its existing Economic Development Tax Credit program that will permit transfers of the credits under certain circumstances. This article provides an overview of Wisconsin’s Economic Development Tax Credit program, and then analyzes the policy behind and the conditions governing the newly enacted transferability provisions.
Click here to read full article: 2014TaxReportDecember