Tax Credits and Incentives

I. Tax Credits and Incentives

New Markets Tax Credit

This program permits taxpayers to receive a credit against federal income taxes for qualified equity investments in designated Community Development Entities (CDEs). Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities. Qualified Active Low Income Community Businesses must be in the designated low-income census tracts, and must have a >20% poverty rate as well as a median family income of <80%. The credit provided to the investor totals 39% of the cost of the investment and is claimed over a seven-year period. In each of the first three years, the investor receives a credit equal to 5% of the total amount paid for the stock or capital interest at the time of purchase.

Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit is a Federal income tax credit provided to private-sector businesses for hiring individuals from nine target groups who have consistently faced barriers to employment. These groups include:

  • Veterans Target Groups
  • Long-Term Temporary Assistance for Needy Families (TANF) Recipient
  • Short-Term TANF Recipient
  • Supplemental Nutrition Assistance Program (Food Stamp) Recipient
  • Designated Community Resident
  • Vocational Rehabilitation Referred Individual
  • Ex-Felon
  • Supplemental Security Income Recipient
  • Summer Youth Employee

Employers generally can earn a tax credit equal to 25% or 40% of a new employee’s first-year wages, up to the maximum for the target group to which the employee belongs. Employers will earn 25% if the employee works at least 120 hours and 40% if the employee works at least 400 hours.

Section 179 Tax Deduction (Upgrading Equipment)

Essentially, Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the FULL PURCHASE PRICE from your gross income. It’s an incentive created by the U.S. government to encourage businesses to buy equipment and invest in themselves.

  • 2015 Deduction Limit = $25,000
  • 2015 Spending Cap on equipment purchases = $200,000
  • Bonus Depreciation: not available in 2015

Please keep in mind that to qualify for the Section 179 Deduction, the equipment listed below must be purchased and put into use between January 1 and December 31 of the tax year you are claiming.

  • Equipment (machines, etc) purchased for business use
  • Tangible personal property used in business
  • Business Vehicles with a gross vehicle weight in excess of 6,000 lbs (Section 179 Vehicle Deductions)
  • Computers
  • Computer “Off-the-Shelf” Software
  • Office Furniture
  • Office Equipment
  • Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)
  • Partial Business Use (equipment that is purchased for business use and personal use: generally, your deduction will be based on the percentage of time you use the equipment for business purposes).

Manufacturers’ Energy Efficient Appliance Credit

This credit applies to businesses that manufacture energy/water efficient dishwashers, clothes washers, and refrigerators. The Tax Relief and Job Creation Act of 2010 modifies and extends the energy efficient appliance credit for certain dishwashers, clothes washers, and refrigerators manufactured after December 31, 2010. The credit may be claimed on each qualifying appliance produced by the taxpayer and is based on the type of appliance, its energy efficiency, and for dishwashers and clothes washers, the amount of water it consumes. The total credit for any type of qualifying appliance is the applicable amount listed on the below link multiplied by the eligible production for such type.

Small Business Health Credit

A qualified small business can claim a credit for 50 percent of the health insurance premiums paid on behalf of employees. To be eligible for the credit, the business must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) marketplace or otherwise qualify for an exception. The credit is available to eligible employers for two consecutive tax years.

Employer-Provided Childcare Credit

A business may qualify for a credit if it provides child care benefits on the jobsite or nearby. The credit is equal to 25 percent of qualified child care services plus 10 percent of qualified resource and referral expenses, limited to a maximum credit of $150,000 for the year.

ADA Compliance Tax Incentives

To help businesses welcome customers with disabilities, the IRS offers two tax incentives to remove access barriers. The following tax incentives can be used every year to help cover the cost of expenditures to bring businesses into compliance with the Americans with Disabilities Act (ADA).

  • Tax Credit for disabled access expenditure: Small businesses with 30 or fewer employees or total revenues of $1 million or less can take a general business credit of up to $5,000 for eligible access expenditures to comply with ADA. The credit is generally equal to 50% of eligible expenditure.
  • Tax Deductions for eligible access expenditure: Businesses of all sizes can deduct up to $15,000 per year for costs of removing architectural and transportation barriers to make businesses more accessible to and usable by handicapped and elderly individuals. Absent this provision, businesses must capitalize and depreciate such expenditure generally over 39 years.

California Competes Credit

Businesses will have the opportunity to compete for available tax credits when contemplating to move their business out of the state. 25% of these credits will be designated for small businesses. Criteria for competition includes the number of jobs to be created or retained, the extent of poverty in a business development area, a minimum compensation limitation and a set job retention period. For fiscal year 2015-16, GO-Biz will accept applications for the California Competes Tax Credit during the following periods:

  • July 20, 2015, through August 17, 2015 ($75 million available)
  • January 4, 2016, through January 25, 2016 ($75 million available)
  • March 7, 2016, through March 28, 2016 ($50.9 million plus any remaining unallocated amounts from the previous application periods)

(Partial) Sales and Use Tax Exemption

This is a partial exemption of sales and use tax on certain manufacturing, biotechnology, and research and development equipment purchases. The partial exemption applies only to the state sales and use tax rate portion, currently at 4.1875 percent. The exemption does not apply to any local, city, county, or district tax. This exemption applies to all manufacturers (NAICS Codes 3111 – 3399, inclusive), Research and Development in Biotechnology, and the Physical, Engineering, and Life Sciences (NAICS Codes 541711 and 541712, respectively).

(Full) Sales and Use Tax Exclusion – Advanced Manufacturing & Transportation, and Alternative Energy

A sales tax exclusion from both state and local sales tax collection on equipment purchases for qualifying businesses that conduct qualifying activities. Sales tax rates vary by jurisdiction (typically 7% to 9.25%).

Sales and Use Tax Exemption – Agriculture

This program which is administered by the Board of Equalization, provides a partial sales tax exemption available under section 6356.5 for the sale, storage, use, or other consumption of farm equipment, machinery and their parts to qualified persons for use in qualifying activities. The partial exemption may also apply to leases.

The partial exemption applies only to the state sales and use tax rate portion. The exemption does not apply to any local, city, county, or district taxes. Sales and purchases of farm equipment, machinery and parts will continue to be subject to the remaining portion of the sales and use tax rate consisting of the local, city, county and any applicable district taxes.

New Employment Hiring Tax Credit (NEC)

The NEC is available for each taxable year beginning on or after January 1, 2014, and before January 1, 2021, to a qualified taxpayer that hires a qualified full-time employee on or after January 1, 2014, and pays or incurs qualified wages attributable to work performed by the qualified full-time employee in a designated census tract or economic development area, and that receives a tentative credit reservation for that qualified full-time employee.

Research & Development Tax Credit

A tax credit may be available for the incremental increase in Research and Development spending a business has within a year. The credit is 15% on state income for work performed in-house or 24% for work performed by an outside firm. To qualify, research must be conducted within California and must not include research for the purpose of improving a commercial product for style, taste, cosmetic or seasonal design factors. The credit is applied to the incremental increase in Research and Development spending for the year.

California Film & Television Tax Credit

This tax credit incentive program is available to qualified motion pictures. One hundred million dollars has been allocated annually beginning in fiscal year 2009-2010 through 2016-2017 on a first-come first-served basis. The program allows a 20% tax credit for qualified production related expenses against State income taxes. The program offers a special 5% additional tax credit bonus for those TV series that return from out of state and to “independent films.”

Net Operating Loss Carryover

California tax law allows businesses that experience a loss for the year to carry this loss forward to the next year (dubbed “Net Operating Loss Carryover”) in order to offset income in the years that follow. New businesses can carry-over 100% of their losses for 20 years if the loss is in their first year of operation.

College Access Tax Credit (CATC)

CATC is a credit available to individuals and business entities that contribute to the CATC Fund. The California Educational Facilities Authority (CEFA) administers the fund. The CATC is available for taxable years 2014 through 2017. The credit is a percentage of the amount you contribute each taxable year:

  • 55 percent for 2015.
  • 50 percent for 2016.
  • 50 percent for 2017.

The credit can be used to offset tax, including reducing the tax below tentative minimum tax. You may also be able to claim a charitable deduction on your federal tax return. If you do this, you must add back the amount of the charitable deduction taken on your federal return as a state adjustment on your California tax return. You cannot claim a deduction and a credit for the same contribution. The maximum aggregate amount of tax credits that can be allocated and certified by CEFA is $500 million.