Targeted Tax Credits
Economic Development Areas
The state offers four types of Economic Development Areas (EDAs): Enterprise Zones (EZ); Local Agency Military Base Recovery Areas (LAMBRA); Manufacturing Enhancement Areas (MEA); and, Targeted Tax Areas (TTA) in urban and rural areas.
Businesses located within the boundaries of an EZ are eligible for tax credits. The first major EZ tax credit is equivalent to the sales and use tax paid on the first $1,000,000 of Personal Income Tax or Corporations can earn sales tax credits on purchases of $20 million per year of qualified machinery and machinery parts. Qualified machinery is machinery or parts used
•Manufacture, process, fabricate, or otherwise assemble a product.
• Produce renewable energy resources.
• Control air or water pollution.
The definition of "qualified property" has been expanded to include data processing and communications equipment including, but not limited to, computers, CAD systems, copy machines, telephones systems and faxes. Equipment must be purchased in California unless equipment of comparable price and quality cannot be found in California. The second major EZ benefit takes the form of a credit equal to a percentage of the wages paid to a qualified employee. The credit is based on the lesser of the actual hourly wage or 150% of the state-established minimum wage. The credit is provided over a five-year period with 50% of the wages creditable in the first year of employment, 40% the second year, 30% the third year, 20% the fourth year, and 10% the fifth year. If the employee stays with the company for the entire 5-year period, the company receives credits totaling nearly $37,440 per qualified employee. If the employee is terminated prior to 270 days of employment, the credit is recaptured.
Other EZ benefits that may apply in certain cases include:
• A 15-year carryover of up to 100% of net operating losses.
• Expensing of certain depreciable property.
• Lender interest income from loan to zone businesses is deductible.
LAMBRAs, MEAs, and TTAs
LAMBRA zones are a companion to EZs. The most notable differences in incentives include enhanced equipment purchase eligibility under the sales and use tax credit; an annual wage limitation of $2 million per year under the hiring tax credit; and redefinition of qualified employees to include displaced military or civilian employees of the former base.
Research and Development Tax Credit
Designed to encourage businesses to increase their basic research and development activities
in California, the research and development tax credit allows companies to receive a 15% credit
against their bank and corporation tax liability for qualified in-house research expenses, and a
24% credit for basic research payments to outside organizations. Qualified research expenses generally include wages, supplies and contract research costs. To qualify, a taxpayer's research must be conducted within California and include basic or applied research of scientific inquiry,
original investigation for the advancement of scientific or engineering knowledge or improved function of a business component.
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 in order to offset income in the following years. New businesses can carry over 100% of their losses for 20 years if the loss is in their first year of operation.
The federal government has designated sections of several California communities as Renewal Communities, Empowerment Zones and Enterprise Communities (RC, EZs and ECs). The cities of Fresno, Los Angeles, Santa Ana, San Francisco, Orange Cove, Parlier, and the counties of Imperial and Riverside have designated RCs, EZs or ECs. Benefits to
businesses locating or expanding in these areas include:
• Employer wage credits of 20% for the first $15,000 in wages paid to an individual
who resides in the EZ up to $3,000.
• Section 179 deduction allowing businesses to deduct all or part of the cost of eligible property (machinery, furniture, equipment, computers) up to an additional $20,000.
• Availability of low interest rate tax-exempt private activity bonds to finance industrial projects typically between $1-3 million (some zones have substantially larger limits), often with fewer restrictions than those normally associated with tax-exempt bond financing.
• Possible city business tax exemption.
• Postponement of capital gains on the sale of EZ/EC assets.
Foreign Trade Zones
California's Foreign Trade Zones (FTZ) are located in San Francisco, San Jose, Long Beach, Oakland, West Sacramento, San Diego, Palmdale, Los Angeles, Port Hueneme, Merced/Madera/Fresno counties, Stockton, Palm Springs, Santa Maria, Victorville, Eureka and Imperial, Butte and Riverside counties.
FTZs are secured areas legally outside of U.S. customs territory usually located in or near customs points of entry. FTZs allow entry of foreign or domestic merchandise without formal customs entry or government excise taxes. Merchandize entering a zone may be stored, tested, sampled, relabeled, repackaged, displayed, repaired, manipulated, mixed, cleaned, assembled, manufactured, salvaged, destroyed or processed. Products exported from or imported into FTZs are excluded from customs duty and excise taxes until the time of transfer from the FTZ.
New Markets Tax Credits
The New Markets Tax Credit (NMTC) Program permits taxpayers to receive a credit against federal income taxes for qualified equity investments in designated Community Development Enities (CDEs). Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities. The credit provided to the investor totals 30% of the cost of the investment and is claimed over a seven-year period. In each of the frist 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. For the final four years, the value of the credit is 6% annually. Investors may not redeem their investments in CDEs prior to the conclusion of the seven-year period. NMTCs will be allocated annually the Fund to CDE's under a competitive application process. As of 2007, allocates in California include Border Communities Capital Company, LLC of Solana Beach; Clearinghouse CDFI of Lake Forest; Impact Community Capital CDE, LLC of San Francisco; KHC New Markets CDE, LLC Series A of Carlsbad; Lenders for Community Development of San Jose; and WNC National Community Development Advisors, LLC of Costa Mesa.
Film and TV Production Tax Credit
Film and TV Production Tax Incentives will lure television and movie production back to California where it belongs:
• for the next five fiscal years, the California Film Commission will certify and administer a tax credit for new production in the state or production that returns to California from another state. The credit will be equal to 20% of expenditures in the state related to the film production, and 25% for production returning to the state and independent films. It will be capped at $100 million per year.
• This is about much more than actors and directors-- it's a benefit to the small businesses such as make up artists and caterers who rely on film production for their business.
Job Referral and Placement
California's Employment Development Department (EDD) works with businesses to access the state's entire workforce, as well as to coordinate recruitment activities with local community-based job training and placement organizations called "One-Stop Career Centers." EDD, in cooperation with the One-Stop network, will help to customize and deliver pre-employment and on-the-job training; recruit, screen, and assess workers for specific skills sets; and assist employers to maximize California Enterprise Zone and federal hiring tax credits.
Also, through its CalJOBS system, EDD's Job Service offers a statewide network that provides an instant link between employers and job seekers anywhere in California. This network provides employers with quick access to the largest available pool of job-ready applicants.
SM system, EDD's Job Service offers a statewide network that provides an instant link between employers and job seekers anywhere in California. This network provides employers with quick access to the largest available pool of job-ready applicants.