California is home to more small businesses than any other state. There are approximately 4.1 million, employing over 7 million people (nearly 49% of all California employees). This may be surprising considering California ranks third-worst in the U.S. for business tax climate. It’s also one of the few states that allow double taxation, personal and business, on small business owners who set up pass-through entities. There are, however, California tax credits for small business owners that can help decrease their tax liability.
General California Tax Credits
Depending on the size and nature of the business, small business owners may be eligible for one or more of these California tax credits.
California Competes Tax Credit
The California Competes Tax Credit (CCTC) is an income tax credit that encourages new businesses to relocate to California, as well as help retain current businesses. Businesses compete for over $180 million in tax credits. Selection is based on 12 different factors, including jobs created, investment amount, and the strategic importance to the state. For the 2019-2020 fiscal year, there are two application periods still available:
January 4, 2021 – January 25, 2021
March 8, 2021 – March 29, 2021
Any business in any California may apply. The process takes approximately 90 days to complete. Learn More >>
New Employment Credit
This income tax credit is available to California business owners who hire qualified, full-time employees within designated geographical areas (DGA). The credit is based on 35% of qualified paid wages. Several requirements must be met to receive the credit, including:
- Starting wages must exceed 150% California minimum wage
- The employee must work full time
- At least 50% of work is performed in DGA
- The employee must meet one of the following at the time of hire:
- Unemployed for the previous 6 months or longer
- Veteran, separated from military within the previous 12 months
- Received Earned Income Credit (federal) in the previous tax year
- Ex-offender (convicted of a felony)
- Current recipient of CalWORKs or county general assistance
In addition, business owners must also request a Tentative Credit Reservation (TCR) within 30 days of completing the Employment Development Department (EDD) New Hire Reporting Requirements. Learn More >>
Work Opportunity Tax Credit
This federal tax credit is available to California employers who hire individuals from qualifying target groups, such as veterans, ex-felons, or food stamp recipients. To receive the maximum credit, which is a 40% tax credit on qualified wages, the hired employee must work a minimum of 400 hours or more during the first year. Tax credit amounts vary between $2,400 and $9,600, depending on the target group. Employers may also be eligible for a 25% credit if the employee works between 120 and 399 hours during their first year. Learn More >>
New COVID-19 California Tax Credits
The pandemic has taken quite a toll on California’s small business owners. Six of the eight hardest-hit metro areas nationwide are located within the state. To help them recover, Governor Gavin Newsom signed a law in September which now gives COVID-19 tax breaks to small business owners (100 employees or less), essentially reducing how much they will owe in state taxes.
Hiring Tax Credit
To qualify for the new Hiring Tax Credit, small business owners must have lost at least 50% of their revenue from April 1 to June 30 of this year compared to the same period last year. They must also have more employees working between July 1 and December 1 than they did between April 1 and June 30 of this year. Small business owners may receive $1,000 credit for the net increase of each new employee. The tax credit is capped at $100,000 per business or $100 million statewide.
PPP Income Tax Break
Small business owners who took out a loan under the Paycheck Protection Program (PPP) will also be exempt from paying state income taxes on any amount forgiven. This includes rent payments, payroll costs, mortgage interest, and utility payments that are eligible under the program guidelines.
California Small Business Tax Help
If you own a small business in California and need help with your taxes, contact Tax Defense Network. We have 42 locations throughout the state. Our services include small business tax preparation (state and federal), payroll taxes, sales taxes, tax planning, bookkeeping, close corporate filing, and tax debt resolution. To learn more about how we can help you, schedule a free consultation today!