On November 27, 2013, the Governor’s Office of Business and Economic Development (“GO-Biz”) released draft proposed regulations on the recently enacted California Competes Tax Credit, and has scheduled workshops throughout California for public comment.
On July 11, 2013, Governor Brown signed Assembly Bill (“AB”) 93 into law, which provides for various tax credits,1 including the California Competes Credit (“CCC”) – a credit against the income and franchise tax.2
For taxable years beginning on and after January 1, 2014 and before January 1, 2025, the CCC is allowed against the net tax in the amount allocated by the California Competes Tax Credit Committee (the “Committee”).3 Unused CCC may be carried over to reduce the net tax in the following taxable year and succeeding five taxable years,4 but may not be used to reduce tax below the tentative minimum tax.5 The CCC or carryover of the CCC earned by members of a combined reporting group may be assigned to an affiliated corporation that is a member of the same combined reporting group that is an eligible assignee.6
Qualification for the CCC
A taxpayer must enter into a written agreement with GO-Biz which sets forth the amount of CCC to be allocated to the taxpayer. The agreement is subject to Committee approval.7 The amount of CCC to be allocated to a taxpayer must be based on the following factors:8
- The number of jobs the taxpayer will create or retain in California.
- The compensation paid or proposed to be paid by the taxpayer to its employees, including wages and fringe benefits.
- The amount of investment in California by the taxpayer.
- The extent of unemployment or poverty in the area according to the U.S. Census in which the taxpayer’s project or business is located.
- The incentives available to the taxpayer in California, including from state and local governments and other entities.
- The incentives available to the taxpayer in other states.
- The duration of the proposed project and the duration the taxpayer commits to remain in California.
- The overall economic impact in California of the taxpayer’s proposed project or business.
- The strategic importance of the taxpayer’s project or business to California, the region, or locality.
- The opportunity for future growth and expansion of the taxpayer’s business in California.
- The extent to which the anticipated benefits to California exceed the projected benefit to the taxpayer from the Credit.
The written agreement between the taxpayer and GO-Biz shall include:9
- Terms and conditions for minimum compensation levels and job retention periods.
- Provisions indicating whether the CCC is to be allocated in full upon approval, or in increments based on mutually agreed upon milestones achieved by the taxpayer.
- Provisions that allow the Committee to recapture the CCC (in whole, or in part) if the taxpayer fails to fulfill the terms and conditions of the written agreement.
If the taxpayer fails to fulfill the terms and conditions of the agreement, GO-Biz may recommend recapture of the CCC to the Committee.10
The FTB must review the books and records of all taxpayers who have been allocated the CCC to ensure compliance with the terms and conditions of the written agreement with GO-Biz.11 This review is separate from the FTB’s normal audit of an income tax return, and does not preclude the FTB from auditing any other item on the taxpayer’s income tax return.12
The FTB must also notify and provide information to GO-Biz of a possible breach of the written agreement, and whether a taxpayer is a “small taxpayer,” notwithstanding Section 19542.13 The Committee, not the FTB, is responsible for determining whether any CCC must be recaptured, and the amount of any such recapture.14
Any recapture of CCC is treated as a mathematical error appearing on a return, and any amount of tax resulting from that recapture shall be assessed by the FTB in the same manner as provided in Section 19051.15 The amount of tax resulting from recapture of the CCC is added to the tax otherwise due by the taxpayer for the taxable year in which the Committee’s recapture determination occurred.16
CCC Allocation Limitations
The aggregate amount of CCC that may be allocated in any fiscal year17 is as follows:18
- 2013-2014 fiscal year---$30 million.
- 2014-2015 fiscal year---$150 million.
- For each fiscal year thereafter, until fiscal year 2018-2019---$200 million.
- No maximum allocation has been set for fiscal years after 2018-2019.
The above amounts will be increased by unallocated amounts of CCC (if any) from the preceding fiscal year, and the amount of any previously allocated CCC that has been recaptured.19
These amounts will be decreased by the amount estimated by the Director of Finance, in consultation with the FTB and the State Board of Equalization, to be necessary to limit the aggregation of the new sales and use tax manufacturing exemption, the new income tax hiring credit, and the CCC to $750 million for either the current fiscal year, or any of the three succeeding fiscal years.20
Each fiscal year, 25 percent of the aggregate amount of the CCC permitted to be allocated is reserved for small businesses,21 and no more than 20 percent may be allocated to any one taxpayer.
Duties of GO-Biz22
- Give priority to a taxpayer whose project or business is located or proposed to be located in an area of high unemployment or poverty.
- Negotiate with a taxpayer the terms and conditions of a proposed written agreement setting forth the CCC to be allocated to said taxpayer.
- Provide the negotiated written agreement to the Committee for its approval.
- Inform the FTB of the terms and conditions of the written agreement, upon approval by the Committee.
- Inform the FTB of any recapture of a previously allocated CCC, upon approval of the recapture by the Committee.
- Post on its website: (a) the name of each taxpayer which is allocated a CCC; (b) the estimated amount of the investment by each taxpayer; (c) the estimated number of jobs created or retained; (d) the amount of CCC allocated to a taxpayer; and (e) the amount of CCC recaptured from a taxpayer, if applicable.
GO-Biz is authorized to prescribe rules and regulations to carry out the purposes of the CCC, and these may be adopted by an emergency regulation in accordance with Section 11340, et. seq. of the Government Code.23 A written agreement between GO-Biz and a taxpayer with respect to the CCC must comply with existing law on the date the agreement is executed.24
This material is not intended to constitute a complete analysis of all tax considerations. Internal Revenue Service regulations generally provide that, for the purpose of avoiding United States federal tax penalties, a taxpayer may rely only on formal written opinions meeting specific regulatory requirements. This material does not meet those requirements. Accordingly, this material was not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal or other tax penalties or of promoting, marketing or recommending to another party any tax-related matters.