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California’s employment outlook in 2021 was a mixed bag for many businesses and organizations. Overall, the state has averaged almost 100,000 new jobs every month throughout 2021, and the year ended with a positive employment outlook for most sectors. This encouraging news comes despite the fact that Los Angeles has only recovered about 44% of lost jobs arising from the pandemic, and the challenges many are facing due to the “Great Resignation”. Although economic recovery indicators appear positive, many can still benefit from targeted financial relief programs.
The unfortunate reality is that all the federal COVID-19 programs have ended. To encourage economic growth and offer an incentive for enduring economic disruptions, the state of California is offering eligible Los Angeles and Orange County small businesses an opportunity to receive state tax credits. The Main Street Tax Credit II is available for businesses with up to 500 employees in 2021 and can be worth up to $150,000. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key program details below.
About the Main Street Tax Credit Program
The Main Street Tax Credit II program provides financial relief to struggling small businesses suffering from COVID-19 losses in 2020 and 2021. The Main Street Tax Credit II awards eligible businesses $1,000 for each net increase in qualified employees up to a maximum of $150,000. Small businesses must claim the credit on an original and timely filed tax return – amended returns don’t count.
Qualified employees must be subject to California withholding tax and cannot be considered independent contractors.
Businesses can elect to take the credit against California income tax or make an irrevocable election and claim it against sales and use taxes instead. Unused credits can be carried forward up to five years or until the program expires in 2026. The second iteration of the tax credit loosens restrictions on employee count and a decline in gross receipts.
Tax Credit Qualifications
Around $116 million was allocated for the Main Street Tax Credit II through the California Department of Tax and Fee Administration (CDTFA). Eligible businesses must have already applied for and received a tentative credit reservation in November 2021. Provided certain requirements are still met for the 2021 tax year, employers can begin to view their credit balance on February 1, 2022.
Recall that eligible small businesses must have had 500 or fewer employees as of December 31, 2021, and experienced at least a 20 percent decline in gross receipts. Calendar and fiscal year businesses can compare 2020 to 2019. Businesses that began operations in 2019 can compare January 1 – February 28, 2020, against April 1 – June 30, 2020. Note that new businesses that started in 2020 are not eligible for the Main Street Tax Credit II.
Calculating Net Increase in Qualified Employees
Full- and part-time employees both qualify for the total employee count. To determine net increase, subtract the second from the first.
- Calculate average monthly employees (full- and part-time) between April 1, 2020, and June 30, 2020. Then add the total full-time equivalent (FTE) employees and divide them by three.
- Average monthly FTE count between July 1, 2020, and June 30, 2021, and then add the total FTE for all 12 months and divide by 12. Or the average monthly FTE count between April 1 – June 30, 2021, and then add the total FTE for these 3 months and divide by 3.
FTE means the total of all full- and part-time employees. For purposes of calculating net employee increase, monthly FTE means either:
- Hourly employee: total number of hours worked in the month not to exceed 167, divided by 167.
- Salary employee: total number of weeks worked in the month, divided by 4.33.
Provided the tentative credit reservation is taken care of, small businesses can now look ahead to claiming the credit on their 2021 tax return.
Other Considerations for the Main Street Tax Credit II
This tax credit cannot be combined with other credits and wages allocable to other state tax credits, like the California Research & Development tax credit, cannot be included in calculations. Even if a small business otherwise meets the above criteria, if it did not apply for a tentative credit in November 2021, the business cannot make a claim.
S-Corps and other pass-through entities cannot distribute the credit to owners or shareholders if they take it against sales and use taxes. If they elect to take the credit against franchise and income taxes instead, they can pass the credit through to shareholders to use against their personal income taxes. In that case, pass-through entities may only use one-third of the credit against net income tax at the entity level. The credit cannot be used to offset the franchise tax. Any remaining and unused tax credits from 2020 will be applied first.
The savings opportunity presented by the Main Street Tax Credit II should not be taken lightly. For those businesses that qualify, it is important to make the necessary considerations to determine how to receive the highest benefit. If you have questions about the information outlined above or need assistance with another tax or accounting issue, JLK Rosenberger can help. For additional information, call us at 949-860-9902 or click here to contact us. We look forward to speaking with you soon.