California Rolls Out a New Tax Credit for Small Businesses that Hire New Employees and Suspends the Net Operating Loss Carryover

Date October 5, 2020
Authors Suzanne P. Leighton, CPA, MST

Tax Credit

As California is still in the midst of fighting the COVID-19 virus, it has already moved on to assisting small businesses with the recovery. Small businesses that lost at least half their gross receipts during the pandemic can get a $1,000 tax credit for every full-time employee they hire between July 1 and November 30, 2020.

Eligible businesses are those that had fewer than 100 employees before the pandemic began and experienced a loss of gross receipts of at least 50% in the second quarter of 2020 compared with the second quarter of 2019.

Businesses can reserve a $1,000 credit for each full-time employee they hire during the period for a maximum of $100,000 credit. Applications will be made through the Franchise Tax Board.

The credit can be claimed on the 2020 original state income tax return. The credit can be carried forward through 2025. If the business does not owe income tax, the credit can be applied towards sales and use tax.

The state funding for the credit is capped at $100 million.

Net Operating Loss Suspension

For larger taxpayers, it is important to note that California has suspended the Net Operating Loss Carryover which was passed as part of the state budget. For tax years beginning on or after January 1, 2020, and before January 1, 2023, California generally suspends NOL deductions. The suspension applies to both personal income and corporate taxpayers. It does not apply to taxpayers with net business income or modified adjusted gross income of less than $1 million.

For any NOL for which a deduction is denied because of the suspension, California will extend the carryover period. The extension period is:

  • Three years for losses incurred in tax years beginning before Jan. 1, 2020.
  • Two years for losses incurred in tax years beginning on or after Jan. 1, 2020, and before Jan. 1, 2021.
  • One year for losses incurred in tax years beginning on or after Jan.1, 2021. and before Jan. 1, 2022.

If you have questions about the California Tax Credit for new jobs or the Net Operating Loss suspension, please contact your HBK advisor.

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