New employment credit for Semiconductor, Electric Airplane, Lithium Production, and Lithium Battery Manufacturing (SEAL)

Overview

This credit is for employers that:

  • Hire qualified full-time employees
  • Receive a reservation for the qualified employee
  • Pay wages for work performed by that employee in California
  • Report the credit on a timely filed (including extensions) original return

We are required to provide a searchable database on our website that includes the following information:

  • Employer names
  • Amount of tax credit claimed
  • Number of new jobs created for each taxable year

There are a number of elements to this credit. It's important that you understand the requirements to generate this credit. You can also refer to California Revenue Taxation Code (R&TC) Sections 17053.73 and 23626 for the law and all requirements.

Qualified employer requirements

Must be engaged in one of the following SEAL trades or businesses in California:

  • Semiconductor manufacturing or research and development that has applied, or intends to apply, for funding under the federal Creating Helpful Incentives to Product Semiconductors (CHIPS) Act of 2022 . (NAICS Code category 3344)
  • Electric airplane manufacturing that has received a sales and use tax exclusion as an electric vertical takeoff and landing (eVTOL) manufacturer (NAICS Code category 3364 )
  • Lithium production as defined under the California Lithium Extraction Tax Law (NAICS Codes 212390 or 325180 )
  • Lithium battery manufacturing as at least 50% of your primary business (NAICS Code 335910 ).

In addition, qualified employers must:

  • Hire qualified employees
  • Obtain a tentative credit reservation for each of the qualified employees
  • Pay qualified wages
  • Have a net increase in jobs

Qualified employee requirements

  • Hired on or after the first day of your 2023 taxable year, and paid wages subject to California withholding
  • Hired for full-time work (paid hourly wages for an average of at least 35 hours per week, or is salaried and paid for full-time work)
  • Meets 1 of the following qualification categories at the time of hire:
    • Unemployed for the previous 6 months or more
      • Unemployed means not receiving wages, not self-employed, and not a full-time student
      • If the employee completed a college or similar program, the completion date must have been at least 12-months prior to date of hire
    • Veteran, separated from the U.S. Armed Forces within the previous 12 months
    • Received the federal Earned Income Credit in the previous taxable year
    • Ex-offender convicted of a felony
    • Current recipient of CalWORKS or county general assistance

Tentative Credit Reservation

A Tentative Credit Reservation (TCR) from us for each employee is needed to qualify an employee for you to receive the credit. You must submit your information online. You will receive an immediate confirmation.

For employees hired in a taxable year 2023, you must request a TCR by the last day of the month following the end of your 2023 taxable year.

For employees hired in taxable year 2024 or later, you must request a TCR within 30 days of completing the Employment Development Department (EDD) New Hire Reporting Requirements.

Start credit reservation

Information needed to make the reservation

Gather the following information to complete the reservation.

Employer information:

  • Name of business
  • Type of entity (corporation, partnership, individual, etc.)
  • Your ID (California Corporation number, Federal Employer Identification Number, social security number, etc.)
  • Date business began in California
  • Taxable year beginning date
  • Type of business (North American Industry Classification System (NAICS) classification)
  • Address of business
  • Business contact name and phone number

Employee information:

  • Employee’s name
  • Social security number
  • Hire date
  • Date you completed EDD New Hire Reporting requirements for the employee (only needed for hire date beginning in 2024 taxable year or later)
  • Starting hourly rate of pay
  • Average number of hours the employee will work per week
  • Employee’s qualification category
  • Paid preparer information, if applicable:
    • Preparer name
    • Preparer ID

Wages

  • Qualified wages — That portion of wages paid or incurred that exceeds California minimum wage, but does not exceed 350% of California minimum wage. The qualified wages are based on the actual wages paid or incurred, including overtime and commissions.
  • Determining the hourly wage rate for a salaried employee — A reasonable method is to divide the annual salary by the hours upon which the salary is based, normally 2,000 hours.
  • Employee credit length — An employee can continue to generate qualified wages for 60 months from the original date of hire.

Calculating the credit

Calculating the credit — The amount of credit is impacted by:

  • The number of qualified employees
  • Qualified wages paid to those employees
  • The total number of full-time employees during your "base year" (qualified or not)
  • The total number of full-time employees during your current taxable year

The actual amount of credit you can report on your return is determined by the following calculation:

  1. Compute qualified wages:
    • The portion of actual wages paid or incurred to your qualified employee(s) that exceeds 100%, but do not exceed 350%, of California minimum wage.
    • An employee can earn qualified wages for 60 months after the date they are initially hired by you.
  2. Multiply the qualified wages by 35%. This is your tentative credit amount.
  3. Compute your applicable percentage :
    • The top number (numerator) is your net increase in full-time employees.
      1. Take the number of full-time employees working in California and subtract the number of full-time employees working in California in your base year.  If this number is 0 or less, you do not receive credit for this taxable year.
        • Your base year is the taxable year immediately before the year when the first qualified employee was hired. If you begin doing business in California during the taxable year, the number of full-time employees for the base year is 0.
        • Full-time employees for both the current year and your base year are calculated in annual full-time employee equivalents. These are computed as follows:
          1. Hourly employee — The total number of hours worked during the year (not to exceed 2,000) divided by 2,000. For example, an employee who worked 6 months and 1,000 hours is equal to .5 annual full-time equivalents.
          2. Salaried employee — The total number of weeks worked divided by 52, for example, an employee who works for 13 weeks in the year is equal to .25 annual full-time equivalents.
      2. The bottom number (denominator) is the number of all your full-time California employees (both qualified and not qualified) as measured in full-time equivalents.
    • Compute the allowable credit:
      1. Your tentative credit amount multiplied by the applicable percentage equals your Allowable Credit.

Examples of calculating the credit

Example 1: You have a net increase in full-time employee equivalents — you receive the full amount of the tentative credit.

  • Your taxable year 2022, you had 100 full-time employees based on annual full-time equivalents
  • During your taxable year 2023, you hired new full-time employees, 2 of which were qualified full-time employees
  • You received a tentative credit reservation for these employees as required

    Assume the following facts:

    • Qualified Employee 1 was hired on January 1, 2023, at an hourly wage of $20.50 and on July 1, 2023, the employee's hourly wage was increased to $25.50 per hour
    • Employee 1 worked 2,000 hours during taxable year 2023
    • Qualified wages for Employee 1 are $5 per hour ($20.50 minus $15.50) from January 1, 2023, to June 30, 2023, and $10 per hour ($25.50 minus $15.50) from July 1, 2023, to December 31, 2023
    • Qualified Employee 2 was hired on July 1, 2023, at an hourly wage of $18.50 and worked 1,000 hours during taxable year 2023
    • Qualified wages for Employee 2 are $3 per hour ($18.50 minus $15.50)
    • Your base year is taxable year 2022
    • In your base year, annual full-time equivalent employees were 100
    • Your annual full-time equivalent employees in 2023 were 108 (108 minus 100)
    • The net increase in annual full-time equivalent employees over the base year is 8

    Your allowable credit is computed as follows:

Example 1
Description Calculation
Step 1:
Qualified Employee 1: $5,250 [($5 x 1000 hours) + ($10 x 1000 hours)] x 35%, plus
Qualified Employee 2: $1,050 [($3 x 1000 hours) x 35%]
Tentative Credit Amount: $6,300
Step 2:
Numerator: 108-100 = 8 (Net Increase in full-time employees)
Denominator: 2 qualified full-time employees
Computation: 8/2 = 100% (the applicable percentage cannot exceed 100%)
Applicable Percentage: 100%
Step 3:
Allowable Credit: $6,300 ($6,300 x 100%)

Example 2: You have a net increase in full-time employee equivalents — you receive a partial amount of the tentative credit.

  • Assume the same facts as Example 1, except due to attrition the annual full-time equivalents for taxable year 2023 was 101
  • The net increase in annual full-time equivalent employees over the base year is 1 (101 minus 100)

Your allowable credit is computed as follows:

Example 2
Description Calculation
Step 1:
Qualified Employee 1: $5,250 [($5 x 1000 hours) + ($10 x 1000 hours)] x 35%, plus
Qualified Employee 2: $1,050 [($3 x 1000 hours) x 35%]
Tentative Credit Amount: $6,300
Step 2:
Numerator: 101-100 = 1 (Net Increase in full-time employees)
Denominator: 2 qualified full-time employees
Computation: 1/2 = 50%
Applicable Percentage: 50%
Step 3:
Allowable Credit: $3,150 ($6,300 x 50%)

Example 3: You do not have a net increase in full-time employee equivalents — you receive none of the tentative credit.

  • Assume the same facts as Example 1, except due to attrition the annual full-time equivalent for taxable year 2023 was 98
  • The net increase in annual full-time equivalent employees over the base year is 0 (98 minus 100, but it cannot be less than 0)

Your allowable credit is computed as follows:

Example 3
Description Calculation
Step 1:
Qualified Employee 1: $5,250 [($5 x 1000 hours) + ($10 x 1000 hours)] x 35%, plus
Qualified Employee 2: $1,050 [($3 x 1000 hours) x 35%]
Tentative Credit Amount: $6,300
Step 2:
Numerator: 98-100 = 0. (Net Increase in full-time employees cannot be less than zero)
Denominator: 2 qualified full-time employees
Computation: 0/2 = 0%
Applicable Percentage: 0%
Step 3:
Allowable Credit: $0 ($6,300 x 0%)

Credit usage and carryover

You can claim the nonrefundable credit for employees hired (in the SEAL industries) in taxable years beginning on or after January 1, 2023, and before January 1, 2026. 

  • An employee has qualified wages for a 60-month period beginning with the first day the employee works for you
  • Any unused credit may be carried over for 5 taxable years subsequent to the year the credit was generated
  • You can only claim the credit on a timely filed (including extensions) original tax return
  • You can assign the credit to a member of the combined group as long as they meet the provisions of an eligible assignee

Credit recapture

If a qualified employee is terminated within the first 36 months after beginning employment, you may be required to recapture previously taken credits. The amount of credit that must be recaptured is the amount for that taxable year and all prior taxable years attributed to qualified wages paid to that employee.

You are not required to recapture the credit under the following circumstances:

  • The employee voluntarily leaves employment
  • The employee becomes disabled and unable to perform the services of that employment, unless the disability is removed before the close of the period and the employer fails to offer reemployment
  • The employee is terminated due to misconduct
  • The employer has a substantial reduction in operations, including reductions due to seasonal employment
  • The employee is replaced by other qualified full-time employees so as to create a net increase in both the number of employees and the number of hours of employment
  • The employment is considered seasonal, and the qualified employee is rehired on a seasonal basis

Annual Certification of Employment

An annual certification of employment filed with us is required for each qualified full-time employee hired in any previous taxable year. You certify that:

  • You are still a qualified employer
  • Each qualified full-time employee hired in a previous taxable year is still a qualified full-time employee in the current taxable year

The annual certification of employment is due on or before the 15th day of the 3rd month of your current taxable year. (March 15 for a calendar year taxpayer).

For example, during your taxable calendar year 2023, you hire several qualified full-time employees and obtain a TCR for each qualified full-time employee. The first annual certification of employment for these employees is due on or before March 15, 2024. In subsequent taxable years, the annual certification will be due on or before March 15 of each taxable year.

You must submit the annual certification of employment online and you will receive an immediate confirmation.

Start annual certification

Related taxpayers

Employees that worked for one qualified taxpayer, and are hired by (or transferred to) a related taxpayer, do not get a new hire date. Their 60 months of eligibility begins when they were hired by the first employer.

  • All employees of employers that are treated as related under Internal Revenue Code (IRC) Sections 267, 318, or 707, are treated as if employed by a single taxpayer
  • All employees of trades or businesses that are not incorporated and are under common control are treated as being employed by the same employer
  • The credit allowable for each related trade or business is allocated on a pro-rata basis depending on their proportionate share of the expense for the qualified wages

Relocated businesses

If you relocate your business to the DGA, you will be allowed an NEC for wages paid to each qualified full-time employee employed in the new location if you provide each employee at the previous location a written offer of employment at the new location, with comparable compensation.

  • This requirement does not apply if your business is a small business
  • The requirements for relocated employees apply if there is both:
    1. An increase in the number of qualified full-time employees in the DGA within a 12-month period
    2. A decrease in the number of full-time employees employed in California, but outside of the DGA

Contact

Phone
916-845-3464
Weekdays, 8 AM to 5 PM
GEDI@ftb.ca.gov