Will your client qualify for the new jobs credit?
Newly enacted state law, ABX3 15 (Assembly Budget Committee, Stats. 2009 Third Extraordinary Session, Ch. 10) allows a potential income tax credit of $3,000 to a qualified taxpayer for each additional full-time employee hired. The total amount of the credit available to taxpayers is capped at $400 million.
This credit will not be subject to the 50 percent limitation for business credits in 2009. This credit does have an eight year carryover provision.
The credit must be claimed on a timely-filed original return received by us before the cut-off date. This cut-off date is defined as the last day of the calendar quarter within which we estimate the $400 million limit will be reached. The cut-off date has not yet been determined.
This credit is allowed for taxable years beginning on or after January 1, 2009.
An employer qualifies for the credit if both apply:
- They employed a total of 20 or fewer employees on the last day of the preceding taxable year (for calendar taxpayers this would be December 31, 2008).
- They have a net increase in qualified full-time employees compared to the number of full-time employees employed in the preceding taxable year.
We would like to address some of the questions we have been receiving regarding this credit.
If my client starts a new business in 2009, will they qualify for this credit?
For taxpayers who start doing business in California during the current taxable year, the number of qualified full-time employees employed in the preceding year would generally be zero, unless certain special rules apply.
Does the employee have to work for the taxpayer the entire year?
No. Taxpayers who hired employees throughout the year can qualify for this credit. The credit is, however, limited by being prorated on an annual full-time equivalent basis for employees employed less than one full year. This is done by taking the total number of hours each less-than-full year employee work (not more than 2000 hours for each employee) and dividing by 2000. Salaried employees are based on weeks worked. So if your client, who otherwise meets the requirements for this credit, hired a new employee in June and that employee worked 1,000 hours, your client could qualify for a $1500 credit.
Can my client claim this credit on their fiscal 2009 return?
This credit is only allowed for taxable years beginning on January 1, 2009, which means taxpayers that file for fiscal year 2009 will have to wait to see if there is any credit left available to claim on their returns filed for years ending in 2010.
What if my client converts their business from a partnership to an S corporation? Would the S corporation be consider a new business or need to count the employees the partnership had in 2008 as prior year employees?
The answer to your question will depend on the facts and circumstances of each taxpayer; certain special rules apply. But if the client just changed the business form, they would need to count the partnership employees as prior year employees.
A new credit form 3527, New Jobs Credit, is currently being developed and will be available in December 2009. For more information about this credit, go to ftb.ca.gov and search for new jobs tax credit.