Tax Incentives in General
Statutory tax credits are helpful to businesses looking to expand their operations within a state. As is often headlined in mainstream media, states compete with one another to entice companies to build plants, new headquarters operations, etc. within their state. And companies (particularly large ones) are happy to be courted for these often lucrative incentives which can include income tax credits, sales tax rebates, alternative financing, property tax incentives and infrastructure improvements – to name a few.
But over the years, state tax incentive programs have been criticized by many as “corporate giveaways” because companies often receive the tax breaks but don’t live up to the agreed upon investment (generally headcount). When companies fail to meet their milestones, it is often difficult for states to claw that money back and states are left to decide how to deal with the shortfall.
California’s Credit
In 2013, the state created the CA Competes Tax Credit, which is a business income tax credit to benefit companies with job creation and capital investment.
As we have discussed in a previous blog, the CA Competes Tax Credit is an income tax credit available to companies seeking to expand their business in CA. (While initially intended to increase expansion from companies outside the state, many of the credits are actually awarded to existing CA companies which are expanding their CA footprint.) Companies that apply for this credit must submit applications to the state detailing increased investment in CA. Tax credit agreements are approved by GO-Biz and approved by a statutorily created “California Competes Tax Credit Committee.” The GO-Biz is a board consisting of representatives from the Governor’s office of Business and Economic Development. Not all companies requesting money receive it. There is a subjective process for allocating the funds annually.
Key Facts About the Credit
Here are a few facts about the credit:
- This credit is available to companies already in CA who are expanding and out of state businesses expanding to CA.
- The credit is largely based on the expansion of people (payroll), property (buildings, plants, etc.) and infrastructure within the state.
- Until 2018, 20% of the total money allocated was reserved for small businesses.
- Companies expanding in certain geographic areas (including former enterprise zones) get additional “points” in the competitive process.
- Annual funding for the program is $180M and funds are approved at set meetings which take place 3-4 times per year. As a result of Covid, the budget for the program has been increased to $270 per year for the next two years as a continued pandemic relief effort.
- According to the California Competes Website, upcoming funding rounds and application periods are scheduled for January 3, 2022- January 24, 2022, and March 7, 2022- March 28, 2022.
- The Franchise Tax Board is responsible for reviewing taxpayer books and records to verify that companies are meeting their agreed upon milestones.
Update on the Credit
According to a recent article by Bloomberg Tax, California has awarded $1.3 billion in credits to 1,121 companies that promised to expand their presence in the state.
The article also says that, after analyzing data from the program, the number of applicants for the credit and the individual credit awards have fallen over time. This is the same with the percentage of applications that have been approved by the board. 2020 saw a rise in applications. A large number of these came from companies who do not qualify for the program, but were hurting from the effects of the pandemic.
As in other states, companies do receive approval for the credits, but then often fall short of meeting their agreed upon requirements. In California, however, if the requirements are not met, the state recaptures the credit, which means the company doesn’t receive the credit and the money goes back into the pool to be awarded to other companies. As the Bloomberg article indicates, about half the awards from the program’s first 2 years and one third from the third year have been recaptured. Program officials expect that trend to continue as businesses face uncertainties in making the initial projections when applying for the credit.
Some other items of interest about the CA Competes Tax Credit:
- Larger dollar awards have become more common and are increasingly being awarded to larger companies
- Historically, most of the money has been awarded to companies in manufacturing, financial services, and professional, scientific and technical services
- California has eliminated the requirement that 20% of the annual budget for the credit be awarded to small businesses.
Future of the Credit
Critics argue that the credit should have ended in 2017. However, the California state legislature reauthorized it until 2023, but strengthened the requirements where applicants need to demonstrate that they would not be able to add jobs without a credit. Officials in other states have been advised to create a credit in their state similar to the one in California because the recapture seems to be working here.
Stay tuned to our future blogs for updates on the future of this credit. If you think that your business might benefit from this credit or if you have any questions about the CA Competes Tax Credit, give us a call at Miles Consulting Group. We are here to help with all of your tax needs. Call us today!
