California Small Businesses to Get COVID Tax Relief

Governor Gavin Newsom signed a bill to help struggling businesses

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Over 4 million companies in the state are small to medium sized, representing over 99% of all employers in the state.

California Governor Gavin Newsom signed a pair of bills into law, providing small and medium-sized businesses (SMBs) in California with tax relief in the wake of the COVID-19 pandemic. The 2 bills — signed early this month — offer tax incentives and credits, primarily to businesses with less than 100 employees.

SMBs employ nearly half the working California population. Over 4 million companies in the state are small to medium sized, representing over 99% of all employers in the state. 

The business closures and slowdowns due to COVID-19 have hit California employers hard. A recent survey by Small Business Majority found 44% of small businesses are at risk of permanent closure due to the impact of the pandemic. For California, these closures put over 7 million workers at risk. 

Tax credits available for hiring

The first bill (SB1447) provides up to $100 million in tax credits for small businesses that hire employees before November 30, 2020. Businesses that qualify for the tax credit must:

  • Have 100 or fewer employees 
  • Verify they’ve experienced at least a 50% decline in gross revenue due to the pandemic

Struggling small businesses will be eligible for up to a $1,000 credit in personal income or corporate income taxes for each additional employee they hire, with a maximum credit per employer of $100,000. The credit is slated at $1,000 for each “net increase in qualified employees,” not to exceed one $100,000. SMBs will be allowed to apply the credit against “qualified sales and use taxes in reporting periods beginning January 1, 2021, and through until April 30, 2026.”

For California businesses that file their taxes monthly, credits apply to amounts due and payable for the month beginning March 1, 2021; ending March 31, 2021 and payable April 30, 2021. 

For businesses that file quarterly, the credit applies to taxes due for the quarter beginning January 1, 2021; ending March 31, 2021, and due April 30, 2021.

Business owners will need to submit an application to the California Department of Tax and Fee Administration to reserve a tentative credit reservation. The application will verify the business is making the credit election. The Department will “allocate the credit reservations on a first-come, first-served basis, not to cumulatively exceed $100,000,000.”  

Small to medium-sized business owners may submit the application beginning December 1, 2020. The application process will close no later than January 15, 2021, and may close earlier, depending on the amount of credits requests received. Once the state has reached its goal of providing $100 million in credits, the application process will close. 

Tax relief for PPP loans

Another bill (AB1577) signed by Newsom removes state income taxes on loans businesses received through federal programs slated to help during the pandemic. This includes loans employers received and were subsequently forgiven under the Paycheck Protection Program through the CARES Act and its amendments. 

No taxes will be due for any amount forgiven under the PPP program, including payroll costs, rent, mortgage, and utility payments that are forgivable under the act. The new bill in California aligns with federal law, allocating any amount of the loan forgiven under the program as tax exempt. It’s estimated that California businesses received more than $60 billion in loans through the federal programs. 

As companies struggle to return to normal, many states are working with business community leaders to find solutions. Tax relief and incentives may be helpful to keep permanent business closures to a minimum. 

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