California Tax Rates, Incentives & Exemptions
As the most populous state in the union, California attracts new residents from all over the country and around the world. From the glow of Tinseltown to the technological buzz of Silicon Valley, dreamers and entrepreneurs alike are drawn to the state. But California is also one of the most expensive states to call home – 3rd highest to be exact. California tax rates are some of the highest in the nation.
Businesses in California are not spared from the tax hammer. California imposes corporate income taxes on “C” corporations and limited liability companies that operate like corporations. As a result, many entrepreneurs who operate small businesses in California are subject to quadruple taxation – double taxation from Uncle Sam and double from California.
But as of 2014, California has enacted a series of tax breaks which will award millions of dollars in tax credits to qualifying businesses. These tax incentives were designed to lure businesses to re-locate or keep their base of operations within the state.
Aerospace Industry Gets a Break with State Tax Credits
One business field seeing some high-profile tax breaks in California is the aerospace industry. California was at one point in time the center of the aerospace industry, before the US government was forced to make drastic cut-backs in the 1990’s, essentially reducing the workforce by more than 50% of its workers. California Governor, Jerry Brown, has been trying to put together an incentive package of sorts to entice some of the larger employers to come back to the state, which would improve employment rates, bring a huge influx of new business and cash flows, as well as help off-set the current financial problems that California is facing.
The Aerospace Tax Clarification Act, which was passed in April, cleared up some ambiguity regarding the classification of rocket propulsion systems. This new act clarifies that these rockets qualify for an existing business tax exemption, rather than being classified as a taxable business supply as the prior law read.
“The space commercialization industry is not only developing some of the most advanced space vehicles in the world,” stated Assembly member Al Muratsuchi, “but is also creating thousands of local, high-paying manufacturing jobs.” This law was a direct nod to the Space Exploration Technologies Corporation, a Los Angeles based enterprise founded by Tesla billionaire, Elon Musk. The bill was also supported by Northrop Grunman, the Commercial Spaceflight Federation, Aerojet Rocketdyne Inc., a division of GenCorp Inc. and Lockheed Martin.
Governor Brown is also pushing for the aerospace bill to be expanded to cover the automotive industry. California is one of several states currently bidding for Tesla to build its proposed $6 billion factory to manufacture a new auto battery, known as the “gigafactory”, here in the state. This addition to California would mean the creation of at least 6500 new jobs as well.
Additionally, Governor Brown signed a law in July 2014 which grants a 17.5 percent tax credit on wages for workers hired to build aircraft. The bill serves as an incentive to score lucrative contracts for high-paid aerospace jobs within the state. There was also a 10-year tax exemption granted for the manufacturing of equipment used for the space travel industry.
Is there a tax credit for small businesses in California?
Under the California Competes program, a full 25 percent of the $29 million in tax credits will be reserved to small businesses with gross receipts of less than $2 million annually. Huge corporations are not the only beneficiaries of the new tax incentives in California. The state recently instituted the California Competes tax credit program, designed to provide financial incentives for businesses to relocate to California or for businesses within the state to remain and add jobs.
The California Competes tax credit program replaces the former Enterprise Zone program, which was eliminated in 2013 due to it being wasteful and inefficient. Credits allocated by the program are tentatively set at $30 million for fiscal year 2013/14, $150 for fiscal year 2014/15 and $200 million for each fiscal year after that through 2018. The state’s website lists the following criteria by which California Competes tax credits will be awarded:
- The number of jobs created or retained
- Total compensation, including wages and fringe benefits
- Investment in the state
- Unemployment or poverty rates where businesses are located
- Other state and local incentives available to the business
- Incentives from other states
- Duration of commitment of the business or project
- Overall economic impact
- Strategic importance of the business to the state, region, or locality
- Future growth or expansion opportunities
- Expected benefit to the state in excess of benefit to the business from the tax credit
The California Competes Tax Credit is a non-refundable tax credit, meaning that businesses cannot receive cash back even if the credit is greater than what they would otherwise owe in corporate income taxes. But excess funds from the credit can be carried forward for as long as five years, or until the excess funds are exhausted, whichever is sooner.
Other Business Tax Incentives in California
Other tax incentives for businesses that locate or expand within the state of California include the Manufacturing Equipment Sales Tax Exemption and the New Employment Credit program. Each program is for businesses located within designated Enterprise Zones, or areas that are struggling economically.
The sales tax exemption allows eligible businesses to exclude the State’s portion of the sales and use tax (currently 4.19%), from the first $200 million in equipment purchases made between July 1, 2014 and June 30, 2022. This program will generate significant savings for eligible businesses, allowing them to pay a reduced sales and use tax rate of 3.3125% on qualifying equipment purchases.
The New Employment Credit program allows eligible businesses to receive a credit that may be taken against corporate income tax. This credit may be taken for all qualified employees hired on or after January 1, 2014. The amount of the tax credit equals 35% of the qualified wages paid for each new full-time employee hired, making a potential tax break of up to $56,000 or more per new employee over a five-year period.
For a newly hired employee to qualify the business for the New Employment Credit, they must fall into one of the following categories:
- Unemployed for 6 months or more (excluding students and self-employed workers) either without a degree or having completed a degree more than 12 months before being hired
- Veterans separated from active duty for less than 12 months
- Earned Income Tax Credit (EITC) recipients during the previous year
- Ex-offenders convicted of felonies
- Current CalWORKS or county general assistance recipients
Attracting New Business with Tax Incentives
Many Californians approve of Governor Brown’s latest attempts to keep California in the running when it comes to attracting new businesses and keeping the existing ones from moving to another state that offers better business incentives. California is beginning to offer many appealing incentives to businesses, including State Tax credits, new employee credits, green tax incentives, as well as energy and transportation credits. When combined with available Federal tax credits and discounts, California can be a very profitable place for business owners to call home.
Below is a list of some additional tax incentives and tax credits currently offered in the state of California.
| California Tax Programs, Credits, and Incentives | Benefits to Businesses |
| California Competes | $29 million in various tax credits to businesses who create or retain jobs within the state of California |
| Aerospace Tax Clarification Act | Qualifies rocket propulsion systems for an existing business inventory tax exemption |
| California Motion Picture and Television Production Credit (AB-1839) | 20% of expenditures for a qualified motion picture and 25% of production expenditures for an independent film or a TV series that relocates to California |
| Manufacturing Equipment Sales Tax Exemption | Allows businesses to exclude the state share of sales tax (4.19%) from the first $200 million equipment purchases. |
| SB 1309 | Tesla bill to include tax credits, workforce training grants and streamlined permitting and environmental reviews |
| New Employment Credit | 35 percent of wages between 1.5 and 3.5 times the minimum wage for a period of five years. |
| California Research and Development Tax Credit | Credit for costs attributable to research activities conducted in California |
| California Capital Access Program Collateral Support (Cal-CAPS CS) | Pledges cash (up to 40% of loan) to cover collateral shortfall of loans of $100,000 or more in Severely Affected areas |
| Small Business Loan Guarantee Program | Enables small businesses to obtain a loan it could not otherwise obtain |
| Industrial Development Bond | Provides manufacturing and processing companies low-cost, low-interest financing for capital expenditures |
| Employment Training Panel | Helps assist with post-hire training reimbursement |
| Community Development Financial Institutions Investment Credit | 20% of qualified investments made into a community development financial institution |
| Disabled Access for Eligible Small Businesses (FTB-3548) | $125 per eligible small business, and based on 50% of qualified expenditures that do not exceed $250 |
| Enhanced Oil Recovery (FTB 3546) | 1/3 of the similar federal credit but limited to qualified enhanced oil recovery projects located within California |
| Environmental Tax (FTB 3511) | $0.05/each gallon of ultra-low sulfur diesel fuel produced during the year by a small refiner at a California facility |
| Low-Income Housing (FTB 3521) | Similar to the federal credit but limited to low-income housing in California |
| Manufacturing Enhancement Area Hiring | Hiring credit for Manufacturing Enhancement Area |
| Prison Inmate Labor (FTB 3507) | 10% of wages paid to prison inmates |
| Targeted Tax Area Hiring (FTB 3809) | Business incentives for trade or business activities conducted within a targeted tax area |
This article was written by staff writers Audrey Henderson and Jennifer Leonhardi. Consult with Optima’s Tax Relief professionals to learn more.