Sensiba San Filippo: How new tax changes could affect your business’s tax incentives Featured

7:00pm EDT November 25, 2013
Marcus Halluin, CPA, Tax manager, Sensiba San Filippo LLP Marcus Halluin, CPA, Tax manager, Sensiba San Filippo LLP

For more information on tax changes and tips for 2014, visit Sensiba San Filippo LLP's blog.

If your business has benefited from California enterprise zone credits, the next few months might shock your system.

AB 93, signed into law by Governor Jerry Brown on June 12, 2013, effectively eliminates the enterprise zone program. In its place, three new tax incentives will take effect beginning Jan. 1, 2014. Will these new incentives bring the same value to the California economy? Will your business lose benefits that it has come to rely upon, or will it find new benefits?

Smart Business spoke with Marcus Halluin, CPA, tax manager at Sensiba San Filippo LLP, to find out more about these incentives, what’s coming in 2014 and what businesses can expect moving forward.

What was the enterprise zone program and what did it do for businesses?

The enterprise zone program was a long-standing state incentive designed to encourage specific business activities in designated ‘economically depressed’ areas. The program provided lucrative hiring credits, sales tax credits, net interest deductions, business expense deductions and net operation loss deductions.

What new incentives does AB 93 create?

AB 93 creates a statewide sales tax exemption, which will be available for equipment purchases made by businesses engaged in manufacturing or biotechnology research and development. It will significantly modify and restrict eligibility for the hiring credit. AB 93 also creates a new investment tax credit based on a competitive application process.

How has the California sales tax exemption changed?

The new sales tax exemption created by AB 93 targets industries and activities rather than geographic areas. Specifically, the exemption will apply to manufacturers and biotechnology R&D companies. Qualifying businesses can exclude the first $200 million of eligible purchases per year from state sales and use tax. At least 50 percent of qualified purchases must be used in the process of manufacturing or R&D.

How will the hiring credit change in 2014?

Beginning in 2014, the hiring credit will be decidedly more restrictive and will apply only to the net increase in jobs. The expected effect of this change is significant. Many businesses that previously relied on hiring credits may no longer qualify or may see their benefits significantly reduced. The new law also makes changes to the definition of qualified jobs, including reducing the number of qualifying target employee groups and requiring hourly wages between $12 and $28 per hour.

What is the investment tax credit and how will it be administered?

The investment tax credit will be based on a competitive application process and will be awarded by a newly established California Competes Tax Credit Committee. Competitive criteria have been outlined and include the number of jobs created or retained, the compensation paid to employees, the total value of the investment made in the state, the level of unemployment in the area of proposed business locations and the overall economic impact in the state of the project or business. The Governor’s Office of Business and Economic Development will negotiate agreements with applying businesses, subject to approval by the committee.  

What do California businesses need to know before these changes take effect?

Businesses need to understand that the game has changed. Just because your business qualified for credits in the past doesn’t mean it will in the future.

If you were relying on enterprise zone credits, you should sit down with your accountant or tax adviser and analyze the effects of the changes. Getting caught by surprise with an unexpected tax bill could have a negative long-term effect on your business.

The new incentives are certainly worth investigating. Manufacturers and R&D companies will likely qualify for new sales and use tax exemptions. And the investment tax credit could be very lucrative for businesses that qualify and participate in the application process.

Marcus Halluin, CPA, is a tax manager at Sensiba San Filippo LLP. Reach him at (925) 271-8700 or mhalluin@ssfllp.com.

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