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. ●
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Business owners have been watching the slow rollout of the Patient Protection and Affordable Care Act (PPACA) for a while now. But that doesn’t mean they have a firm grasp on the breadth of the challenges, requirements and decisions that are inherent to its wide-reaching health care and insurance changes.
“If you’re like most business owners, you have already spent significant time gathering and processing information,” says Bill Norwalk, tax partner-in-charge at Sensiba San Filippo LLP. “Very soon, you will make vital decisions that will have significant effects on the future success of your organization.”
Norwalk says it’s critical for business owners not to get too caught up in the political maneuvering and analysis that fills the news coverage.
“Regardless of emotion or political leanings, business owners must understand that the PPACA is a reality and needs to be addressed like any other challenge,” he says. “Taking an unbiased, strategic look at the law and its ramifications for your business will allow you to make decisions that aren’t clouded by emotion or outside factors.”
Smart Business spoke with Norwalk about the PPACA, its ramifications and how businesses can adapt to its effects.
How will businesses be affected by health care reform implementation?
The PPACA will have an impact on benefits planning, tax planning and your ability to compete in a challenging labor market. Making the best decisions will require you to understand all of the decisions and consider their varied consequences.
Taking a decision-and-consequences-based approach to your analysis will help you understand the potential effects of your choices. Many businesses are considering the pros and cons of offering qualifying health insurance versus dropping health coverage and allowing employees to utilize newly established insurance exchanges. While the analysis of direct costs may be straightforward, you need to understand how your employees will view a change in coverage. Changes in health care benefits could have a substantial impact on your ability to attract and retain talent.
What are the potential tax effects and what can businesses and individuals do to plan?
Tax implications of the PPACA are wide reaching for both businesses and their shareholders. New taxes were introduced that could result in significant tax increases — especially for business owners and managers who don’t plan ahead.
Corporation shareholders and shareholders of pass-through entities could both be affected by the 3.8 percent tax on net investment income. An additional 0.9 percent Medicare surtax was also introduced by the PPACA. Shifting from investment income to regular income could be an effective strategy, but the analysis is often far more complex. Depending on your wage level, an additional self-employment tax on regular income could more than offset potential savings from decreasing net investment income. Alternative minimum tax considerations can further muddy the waters. The PPACA simply makes tax planning more convoluted. Fortunately, qualified professionals will have the tools and resources needed to help you consider various scenarios and develop a plan to minimize your liability.
Where should business owners turn for guidance?
Decisions related to PPACA implementation will affect human resources, tax strategy and the broader organization. Business owners must first identify the key decisions and then weigh the consequences of each. If your strategic plan related to the PPACA isn’t complete, it’s time for you to speak with someone who can help.
Work with an insurance or benefits adviser. He or she can help you understand your coverage alternatives and the associated costs. An experienced accountant can offer assistance with compliance, tax and organizational planning. The right information, advisers and analysis will allow for decisions that can minimize negative consequences and maybe even provide a competitive advantage. ●
For more health care reform information and tax tips, visit Sensiba San Filippo's blog.
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