California’s Main Street Small Business Tax Credit I
* Applies to 2020 *
Senate Bill SB 1447, enacted Sept. 9, 2020, provides a credit against either personal income or corporate income taxes for one calendar year for a qualified small business employer that receives a tentative credit reservation for claiming the credit. The legislation sunsets on December 1, 2021. The purpose of this credit is “to provide financial relief for the economic disruptions resulting from COVID-19 that have resulted in unprecedented job losses.” SB 1447 added the following Revenue and Taxation Code sections: 6902.7, 6902.8 and 17053.72.
Credit Amount
The credit is $1,000 for each net increase in qualified employees, up to a maximum of $100,000 per qualified small business employer. The credit can be claimed in one of the following ways:
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As a credit against personal income tax or corporate franchise and income tax, but cannot offset the alternative minimum tax or the $800 annual tax (limited partnerships, LLCs classified as partnerships, limited liability partnerships), or
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By election, as credit against the business’s sales and use taxes.
Credit Must Have Been Applied For – A qualified small business employer is required to submit an application to the Department of Tax and Fee Administration (CDTFA) for a tentative credit reservation. CDTFA is required to allocate the credit reservations on a first-come, first-served basis up to a total of $100 million. The application to CDTFA must be made between December 1, 2020 and January 15, 2021. The credit reservation process is now closed.
CDTFA must notify the applicant within 30 days of receipt of the application what amount of the tentative credit reservation is allotted to the applicant.
CDTFA must report periodically on its website regarding the aggregate credit reservation amounts and the remaining credit amount available for allocation. CDTFA must provide the Franchise Tax Board any information by each applicant.
When Credit Can Be Claimed
When originally enacted, only credits claimed on timely filed, original returns were allowed. AB 194, signed into law June 30, 2022, allows this credit to be claimed on an amended return.
Qualified Small Business Employer
Is a taxpayer who, as of December 31, 2019, employed 100 or fewer employees and had a 50% decrease in gross receipts for the three-month period from April 1, 2020 through June 30, 2020 versus the same three-month period in 2019. Excluded is any small business employer who is required to be included in a combined report.
Qualified Employee
This is an employee paid qualified wages – defined as wages subject to Unemployment Insurance Code Section 13000, et seq – by a qualified small business employer. However, wages that are included in calculating any other credit allowed under the California Personal Income Tax or the Corporation Tax (CT) Law do not qualify.
Determining Net Increase in Employees
The net increase in employees compares the average equivalent full-time employee count for April through June with the equivalent full-time employee count for July through November. The average full-time employees are determined differently for hourly and salaried employees. For the hourly employees 167 hours per month is considered full time and all salaried employees are considered full time. Rather than explaining how the computation is made with written instructions we have developed a worksheet, and a completed one is illustrated below, followed at the end of this section by the blank version for your use.
FTB Form 3866
The FTB developed Form 3866, Main Street Small Business Tax Credit, to be used to claim the credit. The credit code is 240.
Credit Carryover
Any excess credit (i.e., available credit exceeds the current year tax liability or is limited by tentative minimum tax) may be carried over to reduce the “net tax” in the following year and the succeeding four years until the credit is exhausted.
Wage Deduction
The wage deduction claimed on the taxpayer’s 2020 business income tax return must be reduced by the amount of the Main Street Small Business Tax Credit allowed for the 2020 taxable year, including any credit carried forward to future years. (Form 3866 instructions)
Optional Sales & Use Tax Election
A qualified small business employer can make an irrevocable election to apply the Main Street Small Business Tax Credit amount against their qualified sales and use taxes. When the business can claim the credit depends on whether the business’s sales taxes are due and payable monthly, quarterly or annually, as explained here:
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For monthly filers, the credit will be applied to amounts due and payable for the month beginning on March 1, 2021, ending on March 31, 2021, and due April 30, 2021;
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For quarterly filers, the credit is claimed against amounts due and payable for the quarter beginning on January 1, 2021, ending on March 31, 2021, and due April 30, 2021; and
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For annual filers, fiscal year filers, or a qualified small business owner on any other reporting basis, the credit will apply to amounts due and payable on the first return due on or after April 30, 2021.
Any excess credit is carried over, and is not refunded to the taxpayer, but the excess credit can only be used on returns due and filed on or before April 30, 2026. Any remaining excess credit amount after April 30, 2026, won’t be refunded and will be forfeited.
