Effective January 1, 2014 and through 2025 (extended from 2020 by SB 855, signed into law 6/27/2018), a New Employment Credit (NEC) will be available to qualified businesses located in (1) a former enterprise zone (EZ) or former local agency military base recovery area (LAMBRA), (2) a newly created Designated Census Tract, and (3) designated areas of high unemployment. These areas are collectively referred to as designated geographic areas (DGA).

The Department of Finance re-designated the eligible and ineligible census tracts effective January 1, 2020. Qualified employees hired prior to the re-designation remain eligible for the full 60 months from the date of hire even if the location where they perform their work is not part of the re-designated census tracts. To determine if the area where a business is located is within a designated geographic area for each taxable year, check the DGA map on the FTB’s web site (see link below). This map identifies the new DGA, as well as the previous DGA. Users can enter an address to see if it's within the DGA during a particular time period.

The special tax benefits that had been available in the following types of economic development areas were eliminated after December 31, 2013: EZs, targeted tax areas (TTAs), manufacturing enhancement areas (MEAs), and LAMBRAs. However, employers who are eligible for credits for hiring qualified employees under prior law will continue to receive credits for 60 months, and carryover periods for prior credits will remain.

The following types of businesses are not allowed to claim the NEC unless they meet the definition of a small business: food service, retail, casinos, temporary employment agencies, bars and adult live entertainment (such as night clubs and strip clubs). A qualified small business is a trade or business that has aggregate gross receipts, less returns and allowances reportable to California, of less than two million dollars ($2,000,000) during the previous taxable year. However, a small business that is involved in a sexually oriented business is ineligible for the credit.

Taxpayers in the following businesses, effective for years beginning on or after January 1, 2023 and before January 1, 2026 (January 1, 2024 with regard to requesting a tentative credit reservation), have some special rules (see FTB website for details):

The credit factors-in the net increase in jobs not including replacements for current employees. Eligible hires, who generally must be hired for full-time work and paid at least 150% but not over 350% of minimum wage, include: individuals who have been unemployed (including not being self-employed) for at least 6 months, veterans separated from the service within 12 months of the hire date, individuals receiving the federal earned income credit for the previous tax year, ex-felons, and recipients of CalWORKs or general assistance (welfare). Taxpayers in the expanded industries (bullets above) will compute their qualified wages as the amounts paid between 100% and 350% of California's minimum wage.

For eligible employers, who must make a tentative credit reservation with the FTB within 30 days of the date the Employment Development Department’s new-hire reporting requirements are met, the credit is 35% of qualified wages. Unused credits can be carried over for 5 years.

Employers must annually certify continued employment of the qualified employees and their wages (by March 15 for calendar year businesses). The credit may only be claimed on an original, timely filed return, and the employer’s name, amount of credit claimed, and number of new jobs created by the employer will be published on the FTB’s web site. The annual certification is done online at the FTB web site:

https://www.ftb.ca.gov/file/business/credits/new-employment-credit/annual-certification.asp

Form 3554 is used to calculate the credit.

See the Franchise Tax Board’s web site for additional information: