What is the Main Street Small Business Tax Credit?
The damage of the COVID pandemic to the U.S. economy, especially to small local business, has yet to be accurately measured. In 2020 and 2021, every sector of American business suffered from shutdowns and limitations. Closures were rampant and as of 2022, stats showi:
- Compared to 2020, 34% of U.S. small businesses were closed in early 2022.
- One of the most affected areas was San Francisco with a 48% closure rate.
While major chains and national retailers were allowed to operate, small businesses were forced to close or lost so much business they made their own decision to close. Every sector of retail and local business was affected. California’s government decided to take action to supplement federal relief through the Main Street Small Business Tax Credit.
What is the Main Street Small Business Tax Credit?
The Main Street Small Business Tax Credit is a bill that provides financial relief to qualified small businesses for the economic disruptions in 2020 and 2021 that caused massive financial damage and closures of small businesses. Taxpayers can use the credit against income taxes or make an irrevocable election to apply the credit against sales and use taxes.
Why is the Main Street Small Business Tax Credit Important?
As the restrictions and mandates involved with the pandemic begin to wind down and things begin to move back toward normal, help for main street small businesses, particularly in California, is critical to help heal the economy. Whole towns and areas of the state needed financial stimulus to survive. Tax credits are one way to do help small business. When tax credits are involved, the burden is on the business to take the credits. This requires an understanding of the requirements and how to qualify.
What is a Qualified Small Business Tax Credit Employer?
To qualify for the credit, it must be filed on an original tax return, not an amended one. In addition, to qualify the small business employer must:
- Have 500 or fewer employees (including part-time) drawing wages subject to California withholding taxes.
- Show a decrease of 20% or mor in gross receipts:
- Calendar year filers would show a comparison of gross receipts for 2020 to those in 2019.
- Fiscal year filers have two choices:
- Compare gross receipts for fiscal year 2019-2020 to receipts for fiscal year 2019-2018.
- Compare the average gross receipts for the same periods.
- New businesses that opened in calendar year 2019 can compare gross receipts the total for January and February 2020 multiplied by 1.5 to gross receipts for April through June 2020.
- Apply for a tentative credit reservation from CDTFA (California Department of Tax and Fee Administration) during November 2021 and receive the reservation.
- Not be required or authorized to be included in a combined report.
For each tax year beginning on or after January 1, 2021 and before January 1, 2022 allows a small business hiring tax credit to qualified small business employers if they receive a tentative credit reservation from the CDTFA.
S-Corporations are allowed to apply for the credit against qualified sales and use taxes, and:
- Can claim the full credit against their sales and use taxes.
- Cannot pass through credits to shareholders.
If the S-Corporation electing to apply the credit against income and franchise taxes:
- Can only apply 1/3 of the tentative credit reservation (as indicated on CDTFA confirmation) against the tax on net income at the S-Corporation level.
- Cannot use the credit against the $800 minimum franchise tax.
- Forfeits and cannot carry over the remaining 2/3 of the credit.
- Can pass through the entire credit to shareholders to use against their personal income tax liability.
How to Calculate the Credit
You must calculate the credit based on monthly FTE (Full Time Equivalent) qualified employees. The net increase in qualified employees is equal to B (below) minus A.
- Use the average monthly FTE employed from April 1, 2020 through June 30, 2020. You determine the average monthly FTE by adding the total monthly FTE equivalent qualified employees that were employed for the entire period and dividing by three.
- Use the lesser of either:
- Average monthly FTE employees during the period July 1, 2020 through June 30, 2021. Determine the average monthly FTE by totaling the FTE employees for the 12-month period and dividing by 12.
- Average number of FTE employees employed for the period April 1, 2021 through June 30, 2021. Add the three months up and divide by three to get the average.
Monthly FTE (Full Time Equivalent) means either:
- Qualified employee paid an hourly wage: “monthly fulltime equivalent wages” means employee is paid for no more than 167 hours/month and the wages paid are then divided by 167.
- Qualified employee is paid a salary: “monthly fulltime equivalent” means the total number of weeks employed in a month divided by 4.33, then multiplied by the employee’s “time base.”
- “Time base” is the fraction of fulltime employment that the qualified employee is employed.
- “Weeks employed” is the total number of calendar days employed in a month divided by 7 days. The result cannot exceed 4.33.
The FTE calculations and importance come from the Affordable Care Act. Determining the number of full-time and part-time employees are involved in many regulations and IRS rules. Only the government can complicate something to this degree. Get help from qualified professionals. Any credit you can get from tax entities is usually worth the effort to see if your business qualifies and how to do so.
The California Department of Tax and Fee Administration gets a lot of questions about their regulations and forms, and here are some of the most frequently asked about the Main Street Small Business Tax Credit:
Can I qualify for the credit if I started my business in 2019 or 2020?
You cannot qualify for a business started in 2020; it must have been started prior to January 1, 2020. If you started your business in 2019, had 500 or fewer employees, and experienced at least a 20% decrease in gross receipts, you would qualify. The 20% decrease figure is calculated by comparing gross receipts for January and February (total for both months) multiplied by 1.5. Compare the result with gross receipts for the period April 1, 2020 through June 30, 2021.
Who is a qualified employee?
If the employer is qualified, a qualified employee is one whose wages are not used in any other income or franchise tax credits claims.
How much in wages must the employer have paid to the qualified employee?
There are no minimum or maximum levels for how much in wages paid to the qualified employee. The employee paid qualified wages should be included in the net increase in qualified employees’ calculation.
If I was forced to close my business but later reopened and rehired my employees, do they meet the requirements for the hiring tax credit?
If the employees fall within the requirements for timeline and qualifications, they may be included in your calculations for the small business tax credit.
Is there a maximum allowable amount of credit for each qualified business employer?
The cap on the credit is $150,000 for each qualified small business employer. If credits were received prior for the first version of the main street small business tax credit, they would be included in the $150,000 cap.
How do I receive the credit, as a check, direct deposit, or other?
There is no monetary reimbursement of the credit. The credit must be applied to a tax return for qualified sales, personal, or corporate taxes.
If qualified for the credit, can I apply it to prior or past balances?
You cannot apply the credit to prior or previous balances. You can only take it when filing a current return. The credit can be applied to California state income tax returns for 2021 or to sales and use tax due on or after April 30, 2022.
Can family members who help in the business be included as qualified employees?
If you are a qualified business employer, and only if you pay the family members or friends as qualified employees, they can be included. If they are not paid as qualified employees with appropriate withholding, you cannot include them.
Does an employee need to be parttime or fulltime?
If employees are paid as qualified with appropriate withholding, they can be included in the net increase in the qualified employee’s calculation. This includes fulltime, parttime, permanent, and temporary employees.
If your business meets the requirements for number of employees, this tax credit could be worth significant tax savings for California employers.
Though you may find that some of the deadlines have passed for some of these credits, this article is about the second rendition of the California Main Street Small Business Tax Credit. There could be another coming, so keep up with the news and consult with your tax advisors or accountant.