Main Street Small Business Tax Credit

Senate Bill 1447 was enacted on September 9, 2020, and allows a small business hiring credit against California state income taxes or sales and use taxes to certain California qualified small business employers that receive a tentative credit reservation.

On December 1, 2020, the California Department of Tax and Fee Administration (CDTFA) will begin accepting applications for tentative small business hiring credit reservation amounts through an online reservation system.  Qualified small business employers must apply with the CDTFA for a credit reservation. The credit reservations will be allocated to qualified small business employers on a first-come, first-served basis. The reservation system will be available from December 1, 2020 at 8:00 a.m., through January 15, 2021. Within 30 days of receiving an application, CDTFA will notify each applicant via email whether a tentative credit reservation has been allocated to them and the amount of the tentative credit reservation.

Please note, this credit only applies to California small businesses that meet the following qualifications:

  • Employed 100 or fewer employees as of December 31, 2019, and
  • Suffered a 50 percent decrease or more in income tax gross receipts (generally, all income less returns and allowances), when comparing second quarter 2020 to second quarter 2019.

Example: You had $250,000 in gross receipts for second quarter 2019 and $100,000 in gross receipts for second quarter 2020. The percent of decrease in gross receipts is 60 percent. ($250,000 – $100,000 = $150,000. $150,000 ÷ $250,000 = 0.6 x 100 = 60%)

Funding for the Small Business Hiring Tax Credit program totals $100 million and is to be allocated to qualified California small business employers. Generally, these employers may receive a credit of $1,000 for each net increase in qualified employees from April 1, 2020 through June 30, 2020, compared to July 1, 2020 through November 30, 2020. (For more information on “net increase in qualified employees,” please see the Frequently Asked Questions (FAQ) and the Calculation FAQs below). The total amount of credits received cannot exceed $100,000 for each qualified California small business employer.

If you need assistance, please call the CDTFA's Customer Service Center at 1-800-400-7115 (CRS:711). Customer service representatives are available Monday through Friday from 8:00 a.m. to 5:00 p.m. (Pacific time), except state holidays.

If you need assistance with your Franchise Tax Board (FTB) questions, including how to use your credit on your personal or corporate income tax return, please visit the Small Business Hiring Credit webpage located on the FTB website.

Request Tentative Credit Reservation Online Now (Available December 1, 2020, 8:00 a.m.)

Information needed to make your reservation – IMPORTANT

Be sure to have all the required information below before starting your application for a tentative credit reservation amount through the online reservation system. The system will not allow you to save the application if you exit the system before completing and submitting the application.

As a reminder, tentative credit reservations are allocated on a first-come, first-served basis. The order in which reservations are allocated is based on the date and time when the application is completed and submitted in the system, not on when you begin the application in the system. After submission of your application, you will promptly receive a secure email notification notifying you as to whether a tentative credit reservation has been allocated to you and the amount of the tentative credit reservation.

Be prepared to provide the following information to complete your application:

  • Valid email address
  • Irrevocable election to apply the credit to:
    • Personal and/or Corporate Income Tax, or
    • Sales & Use Tax
  • Type of entity (Individual, Corporation, Partnership, LLC, S Corporation, etc.)
  • Entity identification number (SSN, FEIN, Corporation number, LLC number, etc.)
  • Business entity name or owner name
  • DBA (Doing Business As)
  • Business mailing address
  • Business phone number
  • If you make an irrevocable election to apply the credit to sales and use taxes, provide all sales and use tax accounts (i.e. seller permit(s) and use tax account(s)) for the business entity named above
  • EDD Employer Payroll Tax Account number (State Employer ID number (SEIN))
  • Number of employees as of December 31, 2019
  • Total gross receipts for the following periods:
    • April 1, 2019 through June 30, 2019
    • April 1, 2020 through June 30, 2020
  • The average monthly full-time equivalent (FTE) qualified employees employed during the following period (please see the Calculation FAQs):
    • April 1, 2020 through June 30, 2020 (3-month period)
    • July 1, 2020 through November 30, 2020 (5-month period)

Frequently Asked Questions

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A qualified small business employer is a taxpayer who meets the following requirements:

  • Had 100 or fewer employees on December 31, 2019.
  • Had a 50% decrease in income tax gross receipts (generally, all income less returns and allowances), for the three-month period beginning April 1, 2020 and ending June 30, 2020, as compared with the gross receipts for the three-month period beginning on April 1, 2019 and ending June 30, 2019.

Example: You had $250,000 in gross receipts for second quarter 2019 and $100,000 in gross receipts for second quarter 2020. The percent of decrease in gross receipts is 60 percent. ($250,000 – $100,000 =$150,000. $150,000 ÷ $250,000 = 0.6 x 100 = 60%)

A qualified small business employer does not include a taxpayer required to be included in a combined report under Revenue and Taxation Code (RTC) sections 25101  or 25110, or authorized to be included in a combined report under RTC section 25101.15.

A qualified employee is an employee who is paid qualified wages (defined below) by a qualified small business employer.

A qualified employee does not include an employee whose wages are used in the calculation of any other income or franchise tax credits, such as the California Research Credit, or the New Employment Credit.

Qualified wages are wages that are paid to a qualified employee for services performed in the State of California for a qualified employer (see Division 6 (commencing with section 13000) of the California Unemployment Insurance Code).

  • You must complete a tentative credit reservation application with the CDTFA.
  • The application must be submitted online and will be available starting at 8:00 a.m. on December 1, 2020, through January 15, 2021.
  • Tentative credit reservations will be allocated on a first-come, first-served basis until the $100 million available for this program is exhausted; it is important to submit your application early.
  • When applying, you will be required to make an election on how you will take the credit. Will you apply the credit toward your California personal income or corporate taxes, or will you apply the credit against your sales and use taxes? This election is irrevocable and cannot be changed after your application is submitted.

This means that you can only make one choice of applying the credit that best works for you. Once you make your election through our online reservation system, you cannot change it.

No. The decrease must be at least 50%; rounding is not allowed.

The net increase is a calculation, which is determined by subtracting the average monthly full-time equivalent qualified employees employed during the 3-month period (April 1, 2020 through June 30, 2020) from the average monthly full-time equivalent qualified employees employed during the 5-month period (July 1, 2020 through November 30, 2020). Please see the Calculation FAQs below.

A qualified employee that is on the payroll for any part of the 3-month period (April 1, 2020 through June 30, 2020) and/or any part of the 5-month period (July 1, 2020 through November 30, 2020) should be included in the net increase in qualified employees calculation.

There is no minimum or maximum of qualified wages that a qualified employee needs to have been paid by the qualified small business employer. A qualified employee that is paid qualified wages (see above) should be included in the net increase in qualified employees calculation.

Part-time, full-time, permanent, and temporary qualified employees are all included in the net increase in the qualified employees calculation.

It depends. If you are a qualified small business employer and you pay the family members and friends qualified wages, then yes, they should generally be included as qualified employees.

Yes, if they fall within the timelines and qualifications, they may be included in your calculations for the small business hiring tax credit.

For example, assuming you are a qualified small business employer, on March 31, 2020, you closed your business and laid off five employees due to COVID-19. Then on July 1, 2020, you rehired those five employees. Those five employees will be included in the net increase in qualified employees calculation and may result in a credit of up to $5,000.

No. The credit can only be taken when returns are filed. The first return the credit can be applied to is the California state income tax return for tax year 2020, or the sales and use tax return due on or after April 30, 2021, depending upon the election made.

The credit is capped at $100,000 for each qualified small business employer.

No. Interest will not accrue on any of the credit amounts.

For Income Taxes:

As a qualified small business employer with a tentative credit reservation, you will be able to take a credit against your California state personal income and/or corporate franchise or income taxes for each taxable year beginning on or after January 1, 2020, and before January 1, 2021.

  • Tax credits that exceed the “net tax” may be carried over to reduce the “net tax” in the following year, and succeeding four years, if necessary, until the credit is exhausted.
  • You must reduce your wage deduction for the 2020 taxable year by the credit amount.
  • A credit is only allowed if claimed on timely filed, original returns.

For Qualified Sales and Use Taxes:

The credit will be applied as follows:

  • For monthly filers, the credit applies to taxes due and payable for the month beginning on March 1, 2021, and ending on March 31, 2021, on the return due on April 30, 2021.
  • For quarterly filers, the credit applies to taxes due and payable for the quarter beginning on January 1, 2021, and ending on March 31, 2021, on the return due on April 30, 2021.
  • For annual filers, fiscal year filers, or any other reporting basis filers, the credit applies to taxes due and payable on the first return due on or after April 30, 2021.
  • All remaining excess tax credits will be taken on future returns until exhausted or until April 30, 2026.
  • Any remaining unused credit amount after April 30, 2026, is forfeited.

Note: When filing your income tax return for the 2020 taxable year, you must reduce your wage deduction by the amount of the credit.

No. Refunds of credits are not allowed.

For S corporations that make an election to apply the credit against qualified sales and use taxes, the credit amount is limited to 1/3 of the tentative credit reservation amount. Once this irrevocable election is made, the S corporation’s full credit amount will not pass through to its shareholders.

S corporations applying the credit against taxes imposed under the Corporation Tax Law may use 1/3 of the credit as determined under that law to offset the tax on net income at the S corporation level. The remaining 2/3 of the credit must be disregarded and may not be used as a carryover. S corporations can pass through the full credit amount to their shareholders, who may then use the credit against their personal income taxes.

Calculation FAQs

How do I calculate my Small Business Hiring Credit?

The credit is calculated based on monthly, full-time equivalent (FTE) qualified employees. To calculate the credit you should:

  • Task 1: Calculate the average monthly FTE number of qualified employees employed between April 1, 2020 and June 30, 2020. This is determined by calculating how many hourly and salaried qualified employees you employed during this 3-month period and dividing the total by 3.
  • Task 2: Calculate the average monthly FTE number of qualified employees employed between July 1, 2020 and November 30, 2020. This is determined by calculating how many hourly and salaried qualified employees you employed during this 5-month period and dividing the total by 5.

To assist you with calculating the total hourly and salaried employees for Task 1 and 2, follow these guidelines:

  • Hourly qualified employees – The “monthly FTE” means the total number of hours worked each month (not to exceed 167 hours a month per employee) divided by 167.

Note: The 167 hours is considered full time. Overtime hours or hours above 167 per employee will need to be reduced to 167 for this calculation.

Example: During the period April 1, 2020 – June 30, 2020 you have 3 employees with 1,523 total hours. One of the employees during May worked 187 hours. For this calculation, every month each employee can only have 167 hours, so the employee with 187 hours during May must be reduced to 167, and your total hours would be 1,523 – 20 = 1503.

  • Salaried qualified employees – The “monthly FTE” means the total number of weeks worked, per month, divided by 4.33 (average weeks per month) and multiplied by the time base the qualified employee worked.
      • Time base is the percentage of full time (see Calculation Examples, Worksheet A and B below).
  • Task 3: Calculate the net increase in qualified employees by subtracting the average monthly FTE number of qualified employees employed between April 1, 2020, and June 30, 2020, from the average monthly FTE number of qualified employees employed between July 1, 2020, and November 30, 2020.
    • The amount of the credit is equal to $1,000 multiplied by the net increase in qualified employees, up to $100,000, per qualified small business employer.

Calculation Example

The following example illustrates how to calculate the credit amount, including how to calculate the total FTEs when you have hourly and salaried employees (if no salaried employees, then you can skip that part of the calculation).

  • For hourly employees, add all the hours worked for all hourly employees (part-time and full-time employees) from April 1, 2020 through June 30, 2020, not to exceed 167 hours per month, per employee. The total number of hours worked by hourly employees is 1,587. Total hours worked from July 1, 2020 through November 30, 2020, is 4,175.
  • For salaried employees, during April 1, 2020 through June 30, 2020, the employer had 4 employees and during July 1, 2020 through November 30, 2020, had 5 employees (see Worksheet A and B below).

Follow the steps below to calculate your credit amount.

Task 1

Steps Average Monthly FTE
April 1, 2020 – June 30, 2020
Hours/FTEs
1 Hourly Employees – Total number of hours worked by hourly employees (not to exceed 167 hours per employee a month) 1,587
2 Divide line 1 by 167 9.50
3 Hourly Average Monthly FTEs
(Divide line 2 by 3 (months))
3.17
4 Salaried Average Monthly FTEs (see Worksheet A)
(If you have no salaried employees, skip and enter zero)
2.94
5 Average Monthly FTEs
Add lines 3 and 4.
6.11

Worksheet A

Worksheet A
Salaried Employees FTE
April 1, 2020 – June 30, 2020
A
Time Base
B
Total number of weeks worked
C
Divide column B by 4.33
D
Time Base %

(entered as a decimal)

(see Column A)

E
Multiply column C by column D
Employee 1 Full Time 13 3.00 1.00 3.00
Employee 2 3/4 Time 13 3.00 0.75 2.25
Employee 3 1/2 Time 13 3.00 0.50 1.50
Employee 4
(Started May 1, laid off June 30)
Full Time 9 2.08 1.00 2.08
Total Salaried Monthly FTEs 8.83
Average Salaried Monthly FTEs
(Total FTE's 8.83 divided by 3 (months))
Enter this amount in Task 1, line 4
2.94

Task 2

Steps Average Monthly FTE
July 1, 2020 – November 30, 2020
Hours/FTEs
6 Hourly Employees – Total number of hours worked by hourly employees (not to exceed 167 hours per employee) 4175
7 Divide line 6 by 167 25.00
8 Hourly Average Monthly FTEs
(Divide line 7 by 5 (months))
5.00
9 Salaried Average Monthly FTEs (see Worksheet B)
(If you have no salaried employees, skip and enter zero)
3.81
10 Average Monthly FTEs
Add lines 8 and 9.
8.81

Worksheet B

Worksheet B
Salaried Employees FTE
July 1, 2020 – November 30, 2020
A
Time Base
B
Total number of weeks worked
C
Divide column B by 4.33
D
Time Base %

(entered as a decimal)

(see Column A)

E
Multiply column C by column D
Employee 1 Full Time 22 5.08 1.00 5.08
Employee 2 3/4 Time 22 5.08 0.75 3.81
Employee 3 1/2 Time 22 5.08 0.50 2.54
Employee 4
(Rehired July 15th)
Full Time 20 4.62 1.00 4.62
Employee 5
(New-started September 1st)
Full Time 13 3.00 1.00 3.00
Total Salaried Monthly FTEs 19.05
Average Salaried Monthly FTEs
(Total FTE's 19.05 divided by 5 (months))
Enter this amount in Task 2, line 9
3.81

Task 3

Steps Net Increase in Qualified Employees FTEs/Net FTE/Total Credit Amount
11 July 1, 2020 – November 30, 2020 – Average Monthly FTEs (from line 10) 8.81
12 April 1, 2020 – June 30, 2020 – Average Monthly FTEs (from line 5) 6.11
13 Total Net Increase in Qualified Employees (subtract line 12 from line 11)) 2.70
14 Total Credit Amount (line 13 multiplied by $1,000) $2,700

Total Tentative Credit Amount: $2,700

If you have additional questions regarding the hiring credit, please call our Customer Service Center at 1-800-400-7115 (CRS:711). Customer service representatives are available Monday through Friday from 8:00 a.m. to 5:00 p.m. (Pacific time), except state holidays.