Incentives Watch: California Enterprise Zone Hiring Credit Changes Are Coming So Employers Must Be Prepared

A PricewaterhouseCoopers webcast on April 10 discussed the impact proposed regulations will have on businesses seeking the California Enterprise Zone Hiring Credit. These regulations will go into effect once they are finalized, which may be as early as July 1, so businesses should be aware of the upcoming changes to the credit program, including limitations on retroactive vouchering and more stringent documentation requirements.

California provides a tax credit for employers operating businesses within designated enterprise zones that hire certain economically disadvantaged employees. The tax credit equals approximately $1 million for every 25 employees hired or $37,440 per new hire. In fact, the tax credit has had a “target on its back” because of the substantial benefits associated with it, says Matt Mandel, a Principal at PwC.

The proposed regulations are intended to close a loophole in the law by limiting the amount of time, from 4 years to 1 year, that an employer has to get a voucher for an employee, which is required before an employer may claim the credit, reports a Bloomberg BNA Weekly State Tax Reportarticle.

In addition to limiting retroactive vouchering, the regulations contain tighter documentation requirements for employers. Right now, most employers use documents they already have for an employee, such as W-4s and I-9s, but the proposed regulations will require additional third-party documentation, such as utility bills, driver’s licenses, and credit card bills, to verify an employee’s address. These changes are “just meant to limit the population of qualified individuals,” notes Ken Hunter, a Principal at PwC.

The proposed regulations also require employees to actually participate in certain socioeconomic programs, such as CALFresh, instead of just requiring an employee to be eligible for participation in these programs. Panelist Chris Whitney, a partner at PwC, pointed out that many employees that might otherwise qualify for the credit will no longer qualify because they aren’t actually participating in those programs.

The panelists noted several policy considerations brought up by the proposed regulations. One consideration is that many businesses rely on the existing framework for the credit when making business decisions. For example, a company that moves to California based on the availability of the credit will be hurt by these changes if the company hasn’t yet vouchered its employees. The proposed regulations are basically “pulling the rug out from underneath [these businesses],” says Hunter.

Privacy is another issue. The new documentation requirements heighten privacy concerns for employers, as they will need to retain documentation in order to substantiate their credit claims if they are later audited by the Franchise Tax Board, notes Hunter.

There are also timing issues brought up by the proposed regulations. For example, if a company hires several employees and then submits voucher applications within 8 months, but then the enterprise zone coordinator does not get back to the taxpayer until another 5 months go by, then the 1-year mark has passed. If the coordinator asks for more information on an application, then there is no way for the employer to go back and try to correct the application, as the deadline has already passed. In short, there is no grace period for taxpayers to work with enterprise zone coordinators to complete a voucher application.

As a result of all these changes, many businesses are acting now before the new regulations go into effect.

For more information about California’s enterprise zone tax credits, check out Bloomberg BNA’s Credits and Incentives State Tax Portfolios.

In other developments . . .

A conditional certification process for holders of conservation easements was established via tax credit regulations issued by the Colorado Department of Regulatory Agencies, a Bloomberg BNA Weekly State Tax Reportarticle reports.