The Enterprise Zone Hiring Credit (Part 3)

Filed in CPA Blog by on May 18, 2013
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Continued from Part 2 by May 20, 2013, By Robert Salazar, CPA – Tax Alliance Group, LLP


Enterprise Zone Tax Credit in CalforniaBanks and corporations operating in an enterprise zone can also reduce their income tax exposure by taking advantage of the enterprise zone hiring credit. California Revenue and Taxation Code section 23622.7 provides an income tax credit to businesses that employ qualified employees in an enterprise zone during the taxpayer’s income year. The credit is determined on wages paid to qualified employees over a five-year period beginning with the date the qualified employee commences employment. For the first year of employment, the credit is based on 50 percent of the qualified employee’s qualified wages. For each subsequent year the qualified employee is employed, the credit is reduced by 10 percent. All banks and corporations engaged in a trade or business within an enterprise zone are eligible for the credit.

An employee can qualify the business for the hiring credit if the employee meets certain criteria at the commencement of his or her employment. Under the statute, an employee is a qualified employee if he or she satisfies three requisite conditions and falls into one of 14 classifications. The three requisite conditions relate to the employee’s date of hire and services performed. In contrast, the 14 classifications concern the status of an individual in a certain targeted group immediately preceding his or her employment. For example, an employee with a military service-connected disability prior to the commencement of his or her employment would fall within one of the 14 classifications. The business would then need to obtain from an enterprise zone coordinator a certification voucher verifying that the employee meets one of the 14 classifications.

Keep Records of Any Unused Credits

Businesses should also keep records of any unused credits. The enterprise zone hiring credit, like the enterprise zone sales or use tax credit, contains a carryover provision. Where the credit exceeds the tax for the income year, the amount of the credit not used may be carried forward until the credit is exhausted. The credit must be applied first to the earliest income years possible. Moreover, like the sales or use tax credit, the enterprise zone hiring credit includes a provision limiting the credit to the amount of tax that would be imposed on the taxpayer’s business income attributable to the enterprise zone.

Finally, the enterprise zone hiring credit must be reduced by the amount of certain credits, including the federal work opportunity tax credit (WOTC) taken for the same employee. Moreover, any deduction allowed under the California Bank and Corporation Tax Law for wages or salaries paid or incurred by the taxpayer, on which the enterprise zone hiring credit is based, will cause the credit to be reduced by the amount of the deduction.

In short, all banks and corporations in enterprise zones should explore the enterprise zone hiring credit opportunity because this credit can produce significant tax savings, not only in the employee’s first year of employment, but into the future as well. In fact, a business that employs the same 50 qualified employees over a five-year period can cumulatively recognize over $ 1 million in credits. The first step in pursuing this opportunity is recognizing whether the business is in an enterprise zone and then determining whether the company’s employees are qualified employees.

Next: Net Interest Deduction & Conclusion

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