Hiring Credit - Initial Review Guide
Is the trade or business located within the Economic Development Area? Is the trade or business "conducting business" within the Economic Development Area? [See the Economic Development Area Manual (EDAM) for Economic Development areas and code references.]
Check the business address on the California Technology, Trade and Commerce Website. If the business operates in multiple locations, check for an apportionment factor.
The return address may be where records are kept, and may not be where the business is being "conducted."
- Has the amount of the hiring credit generated been added back to income?
Keep in mind the total amount of the hiring credit generated is added back to income. It is NOT the amount of credit utilized. The amount is added back to income via CA adjustments or "Additions to net income", depending upon the entity involved.
- Do the amount of qualified wages used to compute
the credit appear reasonable when compared with wage/salary expense, taking the
type of business into consideration?
For a corporation return, look at:
- Schedule F, line 8 and/or.
- Schedule V, Cost of Goods Sold, Line 3: Cost of labor.
For combined reports, check the California payroll reported for the corporation claiming the credit in the combined statement of apportionment factor.
Are the qualified wages consistent with the number of employees?
Compare the number of employees in the area (EZ: Form 3805Z, line F) with the number of employees included in the computation of the hiring credit (EZ: Form 3805Z, line G). Is this reasonable when taking the qualified wages and wage expense into consideration? (Keep in mind that executives/management wages will be higher than the average employee wage and most likely will not be included in qualified wages.)
DE-3's may also be cross-referenced if available.
Has the taxpayer limited the qualified wages based on hire date?
The percentage of qualified wages allowed as a credit is based on the date of hire.
For combined reports, was the credit properly intrastated and limited by the zone tax limitation and Schedule P limitation (if applicable)?
To verify that the credit has been properly intrastated, check the statement of combined computation of tax to see if the credit was used to reduce the tax of the corporation that incurred the credit. If the credit claimed exceeds the tax of that particular corporation, the credit was not properly intrastated and an adjustment to disallow the excess credit may be necessary.
For the zone tax limitation, check that the taxpayer used the intrastated income (not the combined California income) of the corporation claiming the credit on the Computation of Credit Limitation Worksheet (Worksheet VII for taxable years 1997 - 2001 and Schedule Z for taxable years 2002 and later), Line 1. For the Apportioning Worksheet (Worksheet V), check to see that the total property and payroll within California is the California property and payroll only of the corporation claiming the credit and not the combined California amount as reported on Schedule R-1.
For the Schedule P limitation, check that the taxpayer properly intrastated the alternative minimum taxable income. The Schedule P (100), Part II, should reflect the regular tax and tentative minimum tax of the corporation claiming the credit.