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New Employment Credit—Frequently Asked Questions

The New Employment Credit (NEC) is available for each taxable year beginning on or after January 1, 2014, and before January 1, 2021, to a qualified taxpayer that hires a qualified full-time employee on or after January 1, 2014, and pays or incurs qualified wages attributable to work performed by the qualified full-time employee in a designated census tract or economic development area, and that receives a tentative credit reservation for that qualified full-time employee. In order to be allowed a credit, the qualified taxpayer must have a net increase in full-time employees in California, determined on an annual full-time equivalent basis. These FAQs outline the requirements, credit computation, and how to claim the credit.

Qualified taxpayer

  1. Who is a qualified taxpayer?
  2. What is the designated geographic area (DGA)?
  3. What is an excluded business?
    1. Is the NAICS classification determined on a separate company basis or on a combined group basis when the corporation is part of a combined group and is an otherwise qualified taxpayer?
    2. If a corporation is a manufacturer and has a small retail storefront at its manufacturing plant, how should it be classified under the NAICS?
    3. What NAICS classification should be used when the activities of the taxpayer, or its separate divisions, could fall into several NAICS classifications?
    4. How are gross receipts determined for a combined group of corporations?
  4. What is a small business?
    1. I operate a business in an otherwise disqualified industry that qualified because I was considered a "small business". My business has grown, and I am no longer considered "small" (my gross receipts are $2 million or more). Can I continue to take the credits for the employees with reservations when I was a "small business"?

Relocating businesses

  1. What if I am relocating an existing business into a DGA?
  2. What if I am only relocating some of my qualified employees?

Qualified full-time employees

  1. What is a qualified full-time employee?
  2. What are the five conditions?
  3. What is commencement of employment or the hire date?
  4. What does it mean for an employee to be an Earned Income Credit (EITC) recipient for the "previous taxable year" upon commencement of employment?
  5. Can two or more part-time employees be equivalent to a qualified full-time employee if together they work a total of at least 35 hours in a week?
  6. If an employee meets the requirements, what else must I do?

Timing of hire

  1. If an employee is hired in 2014 but only works part time, can the employer qualify for the credit in the next tax year if that employee works more than 35 hours each week in the following year, 2015?
  2. If I hired a full-time employee before January 1, 2014, can I retroactively claim the credit for this employee?

Qualified wages

  1. What are qualified wages?
  2. How do I determine the hourly wage rate for a salaried employee?
  3. How long does a qualified employee continue to generate credit for the employer?
  4. What are designated pilot areas?
  5. Does the NEC have an add back of the qualified wages similar to the repealed EZ hiring credit?

Tentative Credit Reservation

  1. What is a Tentative Credit Reservation (TCR)?
  2. When must I request a TCR?
  3. What information must I provide to get a TCR?
  4. If the employee receives a raise during the year, is the credit based only on the starting wage?

Annual Certification of Employment

  1. What is the annual certification of employment requirement?
  2. When is the annual certification of employment due for a qualified taxpayer with a taxable year on a calendar year basis?
  3. When is the annual certification of employment due for a qualified taxpayer with a taxable year on a fiscal year basis?
  4. When is the annual certification of employment due for a qualified taxpayer that files a short period return?
  5. What if the short period return is less than 4 months and this return is not the taxpayer's final return? Is an annual certification of employment required for that short period?
  6. Is an annual certification required for a short period final year return, regardless of the length of the short period?
  7. How do I submit my annual certification of employment?
  8. What type of information must I provide when submitting an annual certification of employment?

Calculating the credit

  1. How do I calculate the allowable credit?
  2. How do I compute the tentative credit amount?
  3. How do I compute the applicable percentage?
  4. How do I compute the allowable credit?

    Examples of calculating the credit

Credit usage and carryover

  1. When can a credit be generated?
  2. When can I claim the credit?
  3. Assume a taxpayer is on a fiscal year basis and its taxable year began on July 1, 2013, and ended on June 30, 2014. If the taxpayer hires an otherwise qualifying individual on April 1, 2014, may the taxpayer complete a Tentative Credit Reservation (TCR) and generate a credit for the employee in its taxable year 2013?
  4. Can the NEC be claimed on an amended tax return?
  5. Can the credit be carried forward to future years?
  6. Can this credit be assigned to an affiliated corporation under California Revenue and Taxation Code (R&TC) Section 23663?
  7. Is there a cap on the total available credit or on the amount of credit available to a single employer?
  8. Is this credit refundable?
  9. Can the NEC reduce tax below tentative minimum tax?
  10. Will the NEC only apply to the tax associated with the income attributed to a designated census tract/zone (similar to how enterprise zone credits can only offset tax attributable to zone income)?
  11. Must a business have a net increase in full-time employees in each taxable year in order to have an allowable credit?

Other requirements and considerations

  1. If I claim the NEC on my tax return, is that information confidential?
  2. What if the qualified employee no longer works for me?
  3. How much must be recaptured?
  4. Are there exceptions to the recapture requirements?

Related taxpayers

  1. How are related businesses treated?
  2. What about unincorporated businesses that are under common control?
  3. I have related businesses as described above. How do I allocate the credit amongst them?

Pass-through entities, and estates and trusts

  1. How is the determination of a small business made for a pass-through entity?
  2. How are the qualified wages apportioned between estates and trusts, and the beneficiaries?

Miscellaneous

  1. Can this credit or credit carryover be transferred to another taxpayer?
  2. If my business claims the NEC, am I eligible to apply for the California Competes Credit?
  3. Where can I find the Revenue and Taxation Code for this credit?

Glossary


Qualified taxpayer

  1. Who is a qualified taxpayer?

    A qualified taxpayer is an employer engaged in a trade or business within a designated geographic area (for simplicity referred to as DGA) who, during the taxable year, pays qualified wages to a qualified full-time employee, and is not in an excluded business.

  2. What is the designated geographic area (DGA)?

    The DGAs are comprised of:

    • Designated census tracts that have the highest unemployment and highest poverty in the State.
    • Former Enterprise Zones (in existence on 12/31/2011, designated in 2012) and any revision to an EZ prior to 6/30/2013, except census tracts within those EZs with lowest unemployment and lowest poverty levels.
    • Former LAMBRAs (in existence on 7/11/2013.)
  3. What is an excluded business?

    Excluded businesses are those in temporary help services or retail trades, and those primarily in food services, theater companies and dinner theaters, drinking places (alcoholic beverages,) or casinos and casino hotels. These otherwise disqualified businesses may be qualified if they are considered a small business. The North American Industry Classification System (NAICS) codes for each of these industries are listed below. For more information concerning NAICS codes and what establishments are included, you may search here.

    • Temporary Help-NAICS 561320
    • Retail Trade Services-NAICS Sector 44-45
    • Primarily Theater Companies and Dinner Theater-NAICS 711110
    • Primarily Food Services-NAICS 722511, 722513, 722514, and 721120
    • Primarily Drinking Places (Alcoholic Beverages)-NAICS 722410

    All sexually-oriented businesses are excluded from being a qualified taxpayer regardless of their status as a small business. A sexually oriented business includes a nightclub, bar, or similar commercial enterprise that provides for an audience of two or more individuals live nude entertainment or live nude performances where the nudity is a function of everyday business operations and where nudity is a planned and intentional part of the entertainment or performance.

    1. Is the NAICS classification determined on a separate company basis or on a combined group basis when the corporation is part of a combined group and is an otherwise qualified taxpayer?

      The NAICS classification is determined on a separate company basis, when determining if the corporation is in an excluded industry.

    2. If a corporation is a manufacturer and has a small retail storefront at its manufacturing plant, how should it be classified under the NAICS?

      An otherwise qualified taxpayer properly classified as a manufacturer will not be re-classified or dually classified as an entity in “Retail Trade” under sectors 44-45 of the NAICS unless those retail activities are the entity’s primary line of business.

    3. What NAICS classification should be used when the activities of the taxpayer, or its separate divisions, could fall into several NAICS classifications?

      An otherwise qualified taxpayer should select the NAICS code that represents the entity’s primary line of business.

    4. How are gross receipts determined for a combined group of corporations?

      Gross receipts for this purpose include the aggregate gross receipts of all taxpayers.

  4. What is a small business?

    Small business means a trade or business that has aggregate gross receipts, less returns and allowances reportable to this state, of less than two million dollars ($2,000,000) during the previous taxable year. For this purpose, “gross receipts, less returns and allowances reportable to this state,” means the sum of the gross receipts from the production of business income, as defined in subdivision (a) of Section 25120, and the gross receipts from the production of nonbusiness income, as defined in subdivision (d) of Section 25120.

    Small businesses are excluded from eligibility only if they are a sexually oriented business

    1. I operate a business in an otherwise excluded industry that qualified because I was considered a small business. My business has grown, and I am no longer considered "small" (my gross receipts are $2 million or more). Can I continue to take the credits for the employees with reservations when I was a small business?

      A taxpayer must be "qualified" in order to generate a credit. They are no longer qualified if they are in an excluded business, and their gross receipts (less returns and allowances) are $2 million or more for the previous tax year. If the taxpayer's receipts fall below the $2 million threshold in a future year, they may be able to again generate the credit (assuming all other requirements are met). The time period that an employee qualifies the employer for a credit is not affected by periods when the employer is not qualified. Qualified wages paid to that qualified employee are eligible for the credit for only the 60-month period of employment, beginning with the initial date of hire.

Relocating businesses

  1. What if I am relocating an existing business into a DGA?

    A qualified taxpayer who relocates to a DGA will be allowed a NEC for wages paid to each qualified full-time employee employed in the new location only if the taxpayer provides each employee at the previous locations a written offer of employment at the new location, with comparable compensation.

    This requirement does not apply if the qualified taxpayer is a small business.

  2. What if I am only relocating some of my qualified employees?

    The requirements for relocated employees apply if the taxpayer has an increase in the number of qualified full-time employees in a DGA within a 12-month period in which there is a decrease in the number of full-time employees employed in California, but outside of a DGA.

Qualified full-time employees

  1. What is a qualified full-time employee?

    A qualified full-time employee is an individual who meets all of the following:

    • Performs at least 50% of their services for the employer in the DGA.
    • Receives starting wages that are at least 150% of the State minimum wage.
    • Is hired on or after January 1, 2014.
    • Is hired after the DGA is designated.
    • Is paid hourly wages for an average of at least 35 hours per week, or is salaried, and paid for full-time employment (within the meaning of Section 515 of the Labor Code).
    • Meets one of five conditions.
  2. What are the five conditions?

    Upon commencement of employment with the qualified taxpayer, satisfies any of the following conditions:

    • Unemployed for the six months immediately preceding hire. If the individual completed a college or similar program and received a baccalaureate, postgraduate, or professional degree, the completion date must be at least 12 months prior to hire. For purposes of this definition, an individual is unemployed for a period if all of the following circumstances apply:
      • Not receiving wages subject to withholding.
      • Not self-employed.
      • Not a full-time student at a high school, college, university, or postsecondary education institution.
    • Veteran separated from the U.S. Armed Forces in the preceding 12 months.
    • Recipient of the Earned Income Tax Credit in the previous taxable year.
    • Ex-offender convicted of a felony.
    • Current recipient of CalWORKS or general assistance in accordance with the applicable sections of the Welfare and Institutions Code.

    For additional information on each of the conditions and types of acceptable documentation see Qualified Full-Time Employee Conditions and Examples of Acceptable Documentation.

  3. What is commencement of employment or the hire date?

    Qualified wages are wages paid during the 60 month period beginning with the first day the qualified full- time employee commences employment with the qualified taxpayer. For this purpose, commencement of employment or the hire date is the first day for which the individual receives wages/compensation.

  4. What does it mean for an employee to be an Earned Income Credit (EITC) recipient for the "previous taxable year" upon commencement of employment?

    An employee must have received the EITC for the taxable year prior to the commencement of employment.  For this purpose, a taxpayer is deemed to be an EITC recipient if the EITC was claimed on the last tax return filed  before the employee’s commencement of employment.

    For example, if John Smith commenced employment on March 31, 2014, and filed his 2013 tax return and claimed the EITC on or before March 31, 2014, John Smith would meet this condition. If John Smith had not filed his tax return for 2013 by March 31, 2014, then his eligibility for being a qualified employee on the basis of having claimed the EITC would be based on whether he claimed the EITC on his return for the 2012 taxable year, which was filed in 2013. 

  5. Can two or more part-time employees be equivalent to a qualified full-time employee if together they work a total of at least 35 hours in a week?

    No. A qualified full-time employee must work an average of at least 35 hours a week. An employee who works less than 35 hours a week cannot be a qualified full-time employee.

  6. If an employee meets the requirements, what else must I do?

    You must request a Tentative Credit Reservation (TCR) for each qualified employee. (See What is a Tentative Credit Reservation (TCR)?)

Timing of hire

  1. If an employee is hired in 2014 but only works part time, can the employer qualify for the credit in the next tax year if that employee works more than 35 hours each week in the following year, 2015?

    No. To obtain the required tentative credit reservation, an employee must be a full-time employee (as defined) at the date of hire.

  2. If I hired a full-time employee before January 1, 2014, can I retroactively claim the credit for this employee?

    No. The employee must be hired on or after January 1, 2014, to qualify the employer for a credit.

Qualified wages

  1. What are qualified wages?

    Qualified wages are that portion of wages paid or incurred that exceed 150% of minimum wage but do not exceed 350% of minimum wage. For further information, see Glossary, Qualified wages.

  2. How do I determine the hourly wage rate for a salaried employee?

    A reasonable method is to divide the annual salary by the hours upon which the salary is based, normally 2,000 hours. For instance, an employee with an annual salary of $30,000 would have a $15 hourly rate ($30,000/2,000).

  3. How long does a qualified employee continue to generate credit for the employer?

    An employee can continue to generate credits for 60 months from the original date of hire.

  4. What are designated pilot areas?

    Designated pilot areas are census tracts within the DGA that may be identified by the Governor’s office. At this time, no pilot areas have been designated.

    Potentially eligible pilot areas are census tracts have lower average wages. Up to five pilot areas may be identified for a period of four calendar years. In a pilot area, qualified wages are that portion of wages paid or incurred that exceeds $10 but does not exceed 350% of minimum wage.

  5. Does the NEC have an add back of the qualified wages similar to the repealed EZ hiring credit?

    No.

Tentative Credit Reservation

  1. What is a Tentative Credit Reservation (TCR)?

    A TCR from Franchise Tax Board (FTB) is needed to qualify an employee for purposes of computing the credit. You will be able to request a TCR beginning on the first business day of 2014, January 2, 2014. You must submit your application online. You will receive an immediate confirmation.

  2. When must I request a TCR?

    You must request a TCR within 30 days of completing the Employment Development Department (EDD) New Hire Reporting Requirements.

  3. What information must I provide to get a TCR?
    • Information about your business:
      • Name
      • Business entity identification number
      • Address of business
      • Gross receipts of business for previous taxable year
      • Type of business
      • Taxable year
    • Information about your employee:
  4. If the employee receives a raise during the year, is the credit based only on the starting wage?

    No. The credit allowable is based on the actual wages paid during the taxable year.

Annual Certification of Employment

  1. What is the annual certification of employment requirement?

    An annual certification of employment filed with FTB is required with respect to each qualified full-time employee hired in any previous taxable year. The qualified taxpayer certifies that it is still a qualified employer and that each qualified full time employee hired in a previous taxable year is still a qualified full-time employee in the current taxable year. The annual certification of employment is due on or before the 15th day of the third month of the qualified taxpayer's current taxable year.

  2. When is the annual certification of employment due for a qualified taxpayer with a taxable year on a calendar year basis?

    For a qualified taxpayer with a taxable year on a calendar year basis, the annual certification of employment is due on or before March 15th of the taxable year following the hiring and/or continued employment of qualified full time employees.

    For example, during its taxable year 2014, a qualified taxpayer hires several qualified full time employees and obtains a tentative credit reservation (TCR) for each qualified full-time employee. The first annual certification of employment for these employees is due on or before March 15, 2015.  In subsequent taxable years, the annual certification will be due on or before March 15th of each taxable year.      

  3. When is the annual certification of employment due for a qualified taxpayer with a taxable year on a fiscal year basis?

    For a qualified taxpayer with a taxable year on a fiscal year basis, the annual certification of employment is due on or before the 15th day of the third month of the taxable year following the hiring and/or continued employment of qualified full time employees.

    For example, if a qualified taxpayer obtains a tentative credit reservation (TCR) for each qualified full-time employee hired between January 1, 2014 and June 30, 2014 and its taxable year 2013 ends on June 30, 2014, the first annual certification of employment for these employees is due on or before September 15, 2014.  In subsequent taxable years, the annual certification will be due on or before September 15th of each taxable year. 

  4. When is the annual certification of employment due for a qualified taxpayer that files a short period return?

    The annual certification of employment is due on or before the 15th day of the third month of the taxable year following the taxable year of hiring and/or continued employment of qualified full time employees. The rule is the same if a qualified taxpayer has a taxable year that is for less than a 12-month period, i.e., a short period taxable year.

    For example, a qualified taxpayer with a taxable year on a calendar year basis will file a short period return for the period January 1, 2014 to May 20, 2014.  During the short period, the qualified taxpayer obtains a tentative credit reservation (TCR) for each qualified full-time employee hired between January 1, 2014 and May 20, 2014.  For the taxable year beginning which will begin May 21, 2014, the first annual certification of employment for these employees is due on or before July 15, 2014.  In this short period return situation, the month of May is the first month of the time period used for determining the 15th day of the third month.  In subsequent taxable years, the annual certification will be due on or before March 15th of each taxable year, since the qualified taxpayer is on a calendar year basis. 

  5. What if the short period return is less than 4 months and this return is not the taxpayer’s final return?  Is an annual certification of employment required for that short period? 

    No. The annual certification of employment is waived if the short period return is for less than 4 months and that short period return is not the taxpayer’s final return. However, the annual certification of employment is due on or before the 15th day of the third month of the subsequent taxable year.

    For example, a qualified taxpayer with a taxable year on a fiscal year basis has a February year end. Its taxable year 2013 began on March 1, 2013 and ends February 28, 2014. From January 1, 2014 to February 28, 2014, the qualified taxpayer hires and obtains a tentative credit reservation (TCR) for each qualified full-time employee. On April 10, 2014, they commence bankruptcy proceedings. The taxpayer will file a short period return for the period March 1, 2014 to April 9, 2014. Since the short period is for only 2 months (March and April), the annual certification of employment is waived for the short period that ends on April 9, 2014. However, for the short period return which will begin on April 10, 2014, the first annual certification of employment for these employees is due on or before June 15, 2014. In subsequent taxable years, the annual certification will be due on or before May 15th of each taxable year, since each taxable year begins March 1st.

  6. Is an annual certification required for a short period final year return, regardless of the length of the short period?

    Yes, an annual certification of employment is required for a final year return if the NEC is claimed for any qualified full time employees.

  7. How do I submit my annual certification of employment? 

    Similar to the NEC reservation system, you must submit the annual certification of employment online and you will receive an immediate confirmation. The Annual Certification of Employment system is available here .

  8. What type of information must I provide when submitting an annual certification of employment?
    • Information about your business:
      • Name of business.
      • Business entity identification number.
      • Gross receipts of business for previous taxable year.
      • Type of business.
      • Taxable year.
    • Information about your employee:
      • Employee’s name.
      • Social security number.
      • Worksite address in the DGA.
      • Start date of employment.
      • Rate of pay.
      • Average hours worked per week.
      • Termination date if applicable.

Calculating the credit

  1. How do I calculate the allowable credit?

    Computing the credit involves three steps:

    Step 1: Compute the tentative credit amount.
    Step 2: Compute the applicable percentage.
    Step 3: Compute the allowable credit.

  2. How do I compute the tentative credit amount?

    The tentative credit amount is qualified wages times 35% (the applicable credit percentage).

  3. How do I compute the applicable percentage?

    To claim a credit, the employer must have a net increase in full-time employees working in California. This is measured by comparing the full-time employees working in California during the taxable year to the base year, both determined on an annual full-time employee equivalent basis. The numerator of the fraction is the net increase in full-time employees and the denominator of the fraction is the number of qualified full-time employees. The applicable percentage cannot exceed 100 percent.

  4. How do I compute the allowable credit?

    The allowable credit is the tentative credit amount times the applicable percentage.

Examples of calculating the credit

Example 1: The qualified taxpayer has a net increase in full-time employee equivalents—receives the full amount of the tentative credit.

Taxpayer A is on a calendar year basis and operates entirely within the DGA. For its taxable year 2013, Taxpayer A has 100 full-time employees based on annual full time equivalents. During its taxable year 2014, Taxpayer A hired new full-time employees, 2 of which were qualified full-time employees. Taxpayer A received a tentative credit reservation for these employees as required. Assume the following facts:

Qualified Employee 1 was hired on January 1, 2014, at an hourly wage of $17 and on July 1, 2014 the employee's hourly wage was increased to $18.50 per hour.  Employee 1 worked 2,000 hours during taxable year 2014. Qualified wages for Employee 1 are $5 per hour ($17-$12) from January 1, 2014 to June 30, 2014 and $5 per hour ($18.50-$13.50) from July 1, 2014 to December 31, 2014.

Qualified Employee 2 was hired on July 1, 2014, at an hourly wage of $18.50 and worked 1,000 hours during taxable year 2014. Qualified wages for Employee 2 are $5 per hour ($18.50-$13.50). The Base Year is taxable year 2013. In its base year, annual full-time equivalent employees were 100. The annual full-time equivalent employees in 2014 were 108. The net increase in annual full-time equivalent employees over the base year is 8. The credit allowable is computed as follows:

Description Calculation
Tentative Credit Amount: $5,250
Qualified Employee 1: $3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2: $1,750 ($5 x 1000 hours x 35%)
Applicable Percentage: 100%
Numerator: 108-100 = 8 (Net Increase in full-time employees)
Denominator: 2 qualified full-time employees
Computation: 8/2 = 100% (the applicable percentage cannot exceed 100%)
Credit Allowable: $5,250 ($5,250 x 100%)

Example 2: The qualified taxpayer has a net increase in full-time employee equivalents—receives a partial amount of the tentative credit.

Assume the same facts as Example 1, except due to attrition the annual full-time equivalents for taxable year 2014 was 101. The net increase in annual full-time equivalent employees over the base year is 1 (101-100). The credit allowable is computed as follows:

Description Calculation
Tentative Credit Amount: $5,250
Qualified Employee 1: $3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2: $1,750 ($5 x 1000 hours x 35%)
Applicable Percentage: 50%
Numerator: 101-100 = 1 (Net Increase in full-time employees)
Denominator: 2 qualified full-time employees
Computation: 1/2 = 50%
Credit Allowable: $2,625 ($5,360 x 50%)

Example 3: The qualified taxpayer does not have a net increase in full-time employee equivalents—receives no amount of the tentative credit.

Assume the same facts as Example 1, except due to attrition the annual full-time equivalent for taxable year 2014 was 98. The net increase in annual full-time equivalent employees over the base year is zero (98-100 but it cannot be less than 0). The credit allowable is computed as follows:

Description Calculation
Tentative Credit Amount: $5,250
Qualified Employee 1: $3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2: $1,750 ($5 x 1000 hours x 35%)
Applicable Percentage: 0%
Numerator: 98-100 = 0. (Net Increase in full-time employees cannot be less than zero)
Denominator: 2 qualified full-time employees
Computation: 0/2 = 0%
Credit Allowable: $0 ($5,250 x 0%)

Example 4: The qualified taxpayer first commences doing business in California—receives the full amount of the tentative credit.

Taxpayer B is on a calendar year basis and first commences business in California on January 1, 2014, and operates in the DGA. During its taxable year 2014, Taxpayer B hired full-time employees, 2 of which were qualified full-time employees. Taxpayer B received a tentative credit reservation for these employees as required. Assume the following facts:

Qualified Employee 1 was hired on January 1, 2014, at an hourly wage of $17 and on July 1, 2014 the hourly wage was increased to $18.50.  Employee 1 worked 2,000 hours during taxable year 2014.  Qualified wages for Employee 1 are $5 per hour ($17-$12) from January 1, 2014 to June 30, 2014 and $5 per hour ($18.50-$13.50) from July 1, 2014 to December 31, 2014.

Qualified Employee 2 was hired on July 1, 2014, at an hourly wage of $18.50 and worked 1,000 hours during taxable year 2014.

Since Taxpayer B first commenced business in California on January 1, 2014, its base year annual full-time equivalent employees are zero. Assume its annual full-time equivalent employees were 5 in taxable year 2014. The net increase in annual full-time equivalent employees over the base year is 5 (5-0). The credit allowable is computed as follows:

Description Calculation
Tentative Credit Amount: $5,250
Qualified Employee 1: $3,500 ($5 x 2000 hours x 35%) plus
Qualified Employee 2: $1,750 ($5 x 1000 hours x 35%)
Applicable Percentage: 100%
Numerator: 5-0 = 5 (Net Increase in full-time employees )
Denominator: 2 qualified full-time employees
Computation: 5/2 = 100% (the applicable percentage cannot exceed 100%)
Credit Allowable: $5,250 ($5,250 x 100%)

Credit usage and carryover

  1. When can a credit be generated?

    Employees hired between January 1, 2014, and December 31, 2020, may be qualified employees for purposes of the NEC. Each qualified employee generates a credit for 60 months starting with their date of hire.

  2. When can I claim the credit?

    You can claim the credit for employees hired on or after January 1, 2014, in taxable years beginning on or after January 1, 2014, and before January 1, 2021.  Additionally, a credit carryforward may be claimed for 5 taxable years subsequent to the year the credit was generated.

  3. Assume a taxpayer is on a fiscal year basis and its taxable year began on July 1, 2013, and ended on June 30, 2014.  If the taxpayer hires an otherwise qualifying individual on April 1, 2014, may the taxpayer complete a Tentative Credit Reservation (TCR) and generate a credit for the employee in its taxable year 2013?

    Yes, the taxpayer may complete a TCR for this employee.  However, since its taxable year does not begin on or after January 1, 2014, the taxpayer may not generate a credit for this employee in taxable year 2013.  In its taxable year 2014, assuming all other requirements of the statute are met, the taxpayer may generate a credit.  Qualified wages for this employee begin on April 1, 2014, and end after 60 months, but because the first three months of that 60-month period occurred during the taxpayer’s 2013 taxable year, the taxpayer will only be able to claim credit for qualified wages paid for 57 months of employment rather than the entire 60 months the qualified employee might have been employed.

  4. Can the NEC be claimed on an amended tax return?

    No, you can only claim the credit on a timely filed (including extensions) original tax return.

  5. Can the credit be carried forward to future years?

    Yes. The credit carryforward period is 5 years.

  6. Can this credit be assigned to an affiliated corporation under California Revenue and Taxation Code (R&TC) Section 23663?

    Yes. A credit or carryover earned by members of a combined reporting group may be assigned to an affiliated corporation that is a member of the same combined reporting group that meets the provisions of an eligible assignee. The eligible assignee shall be treated as if it originally generated the assigned credit. Any credit limitations or restrictions that applied to the eligible assignor will also apply to the eligible assignee. For more information see Credit Assignment - Revenue and Taxation Code Section 23663.

  7. Is there a cap on the total available credit or on the amount of credit available to a single employer?

    No.

  8. Is this credit refundable?

    No.

  9. Can the NEC reduce tax below tentative minimum tax?

    No.

  10. Will the NEC only apply to the tax associated with the income attributed to a designated census tract/zone (similar to how enterprise zone credits can only offset tax attributable to zone income)?

    No. Unlike the Enterprise Zone credits, the credit is not limited to tax on income attributable to a particular designated area.

  11. Must a business have a net increase in full-time employees in each taxable year in order to have an allowable credit?

    Yes, but only as compared with the base year. The increase in full-time employees is the total number of full-time employee equivalents in the taxable year, less the full-time equivalents in the base year. If there is not an increase in a taxable year, the allowable credit will be zero. But there is no requirement to increase full-time employees annually.

Other requirements and considerations

  1. If I claim the NEC on my tax return, is that information confidential?

    FTB is required to provide the employer names, the amounts of tax credit claimed, and the number of new jobs created for each taxable year, as a searchable database on its website for each taxable year.

  2. What if the qualified employee no longer works for me?

    If a qualified employee is terminated within the first 36 months after beginning employment, you may be required to recapture previously taken credits.

  3. How much must be recaptured?

    The amount of credit that must be recaptured is the amount for that taxable year and all prior taxable years attributed to qualified wages paid to that employee.

  4. Are there exceptions to the recapture requirements?

    Yes. You are not required to recapture the credit if you meet any of the following exceptions:

    • The employee voluntarily leaves employment.
    • The employee becomes disabled and unable to perform the services of that employment, unless the disability is removed before the close of the period and the employer fails to offer reemployment.
    • The employee is terminated due to misconduct.
    • The employer has a substantial reduction in operations, including reductions due to seasonal employment.
    • The employee is replaced by other qualified full-time employees so as to create a net increase in both the number of employees and the number of hours of employment.
    • The employment is considered seasonal, and the qualified employee is rehired on a seasonal basis.

Related taxpayers

  1. How are related businesses treated?

    All employees of employers that are treated as related under Internal Revenue Code (IRC) Sections 267, 318, or 707, are treated as if employed by a single taxpayer.

  2. What about unincorporated businesses that are under common control?

    All employees of trades or businesses that are not incorporated and are under common control are treated as being employed by the same employer.

  3. I have related businesses as described above. How do I allocate the credit amongst them?

    The credit allowable for each related trade or business is allocated on a pro-rata basis depending on their proportionate share of the expense for the qualified wages.

Pass-through entities, and estates and trusts

  1. How is the determination of a small business made for a pass-through entity?

    The $2 million limitation for a small business is determined at the entity level, as well as for any partner or shareholder.

  2. How are the qualified wages apportioned between estates and trusts, and the beneficiaries?

    The qualified wages are apportioned on the basis of the income of the estate or trust allocable to each. Any beneficiary who has qualified wages apportioned shall be treated as the employer, with respect to those wages.

Miscellaneous

  1. Can this credit or credit carryover be transferred to another taxpayer?

    Generally not, unless the credit qualifies under R&TC Section 23663 for an assignment to an affiliated corporation. For rules and restrictions regarding credit assignment, see The credit assignment election.

  2. If my business claims the NEC, am I eligible to apply for the California Competes Credit?

    The statutes do not prohibit taking both credits. The decision to grant a California Competes Credit rests with the Governor’s Office of Business and Economic Development (GO-Biz) and the California Competes Tax Credit Committee.

  3. Where can I find the Revenue and Taxation Code for this credit?

    You can also see R&TC 17053.73 / 23626 for the statute and all requirements.

Glossary

Allowable credit
The allowable credit is the tentative credit amount multiplied by the applicable percentage.  This is the amount that is available to use as a credit in the current tax year.
Annual full-time equivalent
For a full-time employee paid on an hourly basis, it means the total number of hours worked (not to exceed 2,000) divided by 2,000.  For example, an employee who worked 6 months and 1,000 hours is equal to .5 annual full-time equivalent.
For a salaried employee it means the total number of weeks worked divided by 52.  For example, an employee who works for 13 weeks in the year is equal to .25 annual full-time employee equivalent. 
Applicable credit percentage
35%
Applicable percentage
The applicable percentage is the net increase in full-time employees in California jobs divided by the number of qualified full-time employees employed in California, for which you received a tentative credit reservation.
Base year
The base year means taxable year 2013 for a qualified full-time employee hired during taxable year 2014 or if a qualified taxpayer first hires a qualified full-time employee in a taxable year beginning on or after January 1, 2015, it is the taxable year immediately preceding the taxable year in which the qualified full-time employee was hired.
For taxpayers who first commence doing business in this state during the taxable year, the number of full-time employees for the base year shall be zero.
Net increase in full-time employees
The increase in full-time employees is the total number of full-time employee equivalents in the tax year, less the full-time equivalents in the base year. 
Qualified wages

That portion of wages paid or incurred that exceeds 150% of minimum wage but does not exceed 350% of minimum wage. The California minimum wage is $8 per hour from January 1, 2014 to June 30, 2014. Based on $8 per hour qualified wages are between $12 ($8 x 150%) and $28 ($8 x 350%) per hour. For example, if a full-time employee earns $17 per hour, the qualified wages per hour is $5 ($17-12). If the employee works 2000 hours during the taxable year, the qualified wages are $10,000 ($5 x 2,000 hours).

California’s minimum wage increases to $9 per hour from July 1, 2014 until December 31, 2015.  Based on $9 per hour, qualified wages are between $13.50 ($9 x 150%) and $31.50 ($9 x 350%) per hour.  

Tentative credit amount
Tentative credit amount is the total qualified wages, multiplied by applicable credit percentage of 35%.