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Taking Credit- the California New Jobs Credit for Small Employers

We know you're used to hearing accountants talk about Debits and Credits. But this is a different kind of credit. It's the good kind - the kind that can save certain small business employers California state taxes.

If you qualify, you can take a non-refundable credit of $3,000 for each incremental employee you hire during 2009, that is as long as the state of California is under the $400 million cap they have set for awarding these credits. And the money is awarded first come, first serve.

Here's how California defines an eligible small business:

  • You had 20 or fewer employees as of December 31, 2008 (or the last day of your taxable year if later. )
  • You had a net increase in the number of full-time employee equivalent hours in your business during 2009.

It sounds easy enough doesn't it?

Sounds like you just count the people standing around the company on December 31st and if there is a new face at the end of 2009, you've added one net employee and earned your $3,000 credit.  But we're talking about taxes.  You know it has to be more complicated than that. And it is.

The complicating factors:

  1. When you are looking to see if you qualify as a small business on 12/31/08, you have to consider both full and part-time employees.
  2. When you're looking at taking the credit, only full-time equivalent employees are considered.
  3. There are special rules for sole proprietors who incorporate in 2009 and businesses who are new to California in 2009.
  4. You have to pro-rate the credit for employees who work part of a year.
  5. You can only use the credit up to the amount of your 2009 California tax liability; any excess credit is carried forward.
  6. There are special rules for using the credit among related entities, and for partnerships, S-Corporations, and LLCs.
  7. There are some cases in which small businesses can't take the credit for example, it doesn't apply to employees in an enterprise zone or targeted tax area.

This is the kind of stuff we actually enjoy doing so let us help you evaluate your specific situation.

We have created a tool to help you capture your information so you can see if you qualify.  Click here to download a  Microsoft Excel worksheet. (You will need to register in order to access the file.)