Posted 1 year ago - by Payroll Systems

California’s 2021 Main Street Small Business Tax Credit II Explained

Governor Gavin Newsom recently signed Assembly Bill (AB) 150 which establishes the Main Street Small Business Tax Credit II. This will provide financial relief to qualified small businesses for the economic disruptions in 2020 and 2021 that have resulted in unprecedented job losses. This will be offered via a tax credit against CA income tax or CA Sales and use Tax.

Who qualifies?

To qualify for the Main Street Small Business Tax Credit II, an employer must:

• Have 500 or fewer employees on Dec. 31, 2020. This means all employees (including part-time employees) whose wages are subject to California withholding laws.
• The employer must have had a 20% decrease in revenue when comparing calendar year 2020 to calendar year 2019.
• Had a net increase in full-time equivalent employees from specified periods in 2020 to 2021.

How much is the credit?

The amount of the credit is $1,000 for each net increase in qualified employees. Organizations can measure this using monthly average Full Time Equivalents (FTEs). Employers that had the following may be good candidates for this credit:

• Low headcounts from April 1, 2020, through June 30, 2020
• Added employees during the 12-month period beginning July 1, 2020, and ending June 30, 2020

Each employer is limited to no more than $150,000 in credit.

How to calculate the credit?

The employer must compare average monthly FTEs from Q2 2020 to either the 12-month period from 7-1-20 to 6-30-21 OR the 3-month period from 4-1-21 to 6-30-21.  If the employer has more FTEs, then a credit may be available. Employee census reporting and FTE employee calculations is a standard feature for HR and payroll technology.  For assistance, please contact your Payroll Systems rep to assist with these reports.

How to apply?

Organizations can apply for a tentative credit reservation from November 1 through November 30, 2021, or an earlier date if the limit for the credit is reached before November 30, 2021. The California Department of Tax and Fee Administration (CDTFA) will award the credit on a first-come, first-served basis. The allocation limit for this credit will be approximately $116 million. You can check out the CDTFA’s webpage to apply.

Additionally, an organization needs to:

• File their income tax return.
• Include the Main Street Small Business Tax Credit (FTB 3866) Form in the tax return. (The 2021 will be available by January 1, 2022.)
• Provide the confirmation number received from CDTFA on the Tentative Credit Reservation.
• Use credit code 241 when claiming the credit.

Organizations can visit Specific Instructions for form FTB 3866, for more information. Unused credits may be carried over for 5 years or until exhausted.

Tax reporting involves various moving parts and therefore, organizations should speak with a trusted professional to ensure you’re not missing anything necessary to meet federal/local standards.  Validating your FTE headcount numbers can be more complex that it seems as well and you should consult with your payroll or HR technology provider for assistance.

How can Payroll Systems help you with workforce management? We offer a combination of software and human support for your business. Contact us to learn more about our highly scalable HR and payroll solutions.

This article provides general information and shouldn’t be construed as legal or HR advice. Since employment laws may change over time and can vary by location and industry, please consult a lawyer or HR expert for advice specific to your business. You can also contact Payroll Systems to inquire about our HR support services.