Tax Planning

Are Short-Term Disability Claim Payments Considered Additional Income?

If you’re temporarily disabled with an injury, serious medical conditions, or a pregnancy, it is possible you could be covered by short-term disability payments that can be obtained through private insurers and also as part of your employer’s compensation for employees. Payments that you receive could potentially be taxable, it all depends on how and when they are paid. Here’s what you need to know.

Income exemptions

Typically, all income that is received is considered taxable unless it is expressly exempted. These types of exemptions will include worker’s compensation payments and certain compensation that was awarded for damages through litigation.

Short-term disability payments that are received under an insurance policy are not considered exempt and could lead you to be liable for additional taxes if you have already taken on the cost of taxation through the structure of the plan.

Employer disability benefits

If both you and your employer share the cost of a disability plan then you will only be liable for taxes on the amount received due to payments made by your employer. If a taxpayer pays the entire cost of a sickness or injury plan with after-tax money, they will not need to report any payments received under the plan as income.

If an employer only pays half the cost of premiums and does not deduct these payments from a taxpayer’s pay, then a taxpayer will most likely report half the payments received as income. Medical costs that have been paid for after the plan was established and have yet to be reimbursed are generally not taxable.

Cafeteria plans

This is an insurance program that allows employees to pick the coverage they would like to receive from a menu of options. This coverage is typically paid for by directing pre-tax dollars to the plan.

If the amount of the premiums is paid for by an employer or by you with before-tax dollars, then a taxpayer will most likely need to report any payments received as income. However, if the income used for the plan was paid for by a taxpayer with after-tax dollars, they are considered to have paid the premium and no payments under the plan will need to be reported.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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5 Reasons why You should File your Tax Return

Many Americans are required to file their taxes yearly to either receive their refund or pay off their tax balance in order to stay compliant with the IRS. Taxpayers who earn low income may not be required to file their tax returns.

Here are five tips taxpayers should know about when deciding whether or not to file their tax return.

1. How to determine if you should file.

One way to determine whether or not your taxes needs to be filed is typically based off your income, filing status and age. Additional rules that may play a part as to whether or not you will need to file your tax return is if you are self-employed or you can be claimed as a dependent of someone else. For those who are unsure if they need to file this tax year, the IRS offers an Interactive Tax Assistant that can help determine if you need to file.

2. Check your taxes that are being withheld or paid.

Questions that you should ask yourself when deciding whether or not you will receive a refund when you file your tax return:

  • Did your employer withhold federal income tax from their pay?
  • Did you make estimated tax payments?
  • Did you overpay last year and have it applied to this year’s tax?

3. See if you can claim an earned income tax credit.

If you have earned less than $55,592 last year, you could possibly receive an Earned Income Tax Credit (EITC) as a tax refund. A taxpayer must qualify for this credit before placing it on their return. You can check your eligibility by using the EITC Assistant on In addition, a taxpayer will most likely need to file a tax return in order to claim the EITC.

4. Child tax credit or credit for other dependents.

You can claim a child tax credit if you have a qualifying child under the age of 17 as well as meet additional qualifications. In addition, taxpayers may also be eligible for the credit for other dependents. This includes people who have:

  • Dependent children who are age 17 or older.
  • Parents or other qualifying individuals they support.

5. Education credits.

There are two higher education credits that can reduce the amount of tax that is owed on your tax return. There are two types of education credits that you can qualify for, one is the American opportunity tax credit and the other is the lifetime learning credit. In order to qualify, a taxpayer, their spouse or their dependent must have been an enrolled student for at least half the time for one academic period to qualify.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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What to do if You’re Projected to Owe Taxes

Tax season will be upon us shortly, which means it’s time to start preparing all your tax documents in order to ensure that you receive the maximum amount in your refund. Here’s a list of ways you can get the most from your taxes.

Contribute More Towards Your Retirement

Taxpayers who contribute towards their company’s 401(k) or their traditional IRA will automatically lower their taxable income. Currently, the contribution limit for a 401(k) is $19,000 ($25,000 for 50 or older) and $6,000 ($7,000 for 50 or older) for an IRA.

Taxpayers may also be eligible for the Savers Credit which is worth up to $1,000 ($2,000 if married filing jointly). Lower to middle-income taxpayers can qualify for this credit if they are contributing to their retirement. The credit also assists qualifying taxpayers reduce their taxes should they owe a tax liability.

Donate to a Charity

The holiday season is a great way to give back and also give back to those in need, all while also reaping the tax benefits. Tax deductions for non-cash and monetary donations donated to qualifying charitable organizations can get you the most out of your tax refund when itemizing your tax deductions. Those volunteering at a charitable organization can deduct their mileage (14 cents of every mile).

Review Your Tax Withholdings

With the end of the year approaching, it’s important to know where you stand with both your taxes and your finance. One way to know if you’re on the right track is to review how much federal and state taxes are being withheld from your paycheck every month. 

The IRS provides a tax withholding calculator for taxpayers to use to ensure that they’re withholding the accurate amount and to avoid owing the IRS. If a taxpayer does end up owing a balance, they will need to either pay it in full after filing their taxes or make estimated tax payments to the IRS prior to filing their tax return to avoid any interest and penalties.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

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Are Political Donations Tax Deductible?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Many Americans show their support for their political candidate by voting or donating to the political party of their choice. If you’re wondering if your financial contribution to a political campaign affects your taxes in any way, you’re not alone. Here’s everything you need to know about tax deductible donations for political campaigns.

Are Political Contributions Tax Deductible for Businesses?

Businesses are cautioned to not deduct political contributions, donations or payments on their tax returns.

Can I Deduct my Expenses if I Volunteer for a Political Campaign?

For those who volunteer for a political candidate, campaign, or political action committee, the time you volunteer will not be considered tax deductible donation when filing your taxes.

Is it Considered a Tax Deduction when Supporting a Presidential Campaign?

 When filing your taxes, you have the option to set aside $3 of your taxes to go towards the Presidential Election Campaign Fund when you complete your 1040 federal income tax return form. You can check the box to donate the funds and it will not affect your taxes or deductions.

Are there Political Donation Limits?

Taxpayers wanting to support a political candidate or party can donate the following amounts:

  • Up to $2,800 per candidate and election.
  • Up to $10,000 to state, district, and local parties combined each year.
  • Up to $106,500 to a national political party, per account, and per year.

Are there any Political Donations that are Tax Deductible?

To qualify, you must be a registered non-profit organization that operates as a true charity to take a tax deduction for the donation.

If you volunteer, give cash or non-cash items to a 501(c)(3) organization, your donation may be a qualified tax-deductible charitable contribution. To confirm if the organization you gave a donation to is a 501(c)(3) organization, you can use the Tax-Exempt Organization Search Tool from the IRS.

If you need tax help, contact us for a free consultation.

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Having the Right Payroll Service can Protect Employers from Fraud

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

Choosing a company to handle your payroll tax should be chosen carefully in order to avoid missed deposits for employment taxes and unpaid bills. Every year, there are a few payroll service providers who don’t submit their client’s payroll taxes and close down. 

Clients of a payroll firm are typically responsible for paying the taxes that are due even if the employer sends funds to the payroll service provider for required deposits or payments.

Employers need to understand their payroll and employment tax responsibilities in order to file properly. When looking to hire a payroll service to handle your payroll taxes, here are two options to consider:

  • Certified professional employer organizations (CEPOs) are liable for paying the customer’s employment taxes, filing returns, and making deposits and payments for the taxes reported related to wages as well as compensation.
  • A payroll service provider that informs the IRS of its relationship with a client using Form 8655, Reporting Agent Authorization, which is signed by the client. Reporting agents must deposit a client’s taxes using the Electronic Federal Tax Payment System and can exchange information with the IRS on behalf of a client, such as to resolve an issue. 

It’s encouraged that employers enroll in the Electronic Federal Tax Payment System (EFTPs) to ensure that the payroll providers use EFTPS to make deposits. The service provides employers with easy online access to their payment history when deposits are made under their Employer Identification Number, enabling them to monitor whether their payroll service provider is meeting its tax deposit responsibilities.

If you need tax help, contact us for a free consultation.

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Renting out a spare room and taxes – everything you need to know.

Tax Tips For Landlords

If you have decided to join the sharing society and rent out a room or part of your home, either through a service like AirBnB or independently, you should inform yourself about the implications of renting out a room and taxes.

Renting a room requires some work up-front, and ongoing management. You have several tasks ahead of you. You will most likely want to spruce up the place with comfy furnishings and linens, and maybe a fresh coat of paint. Check the legal regulations for renting in your local area, you may discover there are limitation on the type of rentals you can offer, be they short-term or long term.

And then, there’s landlord tax. Running afoul of the IRS can potentially wipe out any financial gains you may reap from opening your home to complete strangers – be sure to abide by the laws of landlord tax. Fortunately, you can reduce your potential tax bite with diligent record keeping. Here is everything you need to know about renting out a room and taxes.

The 14 Day Rule & Paying Rental Income Taxes

The most convenient and potentially lucrative scenario would be to completely avoid reporting or paying income taxes on the income you earn from renting out your couch or your spare room. Well, you can, if you meet two relatively easy requirements set by the IRS.

First, you must use the residence as a home at least 14 days out of each calendar year. Second, you must limit the time that you rent any part of the residence that you use as a home to 14 days or less each tax year. That’s it.

So if you have a primary residence plus a vacation home where you spend at least two weeks of the same year, you could rent out rooms in both and collect rental revenue for 28 days (14 days for each residence) completely tax free. It gets better: the IRS places no upper limit on how much income you earn as long as you don’t exceed 14 total days of rental per property. (

If you live near the town where the All-Star game for a major sport is being played that year, you could rent out one room or the entire place for the week, rake in major cash and never report a dime on your tax return. Pretty sweet. But if a renter burns a hole in your floor, you are stuck paying for the repairs.

What if I Rent My Room for More Than 14 Days?

Should you exceed the 14-day threshold, matters become somewhat more complex. First, you must determine whether you or one or more family members resides in the residence or uses it for personal purposes for at least 10 percent of the time that you rent at fair rental price. You don’t have to be there at the same time you’re renting, but your time in the residence must equal at least 10 percent of the total rental time. So if you rent out your vacation home for 300 days each year, you or another qualifying person will need to live there for at least 30 days during the same year for the IRS to qualify the residence as a home. For the purposes of this article, the assumption will be that the residence qualifies as a home for IRS purposes. (

The rules differ for rental properties that are used for what the IRS calls “personal purposes” rather than as residences. There are also different regulations that apply if you use the rental property as a residence, but don’t live there enough of the time for the residence to qualify as a home. To sort out those types of issues, consult with a professional such as an attorney with Optima Tax Relief.

Which IRS Form Do You Need to File Rental Income?

As a contractor with AirBnB living within the United States, you would complete Form W-9, Request for Taxpayer Identification Number and Certification. You would also receive Form 1099, Miscellaneous Income before you file your federal income tax return for the following year. (International contractors complete different forms.) If you operate as an independent, you will need to maintain your own records for rental income and expenses, preferably separate from your personal household expenses.

If you provide sleeping space, but no frills, report income and losses on Schedule E, Supplemental Income and Loss, attached to Form 1040, Form 1040NR or Form 1041. If you splash out on fluffy towels, turn-down service, and catered breakfast in bed for your guests, report income and expenses through Schedule C, Profit or Loss from Business, also filed with Form 1040, Form 1040NR or Form 1041.

In either case, you are also allowed to deduct the costs of repairs, depreciation (by filing Form 4562, Depreciation and Amortization), uncollected rents and actual operating expenses. But if a renter trashes the place and you file Schedule E, you will also need to complete Form 6198, At-Risk Limitations or Form 8582, Passive Activity Loss Limitations. If you’re not sure which form you should complete, consulting a tax professional is your best strategy.

Fair Rental Prices and How it’s Calculated

If you live in the heart of Manhattan or in a condo overlooking Lake Michigan in Chicago, you might think that setting your rents at bargain basement levels would help you beat the competition. If you set your prices too low, you may well attract the unfavorable attention of the IRS.

That doesn’t mean that you must charge exactly what every other landlord or private renter in your area charges for rent. It does mean that you must set prices for your rental that are comparable to the going rent for similar properties in your area – what the IRS calls “fair rental price.”

If you fail to charge fair rental prices or if you never report a profit from your rental, the IRS may decide that you’re not serious about making money. You don’t have to show a profit every year, but he IRS assumes that you have a genuine profit-making motive if you show gains during at least 3 of the most recent 5 years, including the current year. (

The Hobby Loss Rule

If you fail to show profit, you could be hit by the so-called “hobby loss rule,” which prevents you from using losses related from your venture to offset other income on your federal tax return. Instead, you use must losses related to your rental activities as itemized deduction on Schedule A. Deductions would be limited to the following strict limitations.

  • Deductions such as mortgage interest and taxes are allowed in full
  • Deductions like advertising, insurance and premiums are allowed only to the extent that gross income exceeds deductions from the first category
  • Deductions such as depreciation and amortization are allowed only to the extent that gross income exceeds the amount of deductions taken for both of the prior two categories.

How the Sharing Economy Works

Knowing the ins and outs of renting out a room and taxes can be tricky. However, this article is not intended to discourage you from renting out a room in your home, being a live-in landlord, or otherwise participating in the sharing economy. It’s a potentially exciting way to meet interesting people from all over the country or even other parts of the world.

But just as you want your house or apartment to look its best, you’ll also want your financial house to be in order, too. That way you can concentrate on being the best host you can be, without being hit with unpleasant surprises at tax time.

Need some help with landlord tax? Consult one of our tax professionals to learn more about renting out a room and taxes.

Corp vs LLC – Which One is Right for You?

When you first went into business, you may have operated as a sole proprietor or as a partnership. However, as your operation has grown, a more formal business structure has become necessary.

Depending on your personal circumstances and the nature of your business, you may reorganize as a Limited Liability Company, or LLC, an S-corporation (S-Corp), or a C-corporation (C-Corp). Each business structure has benefits and disadvantages concerning taxes and liability for adverse legal and financial circumstances.

What is an LLC?

Limited Liability Companies, better know as LLCs, are simple to organize and run. The owners (known as members) of an LLC can distribute revenues generated by the company among themselves — there are no shareholders demanding dividends. LLCs also provide a shield against legal liability for adverse actions taken against the company.

In plain English: if your LLC is sued, you won’t lose your shirt (or your house, car or any personal possessions that are not tied to the LLC as collateral) if the person filing the suit wins in court.

However, the Internal Revenue Service does not recognize LLCs as separate entities for federal income tax purposes. Each member of an LLC pays individual federal income taxes on any revenue received from the LLC. In addition, revenue generated by an LLC is also subject to self-employment taxes.

Why Choose an S-Corp?

In many ways, S-corporations represent the best of both worlds.  S-corporations, or an S-Corp, are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.

If an S-corporation is sued, its officers are generally shielded from personal liability. This is because S-corporations, like C-corporations, are technically owned by shareholders who entrust officers (such as a CEO) to run the company in the best interests of those shareholders. As a result, the IRS considers S-corporations to be separate tax entities. Officers of S-corporations are also exempt from self-employment taxes. Also, S-corporations are exempt from the double taxation that the IRS imposes on C-corporations.

However, the IRS limits S-corporations to 100 or fewer shareholders. Non-resident aliens cannot be shareholders in an S-corporation. Certain types of companies, such as insurance agencies, are not allowed to organize as S-corporations. In addition, profits from S-corporations that are not distributed as income to officers must be distributed as dividends to shareholders.

Why Choose a C-Corp?

When people refer to “corporations,” in most cases, they are referring to C-corporations.  A C corporation (or C-Corp) is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. Like S-corporations and LLCs, C-corporations shield officers from financial and legal liability for the actions of the corporation. The IRS also considers C-corporations to be separate entities for tax purposes, which means that the officers of C-corporations are not subject to self-employment taxes.

However, much of the revenue that C-corporations generate is subject to double taxation – taxed once through corporate income taxes and again when profits of the corporation are distributed as dividends to shareholders. As separate tax entities, C-corporations must file separate income tax returns to the IRS. In addition, shareholders must declare dividends as personal income on their individual income tax returns.

Corp vs. LLC – Which is Better for Taxes?

In considering whether to organize as an LLC, S-Corp or C-Corp, consider whether flexibility, exemption from self-employment taxes or avoiding double taxation is more important. If you want flexibility in operating your company, an LLC is a good option. If avoiding both self-employment taxes and double taxation is your main goal, and if your company is eligible, consider forming an S-corporation. For larger companies, organizing as a C-corporation is almost always a necessity. However, you should consult with an attorney or CPA who specializes in corporate tax law before making a final decision.

Looking for some assistance with your taxes? Optima Tax Relief offers a range of professional tax services, including help with S-Corp, C-Corp, and LLC tax preparation. Consult with one of our licensed professionals to learn how we can help you today.

Could I Use My Market Losses to Reduce Taxes?

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

When the Coronavirus pandemic first happened, the stock market took a huge hit. Within days, the stock market entered into a correction period. Despite the market recovering most of its losses, large unemployment rates still remain that haven’t been seen since the Great Depression.

Most people investing in the stock market typically don’t enjoy taking losses and want to avoid future tax problems down the road when filing their taxes.

If you are invested in the stock market or debating whether or not you want to in the near future, here is what you need to know in order to avoid tax implications.

Tax-loss harvesting

Whenever a taxpayer has capital losses, it typically means assets such as stocks and bonds lose value and can be used to offset capital gains. The term tax-loss harvesting is used by investors as a way to explain capital losses so you can use them to offset other gains.

Tax-loss harvest is a type of income tax deferral that can be used with non-tax-sheltered investments. By selling losing asset positions, a taxpayer can minimize the capital gains taxes on your winning sales.

Be cautious for the IRS’s “Wash-Sale” rule

Taxpayers need to be cautious of the wash-sale rule when utilizing tax-loss harvesting. 

A wash-sale is considered to have occurred anytime a taxpayer sells or trades securities at a loss and then within a 30 day period before or after the sale, do one of the following:

  1. Buy substantially identical securities.
  2. Acquire substantially identical securities in a fully taxable trade.
  3. Acquire a contract or option to buy substantially identical securities.

The IRS can disallow the loss on the assets sold. However, there are a few steps a taxpayer can take to ensure that their capital losses offset their gain.

Although we can’t predict what further damage could come from the Coronavirus pandemic and how it will affect the stock market for the rest of 2020, there are steps taxpayers can take to protect themselves when it comes to filing next tax season. 

If you need tax help, contact us for a free consultation.

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Everything You Need to Know about a Tax Exemption

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.

One common goal that nearly all Americans can agree on is that they either want to reduce the amount of money that they owe on their tax bill or eliminate it altogether. A tax exemption comes in many forms and the good news is, is that many taxpayers are entitled to an exemption on their tax return that can help lower any tax liability they may owe. 

An exemption works the same way any deduction might work. Federal and state governments frequently exempt organizations from income tax entirely should they serve the public. Charities and religious organizations would also fall under exempt organizations as well. Here’s everything you need to know about tax exemptions and if you qualify for it.

Personal exemptions

If you are not claimed as a dependent on another taxpayer’s tax return, then you have the ability to claim one personal tax exemption. This is typically a fixed amount that increases yearly and reduces your total amount of taxable income just like a deduction does but with fewer restrictions. If you are married filing joint on a tax return, both you and your spouse are eligible to each get an exemption.

Dependent exemptions

The IRS typically allows a taxpayer to take additional exemptions for each dependent that is claimed on their tax return. The exemption requires that the children being claimed live with the taxpayer in question for more than half the year, are under 19 years old (or under 24 if a full-time student) and who don’t provide more than half of their own financial support during the tax year. 

Tax-exempt organizations

In order for an organization to receive tax-exempt status, it must first satisfy all of the IRS’s requirements. Organizations should not be operating for profit and also provide vital services to the community such as charity work.

Organizations that fall under the tax-exempt status are not required to pay federal income tax and must maintain accurate records to keep their status. 

State and local exemptions

State, county, and municipal governments also provide tax exemptions to businesses that boost the local economy. In some cases, a business could be exempt from paying local property taxes if they move their operations to a particular geographic area. Many cities and states offer sales tax holidays where consumers can purchase goods without having to pay state or local sales taxes. 

If you need tax help, contact us for a free consultation.

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California Tax Rates, Incentives & Exemptions

As the most populous state in the union, California attracts new residents from all over the country and around the world. From the glow of Tinseltown to the technological buzz of Silicon Valley, dreamers and entrepreneurs alike are drawn to the state. But California is also one of the most expensive states to call home – 3rd highest to be exact. California tax rates are some of the highest in the nation.

Businesses in California are not spared from the tax hammer. California imposes corporate income taxes on “C” corporations and limited liability companies that operate like corporations. As a result, many entrepreneurs who operate small businesses in California are subject to quadruple taxation – double taxation from Uncle Sam and double from California.

But as of 2014, California has enacted a series of tax breaks which will award millions of dollars in tax credits to qualifying businesses. These tax incentives were designed to lure businesses to re-locate or keep their base of operations within the state.

Aerospace Industry Gets a Break with State Tax Credits

One business field seeing some high-profile tax breaks in California is the aerospace industry. California was at one point in time the center of the aerospace industry, before the US government was forced to make drastic cut-backs in the 1990’s, essentially reducing the workforce by more than 50% of its workers. California Governor, Jerry Brown, has been trying to put together an incentive package of sorts to entice some of the larger employers to come back to the state, which would improve employment rates, bring a huge influx of new business and cash flows, as well as help off-set the current financial problems that California is facing.

The Aerospace Tax Clarification Act, which was passed in April, cleared up some ambiguity regarding the classification of rocket propulsion systems. This new act clarifies that these rockets qualify for an existing business tax exemption, rather than being classified as a taxable business supply as the prior law read.

“The space commercialization industry is not only developing some of the most advanced space vehicles in the world,” stated Assembly member Al Muratsuchi, “but is also creating thousands of local, high-paying manufacturing jobs.” This law was a direct nod to the Space Exploration Technologies Corporation, a Los Angeles based enterprise founded by Tesla billionaire, Elon Musk. The bill was also supported by Northrop Grunman, the Commercial Spaceflight Federation, Aerojet Rocketdyne Inc., a division of GenCorp Inc. and Lockheed Martin.

Governor Brown is also pushing for the aerospace bill to be expanded to cover the automotive industry. California is one of several states currently bidding for Tesla to build its proposed $6 billion factory to manufacture a new auto battery, known as the “gigafactory”, here in the state. This addition to California would mean the creation of at least 6500 new jobs as well.

Additionally, Governor Brown signed a law in July 2014 which grants a 17.5 percent tax credit on wages for workers hired to build aircraft. The bill serves as an incentive to score lucrative contracts for high-paid aerospace jobs within the state. There was also a 10-year tax exemption granted for the manufacturing of equipment used for the space travel industry.

Is there a tax credit for small businesses in California?

Under the California Competes program, a full 25 percent of the $29 million in tax credits will be reserved to small businesses with gross receipts of less than $2 million annually. Huge corporations are not the only beneficiaries of the new tax incentives in California. The state recently instituted the California Competes tax credit program, designed to provide financial incentives for businesses to relocate to California or for businesses within the state to remain and add jobs.

The California Competes tax credit program replaces the former Enterprise Zone program, which was eliminated in 2013 due to it being wasteful and inefficient. Credits allocated by the program are tentatively set at $30 million for fiscal year 2013/14, $150 for fiscal year 2014/15 and $200 million for each fiscal year after that through 2018. The state’s website lists the following criteria by which California Competes tax credits will be awarded:

  • The number of jobs created or retained
  • Total compensation, including wages and fringe benefits
  • Investment in the state
  • Unemployment or poverty rates where businesses are located
  • Other state and local incentives available to the business
  • Incentives from other states
  • Duration of commitment of the business or project
  • Overall economic impact
  • Strategic importance of the business to the state, region, or locality
  • Future growth or expansion opportunities
  • Expected benefit to the state in excess of benefit to the business from the tax credit

The California Competes Tax Credit is a non-refundable tax credit, meaning that businesses cannot receive cash back even if the credit is greater than what they would otherwise owe in corporate income taxes. But excess funds from the credit can be carried forward for as long as five years, or until the excess funds are exhausted, whichever is sooner.

Other Business Tax Incentives in California

Other tax incentives for businesses that locate or expand within the state of California include the Manufacturing Equipment Sales Tax Exemption and the New Employment Credit program. Each program is for businesses located within designated Enterprise Zones, or areas that are struggling economically.

The sales tax exemption allows eligible businesses to exclude the State’s portion of the sales and use tax (currently 4.19%), from the first $200 million in equipment purchases made between July 1, 2014 and June 30, 2022. This program will generate significant savings for eligible businesses, allowing them to pay a reduced sales and use tax rate of 3.3125% on qualifying equipment purchases.

The New Employment Credit program allows eligible businesses to receive a credit that may be taken against corporate income tax. This credit may be taken for all qualified employees hired on or after January 1, 2014. The amount of the tax credit equals 35% of the qualified wages paid for each new full-time employee hired, making a potential tax break of up to $56,000 or more per new employee over a five-year period.

For a newly hired employee to qualify the business for the New Employment Credit, they must fall into one of the following categories:

  • Unemployed for 6 months or more (excluding students and self-employed workers) either without a degree or having completed a degree more than 12 months before being hired
  • Veterans separated from active duty for less than 12 months
  • Earned Income Tax Credit (EITC) recipients during the previous year
  • Ex-offenders convicted of felonies
  • Current CalWORKS or county general assistance recipients

Attracting New Business with Tax Incentives

Many Californians approve of Governor Brown’s latest attempts to keep California in the running when it comes to attracting new businesses and keeping the existing ones from moving to another state that offers better business incentives. California is beginning to offer many appealing incentives to businesses, including State Tax credits, new employee credits, green tax incentives, as well as energy and transportation credits. When combined with available Federal tax credits and discounts, California can be a very profitable place for business owners to call home.

Below is a list of some additional tax incentives and tax credits currently offered in the state of California.

California Tax Programs, Credits, and Incentives Benefits to Businesses
California Competes $29 million in various tax credits to businesses who create or retain jobs within the state of California
Aerospace Tax Clarification Act Qualifies rocket propulsion systems for an existing business inventory tax exemption
California Motion Picture and Television Production Credit (AB-1839) 20% of expenditures for a qualified motion picture and 25% of production expenditures for an independent film or a TV series that relocates to California
Manufacturing Equipment Sales Tax Exemption Allows businesses to exclude the state share of sales tax (4.19%) from the first $200 million equipment purchases.
SB 1309 Tesla bill to include tax credits, workforce training grants and streamlined permitting and environmental reviews
New Employment Credit 35 percent of wages between 1.5 and 3.5 times the minimum wage for a period of five years.
California Research and Development  Tax Credit Credit for costs attributable to research activities conducted in California
California Capital Access Program Collateral Support (Cal-CAPS CS) Pledges cash (up to 40% of loan) to cover collateral shortfall of loans of $100,000 or more in Severely Affected areas
Small Business Loan Guarantee Program Enables small businesses to obtain a loan it could not otherwise obtain
Industrial Development Bond Provides manufacturing and processing companies low-cost, low-interest financing for capital expenditures
Employment Training Panel Helps assist with post-hire training reimbursement
Community Development Financial Institutions Investment Credit 20% of qualified investments made into a community development financial institution
Disabled Access for Eligible Small Businesses  (FTB-3548) $125 per eligible small business, and based on 50% of qualified expenditures that do not exceed $250
Enhanced Oil Recovery  (FTB 3546) 1/3 of the similar federal credit but limited to qualified enhanced oil recovery projects located within California
Environmental Tax (FTB 3511) $0.05/each gallon of ultra-low sulfur diesel fuel produced during the year by a small refiner at a California facility
Low-Income Housing (FTB 3521) Similar to the federal credit but limited to low-income housing in California
Manufacturing Enhancement Area Hiring Hiring credit for Manufacturing Enhancement Area
Prison Inmate Labor (FTB 3507) 10% of wages paid to prison inmates
Targeted Tax Area Hiring (FTB 3809) Business incentives for trade or business activities conducted within a targeted tax area

 This article was written by staff writers Audrey Henderson and Jennifer Leonhardi. Consult with Optima’s Tax Relief  professionals to learn more.