California is providing additional tax relief to businesses affected by COVID-19, as well as a tax incentive to boost hiring.
Gov. Gavin Newsom (D) announced November 30 that businesses filing a sales tax return in which the tax owed is less than $1 million will get an automatic three-month extension to file and remit the tax to the Department of Tax and Fee Administration (CDTFA).
The extension is “in essence a float,” Newsom said at a November 30 news conference. “That sales tax is collected by the business member, it is in a bank account,” and eligible businesses “can hold that money, you can use that money, to float any obligations you have. . . . And it’s automatic for businesses that owe up to $1 million in sales tax.”
According to a December 1 release by the CDTFA following Newsom’s announcement, the extension applies to payments and returns originally due between December 1, 2020, and April 30, 2021. In addition to sales tax, the same automatic extension rules apply to any tax administered by the CDTFA.
Another relief program will allow businesses with up to $5 million in annual taxable sales to apply to defer remitting up to $50,000 worth of sales and use tax. Meanwhile, businesses with over $5 million in annual taxable sales that have been significantly affected by COVID-19-related restrictions and experienced a significant reduction in sales will also be allowed to seek a deferral.
“We are expanding [relief] to those industries with operations that have been disproportionately impacted” by COVID-19-related restrictions, such as restaurants, bars, hotels and salons, Newsom said, noting that further restrictions are anticipated in the near term because of the rise in COVID cases in the state.
Businesses can apply for a “12-month, interest-free payment plan to defer payment of up to $50,000 for 4th quarter 2020 and the 1st quarter of 2021 in sales and use tax liability,” according to the CDTFA. The deferred amount is to be paid back in 12 equal, monthly installments, with the first payment due in April.
The deferral program is essentially a follow-up to a previous one created earlier in 2020 for which the application period is now closed, according to the CDTFA. Eligible businesses that have an existing payment arrangement with the department will be able to apply for the new deferral option as well.
Businesses with over $5 million in annual taxable sales are encouraged “to contact us so we can discuss their interest-free payment plan request and their specific situation,” the CDTFA told Tax Notes in an email.
According to the administration, the total tax relief announced by Newsom is potentially worth billions in aggregate.
Newsom also announced that an additional $500 million will go to small businesses via a new “COVID Relief Grant” program, and additional funding will fully capitalize the California Rebuilding Fund to help provide loans to small businesses hurt by the pandemic.
Newsom's administration also highlighted the implementation of the newly created hiring credit for small businesses that was approved in the 2020 session.
The Main Street Hiring Tax Credit allows qualifying businesses to receive a credit worth $1,000 per qualified employee they hire, up to a maximum of $100,000 per employer. The program, enacted under S.B. 1447, is available for businesses that had 100 or fewer employees as of December 31, 2019, and experienced at least a 50 percent reduction in gross receipts in 2020’s second quarter compared with the same period last year. Eligible employers that apply for it will receive the credit based on the increase in their average number of employees for the period July 1 through November 30, compared with the second quarter of 2020, and can use it to offset income taxes or, via irrevocable election, sales taxes. The total funding for the program is $100 million, and the credit is available on a first-come basis, according to the CDTFA.
California has provided a range of tax and other relief to businesses during the pandemic, including ensuring that forgiven Paycheck Protection Program loans aren't taxed and temporarily expanding a one-time, first-year exemption from the state's minimum franchise tax to new partnerships and limited liability companies. However, the state also enacted legislation temporarily restricting the use of net operating losses and tax breaks.
Newsom and lawmakers also urged Congress and President Trump to approve a new federal economic relief plan for businesses affected by the pandemic and by the restrictions implemented to counter the spread of the virus.