Given the need to stimulate California’s economy, while at the same time recognizing the State’s fiscal challenges, the Housing and Community Development Department (HCD) and Governor Jerry Brown have agreed to proceed with the California Enterprise Zone (EZ) Program. The California Enterprise Zone is a state-sponsored program available to businesses located within the boundaries of one of the 42 EZs throughout the state. The program offers tax incentives such as employee hiring and sales and use tax credits for qualified businesses in the manufacturing, retail, service, entertainment, and various other industries.
The EZ program was under a number
of proposed changes by the Brown administration during the preparation of the current California budget. Although the budget did not modify the EZ program, the HCD is currently working on implementing policies to strengthen the effectiveness of the program, improve linkages to other development activities, and identify further improvements and reforms to keep the program alive and continue encouraging job growth throughout
the state.
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The HCD is required by statute and regulation to allow up to 42 enterprise zones in the state, along with the processing of applications for EZ expansions. In 2012, the Antelope Valley and Watsonville enterprise zones will expire. However, the HCD has stated that it will not accept applications for new zone designations until the program is reformed to strengthen its effectiveness in job creation.
On October 10, 2011, the Brown administration announced that it will reopen the applications for EZ expansions consistent with its state mandate. Future applications will be processed according to relevant statutes and regulations. In addition, the Brown administration will resume the process of completing the final designation of the following conditional EZs:
 City of Anaheim
Harbor Gateway Communities of
Los Angeles & Huntington Park
City of Pittsburg
County of Contra Costa
City and County of Sacramento
San Diego
City and County of San Francisco
Santa Clarita Valley
Sequoia Valley
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Each of the above EZs will be provided 180 days from October 10, 2011 to satisfy all outstanding conditions in order to obtain final designation status. Once the time frame has elapsed, the HCD will announce the zones which have met the requirements. The new EZs will provide businesses with tax credits and incentives opportunities starting from the final designation date.
In the next three months, the HCD will convene stakeholders with the intent
to examine, provide input, and recommendations to what changes should be made to the EZ program to increase transparency, accountability, cost-effectiveness, and stimulate job growth. The proposed changes and amendments may be revised during the current legislative session to incorporate some of the policy reforms proposed by the Governor earlier this year in his proposed budget legislation.
By: Marisol Casey, Tax Manager,
Orange County |
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On October 12, 2011, the California Franchise Tax Board ("FTB") adopted Regulation § 25128.5, which provides definitions, procedures and examples for businesses (and individuals) electing the Single-Sales Factor ("SSF") method of apportionment. The Regulation became effective on October 22, 2011, and is operable for tax years beginning on or after January 1, 2011.
Single Sales Factor Election
The 2009/2010 state budget agreement, passed under former Governor Arnold Schwarzenegger, changed the apportionment formula used to determine California taxable income for businesses with multi-state operations. Beginning January 1, 2011, businesses subject to the California Corporate Income or Franchise Tax may make an annual irrevocable election to apportion income using an SSF apportionment formula. The election is irrevocable only for the tax year to which the election is applied. As such, taxpayers have the ability to choose the apportionment option that would yield the least amount of tax on an annual basis.
Under prior law, businesses with activities or income derived from sources both within and outside of California, were required to calculate their California income tax using the three-factor apportionment method (i.e., property, payroll, and sales) with double-weighted sales (i.e., the sales factor is used twice in the apportionment formula). Taxpayers not making the SSF election would continue to use the three-factor, double-weighted sales apportionment formula. |
The move to an elective SSF is meant as a business development incentive to attract businesses into the state. The absence of a property and payroll factor for income tax apportionment purposes would encourage businesses to establish operations in California, given the tax costs of such a move would be nil. Moreover, given the trend by most states to move to a SSF method of apportionment, California-established business would be given equal footing when competing with out-of-state competitors who have the ability to manipulate their sales activities and source such sales to SSF states.
SSF Mechanics – "Making the Election"
The election to use a SSF must be made on an original, timely-filed return, including extensions, and is an irrevocable annual election. To make a valid election, the taxpayer must:
Compute its tax liability in a manner consistent with the SSF formula, and
(B) Provide written notification of the election on Part B of Schedule R-1 of the return. (Please note – the 2011 tax forms are currently being drafted by the FTB, and as such, the exact format of the written notification is yet to be determined. It is anticipated that the written notification requirement will be satisfied by checking a box on Part B of Schedule R-1).
Businesses that derive more than 50% of its gross business receipts from agricultural, extractive, savings and loan, and banking and financial activities (collectively referred to as "qualified business activities"), are not allowed to elect the SSF method, and are required to use the standard apportionment formula. |
allowed to elect the SSF method, and are required to use the standard apportionment formula.
Combined Reporting Groups
Members of a unitary business group filing a combined return must each make the SSF election for the election to be valid as a whole. As such, an election made on a group return will not have any effect if a taxpayer member of the unitary business group filed a separate return in which no election is made.
Members of a unitary business group filing a combined return must each make the SSF election for the election to be valid as a whole. As such, an election made on a group return will not have any effect if a taxpayer member of the unitary business group filed a separate return in which no election is made.
The rules for making the SSF election will vary depending on your particular facts and circumstances. If you would like to learn more about the new regulation, and how the SSF election may impact your business, please call our State and Local Tax professionals for assistance.
By: Christian J. Burgos, Tax Manager,
Los Angeles County
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