Is the Employee Retention Credit Taxable in California?

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Due to COVID-19 and mandatory shutdowns for thousands of companies in California, legions of small businesses struggled to keep their employees working and the doors open. Unfortunately, many companies didn’t survive.

 Fortunately, the federal government passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020. As part of the CARES Act, the Employee Retention Credit (ERC) has become a financial benefit for many businesses.

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What is the Employee Retention Tax Program?

The ERC is a refundable tax credit available to eligible employers who saw a substantial reduction in their gross receipts during 2020 and 2021 due to the COVID-19 pandemic. The amount of the ERC is based on the wages paid to the employees they kept on the payroll.

Most employers can qualify for the credit, including colleges, universities, hospitals, and 501(c) organizations. Eligible employers must show that one of the following applied for the quarter for which it is seeking the credit:

  1. Operations were partially or fully suspended, or hours were reduced due to a government order. The ERC can only be claimed for the time when business was suspended.
  2. The business saw a significant decline in gross receipts. To claim the credit in 2020, the company needed to show a greater than 50% decline in gross receipts compared to the same quarter in 2019. To claim the credit for 2021, the employer only needed to show a drop of more than 20% from the same quarter in 2019.

The Employee Retention Credit in California

Essentially, the ERC in California provides financial relief to employers who kept employees on their payroll despite seeing a substantial decrease in their gross receipts due to the pandemic. While the ERC is a straightforward concept, claiming it can be a complex process.

Part of that complexity is the taxability of the ERC in California. The ERC in California is applied differently than it is in other states. Effectually, California hasn’t conformed to the federal tax laws relating to the ERC.

 Fortunately, this nonconformity that California is so well-known for benefits businesses in a way other states don’t.

How does the ERC in California work?

 In 49 states, the Employee Retention Credit is claimed on the employer’s federal quarterly tax report, Form 941. The deduction for wages paid during qualifying quarters (all of 2020 and the first three quarters of 2021) is reduced by the credit claimed concerning the wages.

In California, that’s not the case. According to FTB Publication 1001, published in 2020 and revised in November 2021, the federal deduction of wages doesn’t apply to the California income tax returnInstead, the ERC should be subtracted from the federal business income on Form 540 Schedule CA.

This correction to the wage deduction should be made on business income tax returns for 2020 and 2021. This adjustment wasn’t widely publicized; businesses with an ERC for 2020 may be entitled to a substantial refund by filing an amended 2020 California income tax return.

Bottom Line Concepts has helped thousands of businesses with the ERC in California

Bottom Line Concepts has helped over 16,000 businesses in the U.S. recover almost $3 billion in credits. If you haven’t yet claimed your employee retention credit yet or are unsure if you qualify, contact us today and schedule your 15-minute free consultation.

 It’s not too late to file for it – don’t leave this valuable credit on the table.

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