The California Enterprise Zone Tax Credit program ended in 2013 with the dissolution of Enterprise Zones.

Two things happened as a result of the dissolution:

  • Any employees hired and equipment purchased after December 31, 2013, would not qualify for the tax credit.
  • The carryover period for tax credits that had been for an unlimited number of years was reduced to just ten years. So, any tax credits generated prior to December 31, 2013 expire with the tax returns being filed now for the 2023 tax year.

The carryover

For Employee Tax Credits:

The hiring credit was calculated during the employee’s first five years of being employed with the company.  While the program ended on 12/31/2013, employees that were hired in 2013 were able to calculate a tax credit through 2018 if that employee worked 50% of the time, of course.

The 10 year window therefore expires between 2023 and 2028.  Credits generated prior to 2013 will expire this year and every year after a lower carryover will be available each year until 2028.

The carryover, which likely has been carried over as a single (combined) amount, needs to be split by the year the credit was earned in order to determine when the 10 year mark is met.

For Sales & Use Tax Credits:

The carryover related to sales and use tax credits will expire with the 2023 returns being filed now.  Unlike the Hiring Credit, there is not a five year period extending beyond 12/31/2013.

Conclusion and Help

We suggest reviewing your hires and credits generated between 2014 and 2018 to calculate what amount, if any, is going to be carried over for the tax years after 2023.

Bottom line: Let us help you!

Using expired credits has been flagged by the Franchise Tax Board as an issue they intend to audit.  You will want to make sure that you are using as much of the carryover as possible in 2023 and any amount being carried over to beyond 2023 is appropriate based on the 10 year expiration period.

Get help: Please take a moment now to contact LSL CPAs. We can make sure it’s done right and on time.

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Addendum FOR EXTRA CREDIT: What’s the difference between an Enterprise Zone and an Opportunity Zone?

You might remember something about Opportunity Zones. That’s great, but they’re not the same thing. In our 2019 post, we told you that Opportunity Zones “offer a method by which qualified investors can stimulate economic growth and improve low-income areas while at the same time realizing deferment of capital gains taxes.” To be clear, Enterprise Zones were meant to stimulate economic development by providing tax incentives to businesses. We’ll save an update on the OZs for another time, but the Kiplinger letter says there’s a possibility the program may expire in 2026. We’ll keep you posted!

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