California Enterprise Zone Credit: Carryovers & Replacements

The California Enterprise Zone (EZ) program was a state initiative for business investment and job creation in economically distressed areas, but it was repealed on January 1, 2014. Businesses that earned tax credits before the repeal may still use them as carryovers. The state also introduced several new programs to promote economic development. These replacements include hiring credits, negotiated tax agreements, and sales tax exemptions.

Utilizing Enterprise Zone Credit Carryovers

Businesses with unused Enterprise Zone hiring or sales and use tax credits generated before the program’s end can still claim them. To claim these credits, businesses must have prior-year tax returns that document the original credit and track the remaining carryover balance. This documentation is necessary to substantiate any carryover amount on current returns.

The state provides a 10-year carryover period for unused EZ credits, allowing them to be applied against tax liabilities until exhausted or the window expires. For instance, credits related to employees hired in 2013 could be carried forward until the 2023 tax year. The exact expiration depends on when the credit was originally generated.

To claim a carryover, a business must file Form FTB 3805Z, Enterprise Zone Deduction and Credit Summary. This form calculates the credit available for the current tax year and the remaining carryover amount. The calculated credit is then reported on the taxpayer’s main California tax return, such as Form 540 for individuals or Form 100 for corporations, to reduce tax liability.

The amount of credit used in any year is limited to the tax on business income apportioned to the former enterprise zone. Accurately claiming the carryover requires careful tracking of both the credit balance and this apportioned income.

The New Employment Credit

The New Employment Credit (NEC) replaced the hiring credit from the EZ program. This incentive is for businesses that hire qualified individuals and operate within designated geographic areas (DGAs), which are census tracts with high unemployment and poverty. The Franchise Tax Board (FTB) provides tools to determine if a location qualifies, and the credit is available for employees hired through January 1, 2026.

To be eligible, an employer must have a net increase in full-time employees in California. The credit is not available to certain industries, including temporary help services, retail trade, and food services. A qualified employee must perform at least 50% of their services in the DGA, be hired for a full-time position averaging 35 hours per week, and fall into one of the following categories:

• Former long-term unemployed individuals
• U.S. military veterans
• Recipients of CalWORKs or general assistance
• Ex-offenders convicted of a felony
• Recipients of the federal Earned Income Tax Credit

The credit is calculated as 35% of qualified wages, which are wages paid that fall between 150% and 350% of the state minimum wage. For example, if an employee earns wages above 150% of the minimum wage, the credit applies to that higher portion. Any unused credit can be carried forward for up to five years.

Claiming the NEC is a two-step process. First, an employer must request a tentative credit reservation (TCR) from the FTB online for each qualified employee within 30 days of the new hire reporting. Second, the credit is claimed annually by attaching Form FTB 3554, New Employment Credit, to a timely filed original state income tax return.

The California Competes Tax Credit

The California Competes Tax Credit (CCTC) is a discretionary credit awarded through a competitive application process, unlike the formula-based NEC. It is available to businesses that commit to creating full-time jobs and making capital investments in the state. The program is managed by the Governor’s Office of Business and Economic Development (GO-Biz).

Applications are submitted online during specific periods announced by GO-Biz. The review process has two phases. The first is a quantitative analysis comparing the requested credit to the applicant’s proposed hiring and investment. Applications meeting a minimum threshold move to a second, qualitative review. This phase considers factors like the number of jobs created, employee compensation levels, total investment, the project’s strategic importance, and whether the business is at risk of leaving the state.

GO-Biz negotiates a formal agreement with selected businesses, specifying the tax credit amount and the required job creation and investment milestones over a five-year period. The final agreement must be approved by the California Competes Tax Credit Committee.

Manufacturing and R&D Equipment Sales Tax Exemption

A partial state sales and use tax exemption for qualified equipment purchases replaced the former EZ program’s tax credit. This incentive applies directly to the sales tax at the time of purchase, rather than as an income tax credit. The exemption is available for transactions through June 30, 2030.

A qualified person is a business engaged in manufacturing or specific research and development activities, identified by NAICS codes 3111-3399, 541711, and 541712. Qualified tangible personal property includes machinery and equipment used in manufacturing or R&D with a useful life of at least one year.

The exemption reduces the statewide sales tax rate by 3.9375%. This means a qualified purchase is taxed at the reduced rate plus any applicable district taxes. This benefit is capped and does not apply to purchases exceeding $200 million in a single calendar year.

To claim this benefit at the point of sale, the buyer must provide the seller with a completed partial exemption certificate, Form CDTFA-230-M. This form is available from the California Department of Tax and Fee Administration (CDTFA) and certifies that the purchase qualifies for the upfront tax reduction.