Have you claimed the California enterprise zone credit? Have you so far escaped being audited by the Franchise Tax Board (FTB)?
You may be feeling relieved, however, you are still at risk of an audit.
The FTB is able to look back to the preceding four taxable years – sometimes even further back – to recoup invalid CA enterprise zone tax credits. Early identification of these tax hazards ensures you don’t lose your CAEZ tax credit.
To preserve your enterprise zone tax credits, avoid falling into the following five CAEZ pits:- Not Having CAEZ Vouchers For Qualified Employees
The statute of limitations requires companies to obtain enterprise zone vouchers for qualified employees. Although you aren’t required to file these vouchers with your tax return, they must be provided to the FTB upon request. If the FTB requests enterprise zone vouchers and you don’t provide them, your tax credit will be disallowed. - Not Having All Documentation To Support Your CAEZ Vouchers
The FTB has the right to independently verify the validity of a voucher and may disallow your CAEZ vouchers based on a disagreement over documentation. However, the FTB bears the burden of proof that the employees did not meet the eligibility requirements for vouchering upon audit. - Having CAEZ Vouchers For Invalid Categories
The FTB may disallow your CAEZ vouchers due to disagreements over whether a category is valid. Companies may have received a voucher without satisfying all the tests for a given category.
For example, CAEZ vouchers under the long-term unemployment category may be disallowed if the FTB is unable to verify that all elements of the category were satisfied. The employee is required to be (1) unemployed for the 15 weeks preceding the employee’s hire date, (2) have limited opportunities for employment or re-employment in the same or a similar occupation in the area in which the individual resides. If you’re only able to prove the first point, and not the second, your CA enterprise zone tax credit will be disallowed. - Your Employees Did Not Pass The 50% Test
For a qualified employee to generate a CA enterprise zone tax credit, in any of the first five years, the employee must perform at least 50% of his or her services for your business during the taxable year. If an employee’s job title indicates that the employee does not work exclusively in the enterprise zone location (such as a delivery driver), the FTB may require proof that the employee spent 50% of his or her time in an enterprise zone. This calculation and documentation must be provided for each separate year. If you are unable to prove where an employee worked during the year, the FTB may disallow all of the credit for the employee for that taxable year.
- It Turns Out Your Business Is Not In An Enterprise Zone After All
Each of the 42 enterprise zones in California had a different method of publishing their boundaries. Some used spreadsheets while others used Word documents or an online lookup tool. Many of the address listings did not correspond with maps and it was left to the individual coordinators and the Department of Housing & Community Development to sort out who was in and who was out. If you do not have an address verification letter on file for the enterprise zone coordinator or HCD, the FTB may disallow all of your credit.
Even if you’ve yet to be audited by the FTB, you are still at risk for a potential future tax assessment in which the FTB may disallow your tax credit. Now is the time to ensure your CA enterprise zone tax credits are valid and in order.
Ready to learn more about the CA enterprise zone pitfalls so you preserve your tax credit? Call 866-444-4880 or click here to speak directly with an experienced tax expert at Corporate Tax Incentives.
