Frequently Asked Questions for 2021 Main Street Small Business Tax Credit II

Complete the online registration by entering the required information listed on the Reserving Credit section of this guide. The online reservation application will perform all the qualification and tax credit calculations.

A California qualified small business employer is a taxpayer who meets the following criteria:

• Employed 500 or fewer employees on December 31, 2020.
  • As an employer you are required to possess a valid State Employer Identification Number (SEIN), also known as an EDD Employer Account or Employer Payroll Tax Account. This account number is issued by the California Employment Development Department (EDD).

• Experienced a decrease of 20 percent or more in income tax gross receipts (generally, all income less returns and allowances) and will be determined by comparing:

For calendar year income tax filers compare:

• January 1, 2020, through December 31, 2020, to
• January 1, 2019, through December 31, 2019.

For fiscal year income tax filers compare:

• Gross receipts for fiscal year 2019-2020 to
• Fiscal year 2018-2019.

  or

• Average of gross receipts for fiscal year 2019-2020 and fiscal year 2020-2021 to
• Gross receipts from fiscal year 2018-2019.

For a taxpayer that started business in 2019 compare:

• Gross receipts for the period January 1, 2020, through February 28, 2020, multiplied by 1.5 to
• Gross receipts for the period April 1, 2020, and ending on June 30, 2020.

It is important to note that a qualified small business employer is not a taxpayer that is required to be included in a combined report under Revenue and Taxation Code (RTC) sections 25101 or 25110, or authorized to be included in a combined report under RTC section 25101.15.

Yes, if you started your business in 2019, had 500 or fewer employees and experienced a 20% decrease in gross receipts when comparing the period January 1, 2020, through February 28, 2020, multiplied by 1.5 to the gross receipts for the period April 1, 2020, and ending on June 30, 2020, then you may qualify for the credit.

No. To qualify for these credits, you must have started your business prior to 2020.

A qualified employee is an employee who is paid qualified wages (defined below) by a qualified small business employer.

A qualified employee does not include an employee whose wages are used in the calculation of any other income or franchise tax credits, such as the California Research Credit or the New Employment Credit, except for the credit allowed under the 2020 Main Street Small Business Tax Credit Program (2020 Main Street I).

Qualified wages are wages that are paid to a qualified employee for services performed in the State of California for a qualified employer (see Division 6 (commencing with section 13000) of the California Unemployment Insurance Code).

• You must complete a tentative credit reservation application with the CDTFA.
• The application must be submitted online and will be available starting at 8:00 a.m. on November 1, 2021, through November 30, 2021 at 11:59p.m. (see the Reserving Your Credits tab)
• Tentative credit reservations will be allocated on a first-come, first-served basis until the $70 million, plus available funds from the unallocated 2020 Main Street Small Business Tax Credits are exhausted. It is important to submit your application early.
• When applying, you will be required to make an irrevocable election on how you will take the credit. Will you apply the credit toward your California personal income or corporate taxes, or will you apply the credit against your sales and use taxes? This election is irrevocable and cannot be changed after your application is submitted.

Irrevocable election means that you can only make one choice of applying the credit that best works for you. Once you make your election through our online reservation system, you cannot change it.

No. The decrease must be at least 20 percent.

The "net increase in qualified employees" will be the amount equal to B minus A in the calculation below and it is based on monthly, full-time equivalent (FTE) qualified employees.

1. The average monthly FTE qualified employees employed during the three-month period from April 1, 2020, through June 30, 2020, by the qualified small business employer. The average monthly FTE qualified employees is determined by adding the total monthly FTE equivalent qualified employees employed by the qualified small business employer for all three months and dividing the total by three.
2. The lesser of either the following:
   • The average monthly FTE qualified employees employed during the 12-month period July 1, 2020, through June 30, 2021, by the qualified business employer. The average monthly FTE qualified employees is determined by adding the total monthly FTE qualified employees employed by the qualified small business employer for all 12 months and dividing the total by 12.
   • The average monthly FTE qualified employees employed during the three-month period from April 1, 2021, through June 30, 2021, by the qualified business employer. The average monthly FTE is determined by adding the total FTE employees employed for all three months and dividing the total by 3.

The "monthly full-time equivalent" means either of the following:

• For a qualified employee paid hourly qualified wages, "monthly full-time equivalent" means the total number of hours employed per month for the qualified small business employer by the qualified employee, not to exceed 167 hours per month per qualified employee, divided by 167.
• In the case of a salaried qualified employee, "monthly full-time equivalent" means the total number of weeks employed per month for the qualified small business employer by the qualified employee divided by 4.33 and then multiplied by the time base the qualified employee was employed.
  • "Time base" means the fraction of full-time employment that the qualified employee is employed.
  • "Weeks employed" means the total number of calendar days that a qualified employee was employed by the qualified small business employer during the month, divided by seven, not to exceed 4.33.

A qualified employee that is on the payroll for any part of the qualified period should be included in the net increase in qualified employees' calculation.

Yes.

Part-time, full-time, permanent, and temporary qualified employees should be included in the net increase in the qualified employees' calculation.

There is no minimum or maximum of qualified wages that a qualified employee needs to have been paid by the qualified small business employer. A qualified employee that is paid qualified wages (see above) should be included in the net increase in qualified employees' calculation.

Only If you are a qualified small business employer and you pay the family members and friends qualified wages.

Yes, if they fall within the timelines and qualifications, they may be included in your calculations for the small business tax credit.

No. The credit can only be taken when returns are filed. The first return the credit can be applied to is the California state income tax return for tax year 2021, or the sales and use tax due on or after April 30, 2022, depending upon the election made.

Yes. You can use your credits to pay your prepayments for sales and use returns with an original due date of April 30, 2022, and thereafter (see our Quarterly Prepay Reporting Calendar).

The credit is capped at $150,000 for each qualified small business employer. This cap included credit amounts reserved or received pursuant to 2020 Main Street I.

No. Interest will not accrue.

No. You will not receive any type of monetary reimbursement. The credit must be applied to a tax return for qualified sales and use taxes or personal income and corporate taxes.

For Income Taxes:

As a qualified small business employer with a tentative credit reservation, you will be able to take a credit against your California state personal income and/or corporate franchise or income taxes for each taxable year beginning on or after January 1, 2021 and before January 1, 2022.

• Tax credits that exceed the "net tax" may be carried over to reduce the "net tax" in the following year, and succeeding four years, if necessary, until the credit is exhausted.
• You must reduce your wage deduction for the 2021 taxable year by the credit amount.
• A credit is only allowed if claimed on timely filed original returns.
• For personal or corporate tax information, visit FTB's Main Street Small Business Tax Credit II page.

For Qualified Sales and Use Taxes:

The credit will be applied as follows:

• For monthly filers, the credit applies to taxes due and payable for the month beginning on March 1, 2022 and ending on March 31, 2022, on the return due on April 30, 2022.
• For quarterly filers, the credit applies to taxes due and payable for the quarter beginning on January 1, 2022 and ending on March 31, 2022, on the return due on April 30, 2022, including prepayments for the quarter.
• For annual filers, fiscal year filers, or any other reporting basis filers, the credit applies to taxes due and payable on the first return due on or after April 30, 2022.
• All remaining excess tax credits will be taken on future returns until exhausted or until April 30, 2027.
• Any remaining unused credit amount after April 30, 2027, is forfeited.

Note: When filing your income tax return for the 2021 taxable year, you must reduce your wage deduction by the amount of the credit.

No. Refunds of credits are not allowed.

Yes. The tentative credit reservation you receive under 2021 Main Street II is calculated by multiplying your net increase in qualified employees by $1,000, not to exceed $150,000, and subtracting tentative credit reservations received or credits allocated under 2020 Main Street I. For all entities besides S Corporations, the tentative credit reservations received were equal to credits allocated.

If you are an S Corporation, please see S Corporation section for a discussion of how your tentative credit reservation amount is calculated under Main Street II depending on the irrevocable election you made under 2020 Main Street I.

Yes, you can choose either reservation election type, sale and use tax or personal income tax and corporate tax.

For Sales and Use Tax

Under 2020 Main Street I, S corporations that made the irrevocable election to apply the credit against qualified sale and use taxes were only allocated 1/3 of their tentative credit reservation amounts as credits to apply to their sales and use tax returns, with no pass through to shareholders. Unlike the 2020 Main Street I, S corporations that elect to apply the credit against qualified sales or use taxes in the 2021 Main Street II, will be allocated the full credit amount and the full amount will be applied to their sales and use tax returns. Again, there will be no pass through to shareholders.

For Income or Corporate Tax

S Corporations that elect to apply the credit against income or corporate tax will be treated the same in 2021 Main Street II as in 2020 Main Street I. S corporations that elect to apply their credits to income or corporate taxes in 2021 Main Street II will be limited to applying 1/3 of the tentative credit reservation amount against the tax on net income at the S Corporation level with the remaining 2/3 disregarded and not used as a carryover credit. The full credit reservation amount can pass through to their shareholders, who may use the credit against their income taxes.

The net credit amount for the 2021 Main Street II program will deduct the allocated amount received from 2020 Main Street I. For example, in 2020 Main Street I, you qualified for a tentative credit of $3,000, but the credit amount allocated to your sales and use tax return was $1,000. Under 2021 Main Street II, if you qualify for a tentative credit of $5,000, the allocated credit amount this time will be $5,000. However, because of the credits received in 2020 Main Street Small Business Tax Credit I, there will be a reduction of the allocated amount of $1,000. The total net allocation for 2021 Main Street Small Business Tax Credit II will be a $4,000 tax credit.