Proponents of Assembly Bill 52 (AB 52), authored by Assemblyman Grayson, are trying to correct one oversight in the proposed bill: the bill’s new tax credit currently does not allow taxpayers to reduce their regular tax below the tentative minimum tax. This qualifier is frequently added into the language of bills as an exception to the credit limitation sections listed in Section 17039(c)(1) under the Personal Income Tax Law and Section 23036(d)(1) under the Corporation Tax Law.
Lawmakers often forget to enact legislation releasing this limitation when new tax credits are proposed and must later enact “clean-up” legislation to correct it. We saw this most recently when the Elective Pass-Through Entity Tax and Tax Credit was enacted as part of the state’s 2021 budget. The following year, in SB 113 (Ch. 22-3), lawmakers fixed the credit to allow it to reduce regular tax below the tentative minimum tax.
AB 52 is currently pending in the California Senate and would provide qualified entities a state income or franchise tax credit equal to the local portion of their sales and use tax (SUT) paid on purchases of qualified manufacturing and research and development (R&D) equipment that were partially exempt under the existing SUT exemption, starting with the 2024 tax year. The intention of AB 52 is to further incentivize long-term investments and generate growth in the manufacturing industry in California, just as the partial (state-only portion) SUT exemption has done since July 1, 2014.
The tax credit would bring California closer in line with 38 other states that provide a full SUT exemption for qualified manufacturing and R&D purchases. California state and local sales tax rates rank among the highest in the nation. Although the state sales tax rate is 6%, the combined rate can reach up to 10.75% when local portions of the sales tax are included.
The credit would apply to the same tangible personal property for which the partial exemption is claimed, including, but not limited to, machinery and equipment and certain special purpose buildings.
California manufacturers should pay close attention. Contact Gina Rodriquez or Mary Bernard to determine how you may benefit from this legislation and what you can do to get this passed.
TECHNICAL INFORMATION CONTACTS:
Gina Rodriquez
Principal
Ryan
916.414.0400
gina.rodriquez@ryan.com
Mary Bernard
Director
Ryan
401.272.3363
mary.bernard@ryan.com
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals. For additional information about this topic, please contact us at info@ryan.com.
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- Gina Rodriquez