ERC Tax Free to CA?

This is such a basic question and I am sure it's been asked her before, but the search is not giving me anything.

Do business get to exclude the Employee Retention Credit from their California taxable income?

I know about the wage deduction issue. For Fed purposes, you reduce the wages and for CA you don't.

But, do you need to report the credit amount as Other Taxable Income for CA?

Tax free per the CA expert (Spidell). https://www.caltax.com/forums/topic/erc ... on-for-ca/

Thank you for that link. One of the responders asked this which I think is a good question:

I get why the Federal R&D credit and Federal tips credit, which are general business credits that reduce Federal income tax and reduce the Federal wage deduction, would result in an increased California deduction for wages and no offsetting income to report since California does not conform to those credits and Federal income tax is non-deductible.

ERC is a refundable payroll tax credit. California businesses get to deduct the wages & payroll tax without taking the credit into account, and the refundable credit is tax exempt income?

Clearly a credit that reduces Federal income tax is ignored for CA purposes, because Federal income tax is not deductible.

But a credit that reduces an otherwise allowable deduction, sure seems like it would be taxable to CA.

There is another Fed tax credit that reduces payroll expenses - The FUTA credit reduction.

The FUTA tax is 6.2%, but if your State qualifies, then the business receives a 5.4% FUTA credit reduction.

For CA purposes, does that mean we can still deduct the 6.2% FUTA tax even though we only paid 0.8%?

If ERC is tax free to CA, then the FFCRA credits would also be tax free. Is that correct?

The ERC is tax free for CA. Does an S-Corp SH get basis when the corp receives this?

I finally did my first amended return for the ERC and only learned after the fact that the credit is tax free for California. I am thinking for reporting this for a 540 client in California that I just put the credit in other California adjustments -subtractions line 14 on page 2.

I am looking at a Feb. 24, 2023 notice from Spidell on this topic. This thread seems to be from a year earlier than that. Were there a several changes to this?

February 24, 2023
The FTB has reconsidered its position regarding California’s tax treatment of the Employee Retention Credit (ERC) and will not require taxpayers to include any portion of the ERC on their California tax return. Specifically, the FTB stated:

“Recently, the Franchise Tax Board provided a response to a question regarding the taxability of the refundable portion of the federal Employee Retention Credit (ERC). The previous response indicated that the portion of the refundable ERC that is refunded to the taxpayer would be income for California income tax purposes. However, upon further review of the applicable federal rules and guidance related to the ERC, the Franchise Board has modified its previous response. An employer receiving the ERC is not required to include the portion of the credit that reduces the employer’s applicable employment taxes, nor the refundable portion of the credit, in its gross income for California income tax purposes.”

Also from Spidell annual tax update on California conformity
For California purposes, the ERC is treated like any other federal credit:
• The refund is not included in taxable income for California tax purposes; and
• There is no adjustment to taxable income nor is there a payroll tax reduction.
According to FTB Publication 1001, Supplemental Guidelines to California Adjustments, the only adjustment on the California return is that unlike federal law, the wage expense deduction is allowed in full. There is no adjustment to the California payroll tax deduction, nor is there any basis adjustment for the amount of the federal refund.

Taxmaster, I guess one specific question is that SE Tax on the federal tax return is now higher on the federal return because of the reduced wage and tax expense on Schedule C. Since California pulls from federal AGI, then that new higher SE tax would lower CA income. I think. This why in computing CA income I am thinking of just adding back the credit. Does that make sense?

Spidell just answered this 4 days ago in it's "California Minute."

https://www.caltax.com/news/podcast/podcast-erc-refunds-and-california-returns-practitioner-questions-answered/

Spidell says that for most cases, the ERC doesn't affect CA returns, but for a sole proprietor, since the taxpayer can't deduct the wages that are used for the ERC, there's a change in AGI that could affect several items on the Federal return, and this change in AGI might affect the CA return.