Ref: Franchise Tax Board release 2/24/23

Background: If your business received a Covid Employee Retention Credit from the IRS, you must amend the year to which the credit applies (e.g. 2021) reflecting receipt of the money.

CA approach: A few weeks ago, CA FTB announced that they were looking into whether the IRS ERC would result in tax on the CA state return… with an indication that they were leaning toward assessing tax on it.

New CA approach: Today the CA FTB reversed themselves and 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.”