R&D Tax Credits in California
The California Research Credit is a nonrefundable credit that offers similar benefits to the federal version of the credit and is applicable for Qualifying Research Expenses (QRE) and Qualifying Research Activities (QRA). The California R&D credit was established to reward California-based small businesses and startup companies that continue to pursue research and development activities for the purpose of designing new and improved products and services through advanced, state-of-the-art innovation.
While many states have restrictions on the number of qualifying expenses that can be applied to their research tax credits, the California R&D credit does not impose such limits. Therefore, all eligible businesses may include the total amount of their expenses for the tax year in order to receive the credit.
The credit is equal to 15% on incremental qualifying research expenses incurred inside the state of California over the calculated base amount, as well as 24% on payments made for research purposes over the base amount incurred with institutions and universities involved in performing eligible research. The state also allows for up to 1/3 of the credit to be eligible for use with the 1.5% S-Corp entity tax.
Where To Apply for the California R&D Tax Credit?
Businesses that have paid qualifying research expenses during the performance of research and development within the state are eligible to claim the credit using form FTB Form 3523 for the tax year in which the qualifying expenses were incurred or paid.
These forms are due April 15th of the tax year and companies may file extensions up to October 15th.
Is my Startup Eligible for the California R&D Tax Credit?
What is the Difference Between the California R&D Tax Credit and Federal R&D Credit?
For starters, California has a credit rate of 15% while the federal rate is 20% under the standard calculation. California does not support the Alternative Simplified Credit (ASC) but does continue to allow for the Alternative Incremental Research Credit (AIRC). Eligible businesses may choose to claim the standard Research Credit or take the AIRC, and this decision should be determined as per the base amount. If that is higher than the qualifying research expenses of the business, that business may not be eligible for the credit. The AIRC may then be claimed instead, however this reward will not be as beneficial.
Qualifying research must be performed within the state of California for a business to be eligible for the California credit. Research credits may be carried over on an indefinite basis, while federal credits may only be applied back one year and carried over for up to a maximum of twenty years.
The California research credit has been implemented on a permanent basis. Taxpayers based in the state can anticipate their fixed base percentages to be dissimilar in the state and federal calculations. So the average gross receipts over the previous four years may differ and the minimum fixed base amount for the state could offer a much larger reward.