Are R&D Tax Credits Available in California?
Yes. The state of California provides the Research and Development (R&D) Tax Credit very similar to the federal version including the definition of qualifying research. Below are some of the differences between the federal and California R&D Tax Credits.
The credit is equal to the sum of the following:
- 15% of qualified expenses that exceed a base amount
- 24% of basic research payments
- The credit rate in California is 15% as opposed to 20% for federal purposes when using the regular calculation method
- There is no Alternative Simplified Credit (ASC) method in California
- Qualified Research must take place in California in order to qualify for the California credit
- California has adopted a permanent research and development tax credit
- Unused California research credits must be applied to the earliest tax year possible and then may be carried forward indefinitely, as opposed to federal credits which must be carried back one year and carried forward twenty
- S corporations may claim only 1/3 of the credit against the 1.5% entity-level tax (3.5% for financial S corporations) after applying the limitations relating to passive activity losses and credits.
- If a taxpayer with gross receipts cannot substantiate its base amount and/or fixed‐base percentage calculations for any reason, the taxpayer cannot simply claim that the "minimum base amount" (50% of current year qualified research expenses) applies in lieu of calculating the "fixed‐base percentage." Such a taxpayer is not entitled to credit for lack of substantiation.
California R&D Tax Credit Case Study
A San Francisco Company develops software used by its clients. It had never before claimed the R&D credit for the development activities of its software programmers. This project involved a four-year study with a three-year look back.
The Company qualified for the federal R&D Tax Credit of $330,000 and an additional $247,500 in California state R&D Tax Credit.
FEDERAL
|
CALIFORNIA
|
|||||
Year
|
Total QREs
|
Credit
|
Total QREs
|
Credit
|
||
2021
|
$1,300,000
|
$130,000
|
$1,300,000
|
$97,500
|
||
2020
|
$900,000
|
$90,000
|
$900,000
|
$67,500
|
||
2019
|
$650,000
|
$65,000
|
$650,000
|
$48,750
|
||
2018
|
$450,000
|
$45,000
|
$450,000
|
$33,750
|
||
Total | $3,300,000 | $330,000 | $3,300,000 | $247,500 |
Get More Information About the R&D Tax Credit
The R&D Tax Credit, first enacted in 1981, has been one of the most valuable credits leveraged by companies. Every year, the R&D credit yields billions of dollars in federal and state benefits to companies engaged in qualifying research. This credit provides much-needed cash to hire additional employees, increase R&D, expand facilities, and more. Thousands of companies take advantage of the credit across several industries. » Learn More
Four-Part Test
Qualified research activities are defined by the four-part test outlined below
Technological in Nature
Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.Permitted Purpose
Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.Eliminate Uncertainty
Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.Experimentation
All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.Research and Development Tax Insights
Michigan’s Senate Enacts R&D Tax Credit
03/25/2024KBKG Tax Insight: Michigan’s Senate Enacts R&D Tax Credit By Michael Maroney | Director, R&D Tax Credits On March 19, 2024, Michigan’s Senate passed legislation enacting an R&D credit, the first of its kind since the R&D credit expired over a decade ago. The Senate passed HB 5100, which the Democrat-led Michigan House passed on … Read More
Research and Development Expensing (IRC Section 174) Still has Bipartisan Support
03/22/2024KBKG Tax Alert: Research and Development Expensing (IRC Section 174) Still has Bipartisan Support During a March 21 hearing on President Biden’s Fiscal 2025 budget, members of the Senate Finance Committee urged Treasury Secretary Janet Yellen to remember federal research and development (R&D) tax incentives to improve the United States’ economic competitiveness. The R&D tax … Read More
KBKG Tax Alert: Update on the 174 Capitalization Fix, 2024 Tax Relief Act
03/11/2024KBKG Tax Alert: Update on the 174 Capitalization Fix, 2024 Tax Relief Act The American Families and Workers Act of 2024 (“the Act”), aimed at reinstating the ability to deduct R&D expenditures, extending bonus depreciation, and expanding the Child Tax Credit has hit a significant roadblock in the Senate. Despite its bipartisan passage in the … Read More
Biotech R&D Tax Benefits
03/01/2024Understanding R&D Tax Credits for Biotech, Bioscience, and Pharma Research and development (R&D) is a huge part of the biotech, bioscience and pharmaceutical industries. Biotech, bioscience, and pharmaceutical companies operate on the forefront of innovation, constantly seeking new solutions to complex problems through cutting-edge technology and scientific research. R&D is the lifeblood of these industries, … Read More
R&D Tax Credit for Robotics Industry
02/26/2024R&D Tax Credits for Robotics Industry If you run a small business, large corporation, or a startup, business payroll taxes could take a big bite out of your profitability. Companies in the robotics industry can lower their tax burden with the research and development (R&D) tax credit. This tax credit can help businesses developing exciting innovations … Read More
Common Misconceptions About R&D Tax Credits: Debunking Myths and Clearing Up Confusion
02/26/2024Common Misconceptions About R&D Tax Credits: Debunking Myths and Clearing Up Confusion The R&D credit refers to tax-saving opportunities for companies that invest in research and development. The R&D tax credit incentivizes businesses of all sizes to develop or improve products and processes within their industry. Unfortunately, many misconceptions may unnecessarily stop a company from claiming the … Read More
Tax Credits for Developing Battery Tech and Chemicals for Electric Vehicles
01/31/2024Using the R&D Tax Credit to Join the EV Market The production and sale of electric vehicles (EVs) are on the rise, with more consumers switching to this eco-friendly option each year. The EV market has witnessed substantial growth, driven by factors such as increasing environmental awareness, government incentives, advancements in battery technology, and improvements … Read More
How the PATH Act Helps Small Businesses
01/31/2024Understanding R&D Tax Credits for Forest Products | KBKG Companies in the forest products industry increasingly rely on research and development initiatives to optimize manufacturing, increase revenue, and create a competitive edge. Even small and medium-sized forestry businesses may qualify for valuable tax incentives related to R&D. Unfortunately, the U.S. Chamber of Commerce estimates that … Read More
Understanding R&D Tax Credits for Forest Products
01/31/2024Understanding R&D Tax Credits for Forest Products | KBKG Companies in the forest products industry increasingly rely on research and development initiatives to optimize manufacturing, increase revenue, and create a competitive edge. Even small and medium-sized forestry businesses may qualify for valuable tax incentives related to R&D. Unfortunately, the U.S. Chamber of Commerce estimates that … Read More
KBKG Tax Alert: Proposed Bill Fixes 174 Capitalization and Cuts Off New ERC Claims
01/16/2024KBKG Tax Alert: House passes proposed bill to Fix 174 Capitalization, Extend 100% bonus depreciation, and Cut Off New ERC Claims, now in Senate consideration. Proposal Aims to Boost Businesses with Immediate Deductions for Domestic Research and Experimental (R&E) Expenditures and Capital Investments on qualified property while reining in the Employee Retention Credit (ERC). The … Read More