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

AICPA Pens Letter Urging Congress to Defer R&D Expense Capitalization (Sec 174) Provision Until 2026
02/22/2023On February 14, 2023, the American Institute of Certified Public Accountants (AICPA) sent a letter urging Congress to address expired and expiring tax provisions to avoid needless complexity and ambiguity. More specifically, the AICPA called on Congress to defer the Internal Revenue Code Section 174 amortization requirement for research and experimental expenditures until 2026. The … Read More

IRS Issued Additional Guidance on Section 174, Specified Research or Experimental Expenditures
12/15/2022This article has been updated from its original posting on Dec. 15, 2022. The Treasury Department and Internal Revenue Service (IRS) issued Revenue Procedure 2023-11 providing updated guidelines for accounting method changes for the treatment of specified research or experimental expenditures under Section 174 that changed with the Tax Cuts and Jobs Act of 2017 … Read More

KBKG Tax Insight: Tax Court Denies Construction Company R&D Credits
12/13/2022A summary judgment was recently granted when the government successfully argued that a construction company did not conduct qualified research activities during the tax year in question and was therefore not entitled to the $576,756 refund they were paid. In this case, the defendant was a shareholder of a civil construction company and the contested … Read More

An Introduction to the Reverse Plea to the U.S. Senate and House of Representatives to Extend Section 174
11/02/2022Over 150 U.S.-based businesses and trade associations recently issued a plea to the U.S. Senate and U.S. House of Representatives leadership urging Congress to extend Section 174 provisions allowing taxpayers to deduct 100% of Section 174 R&E expenditure in the year they were incurred. Historically, 100% of Section 174 R&E expenditures could be 1) deducted … Read More

This Month’s Webinars
11/01/2022Looking for CPE credit? We have several sessions available this month. Click the links below to register. If you have questions or need help registering, please email [email protected] Research & Development Tax Credits 11/1/2022 | 12:00 PM PT | 1 hour | 1 CPE credit This webinar will cover the fundamentals of the Research and … Read More

Inflation Reduction Act Expands Payroll Tax Credit Benefits for Small Businesses
08/12/2022The Inflation Reduction Act provides huge opportunities for the real estate industry as well as for architects and engineers. However, the expansion of “green” tax incentives 45L and 179D is not the only tax benefits getting a boost. The newly formed law will also improve upon the R&D Tax Credit. This change will have a … Read More

KBKG Tax Insight: Changes to Recently Amended Texas Franchise Tax Regulations
06/27/2022Published on June 10, 2022, Texas Register, the Texas Comptroller proposed revisions to the recently amended Texas franchise tax regulations surrounding the Texas sales and use tax exemption and the Texas franchise R&D tax credit. These revisions soften the Internal Use Software (IUS) and Combined Group definitions after receiving overwhelming feedback surrounding the Texas franchise … Read More

KBKG Tax Insight: Reviving Missouri’s R&D Tax Credit 2023
06/20/2022It has been nearly 18 years since Missouri taxpayers have seen a state credit related to its qualified research expenditures (QREs). This may change beginning in 2023! In an effort to further stimulate Missouri’s economy, State Senator Brian Williams offered an amendment to HB 2400 sponsored by State Representative Dan Houx. This amendment attempts to … Read More

KBKG, R&D Tax Credits & 179D Incentives Firm, to Exhibit at the American Institute of Architects A’22 National Conference This Week
06/20/2022KBKG plans an educational and interactive booth experience for architect attendees at AIA’s largest annual event. CHICAGO, June 20, 2022 (Newswire.com) – Nationwide tax specialty firm KBKG is set to exhibit at the American Institute of Architect’s (AIA) A’22 Conference on Architecture in Chicago from June 22-25. At the exhibit, KBKG will showcase their architect … Read More

Are You Looking To Upgrade Your R&D Credit or 179D Provider?
06/14/2022Are you looking to upgrade your R&D credit or 179D provider? As you begin to evaluate potential service providers, it’s important to remember that there are significant differences between R&D credit and 179D advisors in the marketplace. Sometimes taxpayers are not immediately aware of how those differences may impact their experience from start to finish. … Read More