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California Research & Development Tax Credit

Many states have credit and incentives for companies that invest in research and development activities within the confounds of the state.  The California R&D Tax Credit generally conforms to the rules and regulations under the federal Internal Revenue Code (“IRC”) §41 and 174, but California has some key research credit provisions that are unique to the state’s eligibility requirements.

Under California Revenue and Taxation Code §23609 and the authorities promulgated thereunder, the credit rate is 15% (unlike 20% for the federal R&D Tax Credit).  While the federal credit limits R&D tax credit carry forwards to 20 years, the California R&D Tax Credit has an unlimited carry forward for California companies that may be in a tax loss position for many, many years.

In addition to the above rules, California has some other interesting and different rules that need to be complied with, as companies seek to reduce their state corporate tax liabilities.

  • The California definition of ‘gross receipts’ is very narrow and specific, unlike the Federal definition which in broad and includes items such as all sales, interest income, rents, royalties, grants, dividends, and other income. In contrast, California’s definition of ‘gross receipts’ means sale of property, delivered, or shipped to a customer within the state.  For example, services income is excluded from the ‘gross receipts’ definition used in the state credit calculation and can help companies receive a credit for which they might not have been eligible if they had to rely on the more broad, federal definition of gross receipts;
  • Another key difference in the California R&D Tax Credit rules is the research activities must be conducted in the state of California. This “boots on the ground” test rewards companies who hire employees in California and/or outside consultants or contractors performing research activities on behalf of the company.  When identifying qualified employees and contractors, taxpayers need to be careful to only include personnel performing research within the state of California.