This month we are continuing our “What’s Happening in Your State?” series, where we provide information about the R&D credit in a different state each month. This month, we are focusing on California!
What do you need to become eligible to the California R&D Credit ?
Qualified research expenses occurring in California for qualified activities are capturable towards the California R&D credit. The qualification requirements closely follow the federal definitions contained within Section 41 of the Internal Revenue Code, but there are a few nuances that a taxpayer should be aware of.
First, if the tax year for which the credit is being claimed does not have adequate tax liability for use of the credit, the credit can be carried forward indefinitely. The credit cannot be carried back. Additionally, the statute of limitations to claim the R&D credit in California is typically 4 years from the date the original return was filed or one year after tax is paid, whichever is later. All entities (C-Corps, S-Corps, LLCs, Partnerships) can claim the California R&D Credit; however, California offers an additional 1/3 of the credits to be applied to the 1.5% S-Corp entity tax.
The California R&D Credit allows the election of the “Alternative Incremental Research Credit”
If the taxpayer is using the regular base methodology, the credit is 15% of the excess of the qualified research expenses for the taxable year over the base period research expenses. One very important distinction from the federal credit is that California does not conform to the federal Alternative Simplified Method for calculating the credit. Instead, it allows the election of the “Alternative Incremental Research Credit”. If the taxpayer elects to use the Alternative Incremental Research Credit methodology, the base amount is computed using a smaller three-tiered fixed-base percentage and a reduced three-tiered credit rate (1.49%, 1.98%, and 2.48%), and this methodology can only be claimed on an original return.
The California R&D credit can be extremely beneficial, but as noted above, the calculation differences between the Federal and California credit are significant. Therefore, it is very imperative that you work with a provider who is familiar with the nuances of the California credit calculation.
Interested in learning more about how your company may be able to take advantage of the California R&D credit? Submit your information here!