California R&D Tax Credits

California law generally conforms to IRC §41, and the federal R&D tax credit calculation methodology, modified by California Revenue & Taxation Code (RTC) §17052.12 (Personal Income Tax) and RTC §23609 (Corporation Tax). The California R&D tax credit also reduces income or franchise tax liabilities.

Taxpayers qualify for the R&D tax credit if the taxpayer paid or incurred qualified research expenses while conducting qualified research in California. Taxpayers claim the California R&D Tax Credit on FTB Form 3523, for the year the Company paid or incurred qualified research and development expenses in California.

Under the regular method, the credit is equal to 15% of the excess of the qualified research expenses over the base amount, plus 24% of the basic research payments.

Learn more about California's R&D Tax Credit law or see if improving products and processes will help you pass the 4-part test.

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R&D Tax Credit Available:

Yes

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Eligible Entities:

C-Corporation, S-Corporations, LLCs, Partnerships

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Deadline for Tax Filing:

Due with California Tax Return

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Data Required to Compute Credit:

Claim Period Qualified R&D Expenses (QREs)

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What Information is needed?

Gross Receipts for Prior 4 Years

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R&D Credit Carryforward:

Unlike the Federal R&D Tax Credit, the California research tax credit cannot be carried back. However, unused credit can be carried forward indefinitely until utilized.

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California R&D tax credit calculation:

• 15% of the excess of California qualified research expenses for the taxable year over the base period research expenses.
• 24% of basic research expenses for qualified university-based research for the taxable year.

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Specific Items to Note:

• Taxpayers may elect the alternative incremental credit in which taxpayers are assigned a smaller three-tiered fixed-base percentage and a reduced three-tiered credit rate (1.49%, 1.98%, and 2.48%).
• California offers an additional 1/3 of the credits to be applied to the 1.5% S-Corp entity tax.
• Several states impose a dollar limit on the amount of expenses that can qualify for the research tax credit. Some states limit the amount of their research tax credits that taxpayers can claim in any one tax year. The California research tax credit does not have a dollar limitation.