California Research Credit
The California version of the research credit for increasing the research activities of a trade or business is claimed on Form FTB 3523, Research Credit, which is also used to claim pass-through research credits from S corps, partnerships, limited liability companies and trusts. The credit is non-refundable but unused credit may be carried forward.
The California credit is 15% of the excess of qualified research expenses for the taxable year over the base period research expenses. Corporations are allowed the 15% credit amount plus credit for 24% of the basic research payments.
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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%).
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The CA credit can be claimed whether or not the federal research credit is claimed.
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California conforms to the federal definition for qualified research expenses under IRC Section 41(b).
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Qualified research expenses do not include any amounts paid for tangible personal property eligible for the exemption from sales or use tax under R&TC Section 6378. The eligible property is tangible personal property used primarily for the following:
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1. In teleproduction or other postproduction services.
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2. To maintain, repair, measure, or test any property described in item 1.
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The basic and qualified research must have been conducted within California.,
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For business conducted both within and outside of California, for purposes of determining the base amount, gross receipts are the receipts from the sale of property that is held primarily for sale to customers (in the ordinary course of a trade or business) and that is delivered or shipped to customers in California.
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If a taxpayer owns an interest in a disregarded business entity [a Single Member Limited Liability Company (SMLLC) not recognized (disregarded) by California and for tax purposes is treated as a sole proprietorship owned by an individual or a branch owned by a corporation], the amount of the credit that can be utilized is limited to the difference between the taxpayer’s regular tax computed with the income of the disregarded entity, and the taxpayer’s regular tax computed without the income of the disregarded entity. If the disregarded entity reports a loss, the taxpayer may not claim the credit for the loss year but can carry over the credit amount received from the disregarded entity. For more information on disregarded business entities, get Form 568, Limited Liability Company Tax Booklet.
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The credit cannot reduce the minimum franchise tax (corporations and S corporations), annual tax (partnerships and QSub), alternative minimum tax (corporations, exempt organizations, individuals, and fiduciaries), built-in gains tax (S corporations), or excess net passive income tax (S corporations).
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This credit can reduce regular tax below tentative minimum tax (TMT). Get Schedule P (100, 100W, 540, 540NR, or 541), Alternative Minimum Tax and Credit Limitations, for more information.
Overall Business Credit Limitation
For taxable years beginning on or after January 1, 2020, and before January 1, 2023, the total of all business credits (except the low-income housing credit), including the carryover of any business credit, for the taxable year may not reduce the “net tax” for personal income tax filers by more than $5,000,000. The business credits disallowed due to the limitation may be carried over. The carryover period for disallowed credits is extended by the number of taxable years the credit was not allowed. The limitation also applies to corporations.