Overview of California R&D Tax Credits
California offers an R&D Tax Credit that mirrors the federal program, with certain distinctions:
- Credit Calculation:
- 15% of qualified research expenses exceeding a base amount.
- 24% of basic research payments.
- Differences from Federal Credit:
- California’s credit rate is 15%, compared to the federal 20% under the regular calculation method.
- The Alternative Simplified Credit (ASC) method available federally is not applicable in California.
- Eligibility Criteria:
- Research activities must be conducted within California.
- Credit Carryforward:
- Unused credits can be carried forward indefinitely, unlike the federal provision, which allows a one-year carryback and a 20-year carryforward.
- S Corporation Limitation:
- S corporations may claim only one-third of the credit against the 1.5% entity-level tax (3.5% for financial S corporations), subject to passive activity loss and credit limitations.
- Substantiation Requirement:
- Taxpayers must substantiate their base amount and fixed-base percentage calculations; failure to do so disqualifies them from claiming the credit.
California Research Tax Credit Case Study
Software Development Firm
Consider a San Francisco-based software development company that had not previously claimed R&D credits for development activities. Over a four-year study, including a three-year look-back period, with a QRE of $4.1M, the company qualified for a federal R&D Tax Credit of $410,000 and an additional $307,500 in California state R&D Tax Credits.
Our Service
Navigating the complexities of R&D Tax Credits requires expertise. ICS Tax specializes in identifying and substantiating qualifying research activities to maximize your tax benefits. Our team ensures compliance with both federal and California-specific regulations, helping you secure the credits your innovative efforts deserve.