Innovative California businesses can take advantage of a federal and state research and development (R&D) tax credit.
You have grand designs for your company and want to be a forerunner in your industry; however, creating new products and testing new features can provide a huge financial strain. Although innovation can be costly, many states and the federal government offer R&D tax credits. Of course, to properly take advantage of such a tool, you’ll need to know which states offer R&D tax credits to see if your home state can help you. Thankfully, R&D tax credits in California are available to inspired business owners.
Does California offer an R&D tax credit?
According to the state of California Franchise Tax Board, the Golden State does offer a permanent R&D tax credit program that rewards qualifying businesses just like the federal government. You need to fill out FTB Form 3523 to apply for R&D tax credits in California.
While this state credit program is quite similar to the federal one, there are some key differences. For example, if you don’t use your California R&D credit immediately, you are required to apply it to the earliest tax year. After that, you may carry your credit forward indefinitely.
Bear in mind that all of your qualified research needs to occur in California in order to qualify for the credit. If you are applying for an R&D tax credit from the federal government, you can submit all your QRE costs no matter where in the US your R&D took place.
How much is the California R&D Tax Credit?
Each company’s total credit amount will vary as companies from different industries will most likely have different qualified research expenditure (QRE) costs. This is why the state of California determines what your credit will be using percentages.
You could receive 15% of qualified expenses above a base amount in addition to 24% of your basic research payments. Add that to a federal R&D credit, and you could be looking at quite a large overall credit.
Which Businesses Qualify for a Federal R&D Tax Credit?
If you meet the qualifications of the California R&D tax credit program, you most likely will be able to apply for the federal R&D tax credit. Below, you can review the questionnaire that will help you determine if your business qualifies for a federal R&D tax credit:
- Has your company developed a new product or process or improved upon existing functionality?
- Has your company dealt with some form of uncertainty in the development process (appropriateness of design, method used, etc.)?
- Has your company utilized a process of experimentation to eliminate uncertainty (modeling, prototyping, trial and error or other testing)?
- Has your company conducted experimentation which relied on engineering, biological, physical or computer science?
- Has your company employed all or a portion of your workers within the United States?
If you’ve answered ‘yes’ to these questions, your company could be a good applicant for the federal R&D tax credit program. After reviewing this questions, you’ll need to take a look at your qualified research expenditures.
Qualified Research Expenditures (QRE)
In order to estimate your federal R&D tax credit, you have to learn what qualifies as QRE. There are three specific items that are considered QRE:
- The salaries of U.S. -based employees working on R&D
- The cost of disposable supplies purchased for R&D
- 65% of R&D contractor fees hired for R&D purposes
You can enter these three items into a free R&D tax credit calculator for an estimate of how much your credit could be. With your credit in hand, you directly reduce the tax burden of your company.
What You Need to Know About R&D Tax Credits in California
Innovative California business owners can utilize both a federal and California state R&D tax credit. Since most states mirror the requirements of the federal credit, it makes sense to verify if your company could qualify for federal R&D tax credit first. Contact us at Bowers R&D today to find out if you qualify.