What is the California Research & Development Tax Credit?
The California R&D tax credit is a state incentive introduced in 1987 to increase technical jobs and encourage businesses to invest in developing and using cutting-edge solutions. Today, it is the most powerful permanent incentive available to California businesses, providing dollar-for-dollar tax reduction for developing, designing, or improving products, processes, formulas, or software.
Combined with the federal R&D tax credit, the California research and development tax credit offers a powerful multiplier for your development efforts. Moreover, the California credit can be claimed for up to four prior years, as opposed to the three-year window of the federal credit, offering significant benefit to businesses conducting qualified activities in the state.
Not sure if you qualify? Schedule a free consultation with our team of experts!
Not sure if you qualify? Schedule a free consultation with our team of experts!
What is the California Research & Development Tax Credit?
The California R&D tax credit is a state incentive introduced in 1987 to increase technical jobs and encourage businesses to invest in developing and using cutting-edge solutions. Today, it is the most powerful permanent incentive available to California businesses, providing dollar-for-dollar tax reduction for developing, designing, or improving products, processes, formulas, or software.
Combined with the federal R&D tax credit, the California research and development tax credit offers a powerful multiplier for your development efforts. Moreover, the California credit can be claimed for up to four prior years, as opposed to the three-year window of the federal credit, offering significant benefit to businesses conducting qualified activities in the state.
Activities that Qualify for the California R&D Tax Credit
Qualifying for this credit doesn’t require you to wear white lab coats or have scientists on board. In fact, industries ranging from manufacturing to agriculture can qualify for this credit through many of their day-to-day activities.
The California research credit is available to businesses of any size involved in activities to develop, design, or improve products, processes, formulas, software, or techniques. These don’t need to be groundbreaking innovations – even incremental improvements qualify.
The IRS Uses a Four-Part Test to Determine Qualification
New or Improved Business Component
The work must aim to create new or improved business components – such as products, processes, or software – focusing on function, performance, reliability, or quality.
Elimination of Uncertainty
There must be uncertainty regarding the capability, methodology, or design at the project's beginning. This means the success of the development effort cannot be known in advance.
Process of Experimentation
Activities must involve systematic evaluation of alternatives through methods such as modeling, simulation, trial and error, prototyping, or other testing methods to eliminate technical uncertainty.
Technological in Nature
Activities must rely on principles of hard sciences - physical science, engineering, computer science, or biological science. The focus is on technical concepts rather than aesthetic or social sciences.
Which Expenses Qualify for the California R&D Credit?
Wages:
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Amounts paid to employees for conducting, or directly supporting or supervising R&D efforts
Contractor Costs:
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Payments to non-employees for carrying out qualified activities, including third-party testing for quality, safety, performance, or durability
Supplies:
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Materials used or consumed during R&D, for example during prototype development or test production runs
Computer Rental Costs:
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Sums paid for rental of computers used in R&D, including cloud computing
Wages:
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Amounts paid to employees for conducting, or directly supporting or supervising R&D efforts
Supplies:
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Materials used or consumed during R&D, for example during prototype development or test production runs
Contractor Costs:
Click below to discover more:
Payments to non-employees for carrying out qualified activities, including third-party testing for quality, safety, performance, or durability
Computer Rental Costs:
Click below to discover more:
Sums paid for rental of computers used in R&D, including cloud computing
Documentation for the California R&D Tax Credit
- Wages – substantiated with Forms W-2
- Supplies – typically shown on invoices or payables reports
- Contractor Costs – usually reflected on Forms 1099, invoices, or contracts
- Computer Rental Costs – generally seen on invoices or payables reports
This financial information is only the starting point for a comprehensive R&D study. To meet California Franchise Tax Board (FTB) requirements, costs must be tied to qualifying projects and activities. This is usually accomplished via time-tracking data for employees and contractors, as well as meeting notes or approval forms. Materials or computer rental costs can be tied to projects with requisition sheets, bills of material, invoices, or payables, but as with personnel-based costs, every company will track this data differently.
Though no two companies utilize the same exact type of documentation, R&D studies should be backed up with whatever is generated, no matter how minimal or exhaustive. A reputable provider will be able to navigate the various types of available information and you should be wary of any provider with a standard “checklist” that does not embrace the nuance inherent to your company.
Success Stories From Our Clients
Berry grower and processor
TOTAL CREDITS EARNED:
243k
EMPLOYEE COUNT
11
QUALIFICATIONS:
- Researching optimal seed varieties
- Designing crop rotation and watering patterns
- Conducting soil analysis for nutrients, pH level, etc.
- Assessing pesticide or insecticide performance
Architect
TOTAL CREDITS EARNED:
382k
EMPLOYEE COUNT
900
QUALIFICATIONS:
- Developing concept-level layouts of buildings, utilities, roadways, or gradings
- Discussing performance requirements and proposed design solutions
- Modeling and assessing project design
- Refining high-level designs to optimize integration of MEP, HVAC, and other systems
HR and healthcare integrator
TOTAL CREDITS EARNED:
352k
EMPLOYEE COUNT
190
QUALIFICATIONS:
- Initial assessment of existing customer stacks and integrations
- Whiteboarding of process flows
- Programming and integrating system components
- Final testing of system design and performance
Electronic interconnect manufacturer
TOTAL CREDITS EARNED:
692k
EMPLOYEE COUNT
700
QUALIFICATIONS:
- Prototyping and testing components for function and performance
- Modeling and assessing new or improved product designs
- Creating tooling or processes to improve production quality and throughput
- Conducting test runs to validate product or process design changes
Insurance software developer
TOTAL CREDITS EARNED:
208k
EMPLOYEE COUNT
70
QUALIFICATIONS:
- Meeting to review performance criteria and preliminary design ideas
- Assessing programming languages and development methodologies
- Writing prototype code, then iteratively testing and refining it
- Final quality assurance testing of software and hardware performance
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FAQ's
Does California have an R&D tax credit?
Yes, California’s R&D tax credit was instituted in 1987. It is a separate incentive from the federal R&D credit and is reflected separately on an entity’s California tax return.
Who is eligible for the California R&D tax credit?
Any company performing qualifying activities in California, as well as paying California income tax, is able to claim the credit.
Is the California R&D credit refundable?
Unlike the federal credit, which can be used to offset payroll tax liability in certain situations, the California R&D credit is non-refundable. This means that an entity must be paying state income tax to utilize the credit – otherwise, it must be carried over to other years with state income tax liability.
What is the percentage of the R&D credit in California?
California provides for a credit of 15% of qualifying research expenditures over the base amount of prior-year research expenditures (instead of 20% as with the federal credit). Moreover, the state credit allows taxpayers to claim 24% of certain basic research payments to universities or non-profit scientific research organizations (as opposed to the 20% offered by the federal credit). As such, it is one of the most powerful of the available state R&D credits.
