Your Guide To California R&D Tax Credit
The government of the United States provides billions of dollars to encourage businesses to develop new technologies, processes, products, services, and materials through the research and development tax credit program. The program varies with each state, and today, we will discuss the California R&D tax credit program.
Each year, qualified businesses use the R&D tax credit to offset their liabilities towards social security taxes. After a successful claim process, the IRS sends a refund check to qualified businesses.
For qualified businesses, claiming the R&D tax credit in California is the simplest and cheapest way to:
- Amplifying business capital
- Achieve more growth
- Improve revenue
What Is California Research & Development Tax Credit?
The California R&D Tax Credit program began in 1984. It is available to taxpayers who incur qualified research expenses within the state. The credit can offset a significant part of the research expenses, and it is available to both small and large businesses.
There are a few more conditions you need to fulfill to qualify for this credit. They include,
- Your business activities must be conducted in California.
- Your company must complete FTB3523.
Plus, the activities must pass a 4-part test that analyses the following aspects of your business:
- Elimination of uncertainty
- Permitted purpose
- Experimentation process
- Technological background
Note: You can carry forward the unused research and development credit indefinitely.
Who Qualifies For Research Credit In California?
The research credit is available to businesses of all sizes and industries. Companies do not need to be a part of the manufacturing sector to qualify for it. If your company’s R&D activities are conducted within California and you have secured the federal R&D tax credit, you are more likely to be eligible. Businesses from various industries can apply for a California R&D tax credit. For example,
- Software developments
- Consumer products
Businesses that deal in plastic mold injections, tool & dye shops, job shops, and reality contractors are potentially feasible candidates for the R&D tax credit in California.
Activities That Qualify
The following are the activities that can qualify your business for the California R&D Tax Credit:
- Developing new software for use or sale
- Improving existing software for use or sale
- Developing new products
- Formulating existing products
- Functionally improving existing processes or products
- Applying for prototyping and patents
- Enhancing existing production processes
- Helping customers with technical problem solving
What Are the Benefits of R&D Tax Credit in California?
You get many attractive benefits through the R & D tax credit in California. Firstly, you can offset your social security taxes by claiming for tax credit each year. It is a valuable tool for businesses that are innovating and expanding their operations in California. The extra money you receive through it can be used to free up resources to invest in new products and services.
Moreover, you can use it to offset your income taxes. You need to be in a taxable position to get this advantage.
And lastly, it can be used to offset AMT. This benefit can be taken if your average revenue for the 3 preceding years from the tax year is less than $50 million and you owe AMT in the ongoing year.
Documentation Required For Credit Claim in California
You need multiple documents and forms to claim the Research & Development tax credit in California. Plus, you need to strictly comply with the following conditions:
- You have to prove that the work occurred in the same year that you are claiming in your application.
- You need to document the application at the time your company’s R&D was done. More the claim, more the documentation.
- Your application must include technical challenges that validate your R&D work.
Where Do I Apply For The California R&D Tax Credit?
Given the complexities, consider working with our experienced tax consultants for your claims. Combining the experience, skills, and knowledge of our in-house R&D tax experts, we can help your business get bigger returns.
We provide expertise in how to apply for the R&D Tax Credit in California through developing business plans and preparing tax returns. Having served hundreds of startups, our specialists know how to go about applying for it.
Find out if your business qualifies for research credit in CA. Call us at (800) 548–6098 to get your FREE assessment!