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California Tax Credits

California Enterprise Zone Credits

The California Enterprise Zone credits are intended to target economically distresses areas throughout California, however the program is wide ranging, covering 54 Assembly Districts and 35 Senate Districts. These tax incentives target businesses who hire employees and conduct business in such zones, offering lucrative benefits to employers. The most beneficial credit to many businesses are generous sales tax credits over five years to each qualified employee a company hires into an enterprise zone. Other benefits include the ability to earn preference points when completing for state projects, sales/use tax credits for certain types of equipment places in service in enterprise zones, including R&D equipment, manufacturing, energy conservation and other types of property. California also provides enterprise zone favorable NOL rules and asset expensing, and as to the employee, annual tax credits for working in an enterprise zone.

How to File for Enterprise Zone Credits

Use Form FTB 3805Z and this form must be filed with the return annually. For employees taking the tax credit for working in an enterprise zone, use FTB 3553.

California Research Credit (R&D Credit)

California offers one of the best tax credits of any state for R&D activities conducted in California. The R&D credit is a 15% credit of qualified research expenditures or QREs over the base amount. Qualified research expenses generally include wages, supplies, and contract research costs. Wages – Qualified wages are for qualified services that directly relate to the research activities and are paid or incurred by the taxpayer. Qualified services include direct supervision, direct support, or direct performance of qualified research. General or administrative wages generally do not qualify. These rules generally follow the Federal research credit for what constitutes a qualified research expenditures, except for the criteria that the QRE must be incurred in California.  Supplies are defined the same as under the federal rules; tangible property that is consumed directly by the research activity or that is utilized in the development of a prototype. The supplies must be used in the conduct of qualified research. Supplies do not include land, improvements to land, or property subject to the allowance for depreciation. Utilities (phone and electricity), small tools, and allocations of total shipping cost do not qualify as supply expenses. Contract research expenses in California qualify as R&D if paid to consultants to perform qualified research. The vendor must perform the research within California. If the research is conducted within and without California, only the expenditures incurred within California qualify. Only 65 percent of the California expense qualifies for the credit.

California’s Basic Research Credit

California also has a ‘basic’ research credit and the term means any amount paid in cash during the taxable year by a corporation (other than S corporations, personal holding companies, and service organizations) to a qualified organization for basic research, but only if such payment is made pursuant to a written agreement and the basic research is to be performed by the qualified organization in California. Qualified organizations include educational institutions, certain scientific research organizations, and certain grant organizations. For California, “basic research” includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, but not if the improvements relate to style, taste, cosmetic, or seasonal design factors.

Gross Receipts Definition – The Biggest Difference Between Federal and California R&D

The California R&D tax credit differs from the Federal R&D credit in a notable way – for California purposes, sales of property are included in the gross receipts calculation, but services income, rent, lease income, interest and other non-property income sources are excluded from the calculation of gross receipts.

How To File For California R&D Credits

Use Form 3523 to claim the R&D credit in California.