What California Business Owners Should Know About the R&D Tax Credit

3 Minute Read
Posted by Randy Eickhoff on Apr 28, 2020 7:20:02 AM

The U.S. government recently extended the standard tax filing deadline from April 15 to July 15, offering business owners a unique opportunity to optimize profit margins and bottom-line dollars. These extra 90 days can prove invaluable to executives in virtually every industry who have been placed in a holding pattern due to COVID-19. CPAs and financial professionals across the country are taking a closer look at operations to determine how to leverage tax incentives to drive cash flow during this time of marketplace disruption.

Research and Development Tax Credit Offers Unique Cash Flow Benefits to California Business Owners

As CPAs navigate through the list of possible tax programs for California business owners to consider, many are recommending taking a closer look at the research and development tax credit. Explicitly designed to help U.S. enterprises maintain a global innovation edge, the R&D tax credit rewards organizations that prioritize scientific experimentation and technological advancement within their operations. 

Many corporate leaders assume that phrases like "scientific experimentation" and "technological advancement" means that their California business must be laden with beakers and lab coats to be eligible. Fortunately, the term "research and development" covers a broad range of corporate verticals. The R&D tax credit rewards organizations in over 40 industries for expenses incurred on qualifying research activities within their organization.


California's R&D Tax Credit Offers Added Incentive for Business Owners in the State

The federal government makes the R&D tax credit accessible to business owners in every state. However, many states, including California, also offer their own version of the research and development program, further enhancing potential return on investment for enterprises engaging in qualifying activities. Understanding some of California's specific innovation tax credit legislation can help you determine if you should use the current tax extension to conduct an R&D tax study at your company. 

The California research and development tax credit closely resembles the federal government's version of the program, beginning with what qualifies as eligible activities. Still, there are some differences between California's regulations and the government's requirements and benefits. Some important nuances include:

  • The federal government's rate is 20 percent; however, the credit rate is 15 percent for California businesses using the regular calculation method
  • The state of California utilizes a different set of requirements than the federal government for gross receipts
  • California law does not recognize the Alternative Simplified Credit
  • To qualify for the state R&D tax credit, California companies must conduct eligible activities within the state
  • The state recognizes a permanent R&D tax credit
  • Federal R&D credits can be carried back for one year and carried forward for twenty; however, business owners can carry forward unused state research credits indefinitely to help optimize program incentives


Work With a Professional R&D Tax Professional to Determine Program Eligibility

Recognizing the basics of both the federal and state R&D tax credit program can give California business owners a general understanding of their company's qualifications. Still, whether you're an entrepreneur pursuing this incentive for your own organization or a CPA working on behalf of your client, it's essential to consult with a qualifying R&D tax professional. An experienced tax firm will work closely with your financial advisors, performing a detailed study on your operations to identify all qualifying expenses. 

Contact Acena Consulting today to learn more about leveraging the tax extension deadline to optimize your 2019 credits.


Randy Eickhoff

Randy Eickhoff

Acena Consulting President Randy Eickhoff, licensed CPA, has partnered with more than 200 companies during more than 20 years of experience securing tax credits and other government incentives. His corporate partners range from multinational technology firms to smaller, privately held manufacturing, sports, and technology enterprises.