Posted by Jeffrey M. Feingold on 03.21.12
March, 2012 - the CA Franchise Tax Board or FTB has issued guidance pertaining to the CA state R&D tax credit for service firms and software developers. For CA R&D tax credit purposes, such companies sales - even CA sales - are not considered CA "gross receipts," and CA gross receipts are a requirement for claiming the CA R&D credit; however, the recent guidance from the FTB provides a clear opportunity for service firms and software developers to still claim their CA R&D credits. Under the regular state R&D credit calculation method (e.g., for manufacturers versus service firms), R&D expenditures for the year of an R&D credit claim are reduced by a certain "fixed base amount," which is a percentage of average gross receipts for the four years prior to the year of the credit (same treatment as the Federal credit). Since service firms and software developers are considered not to have CA gross receipts, they of course can't calculate a fixed base and therefore, ostensibly, can't claim the CA credit; however, the recent FTB guidance makes it clear that such companies can now utilize a minimum fixed base, equal to 50% of their R&D expenditures in the year of the credit claim. So, again, even absent any gross CA receipts, service firms and software developers can calculate a fixed base and claim a CA R&D credit.
State R&D tax credit rules change frequently, are complex, and vary widely across the nearly 40 states with such credits. For assistance with your state as well as Federal credit claims, call the tax credit experts at Tax Point Advisors, Inc., (800) 260-4183, or email us at firstname.lastname@example.org. A copy of the CA FTB's guidance is available here.