Research & Development Credit:
Frequently Asked Questions
California Franchise Tax Board
What is the Research &
Development Credit?
The Research and Development Credit, or R&D Credit,
available to certain taxpayers, may reduce the taxpayer’s
income or franchise tax. To qualify for the R&D Credit,
the taxpayer must have paid or incurred qualified research
expenses while conducting research in California for a
qualified activity. The credit is 15 percent of the excess of
current year research expenditures over a computed base
amount (minimum of 50 percent of current year research
expenses). The credit is claimed on the return for the
taxable year in which the qualified expenses are incurred.
How is the R&D Credit claimed?
The R&D Credit is claimed on the California Research
Credit (form FTB 3523), for the year in which the qualified
research and development expenses were paid or incurred
in California.
Does California conform to federal R&D
Credit provisions?
California law generally conforms to the federal research
credit as enacted under the Small Business Job Protection
Act of 1996. However, California does make some
modifications. The more common modifications are:
1. The definition of “qualified organization” includes
hospitals run by public universities and certain
cancer centers.
2. “Basic research” and “qualified research” must
be conducted in California to qualify for the
California credit.
3. For taxable years beginning on or after 1/1/2000, the
credit is 15 percent of qualified research expenses for
all taxpayers. In addition, corporations (other than S
Corporations, personal holding companies, and service
organizations) may be eligible for the “basic research”
credit, which is equal to 24 percent of the excess of
basic research payments paid or incurred during the
year over the base period amount. The qualified research
rate was 11 percent for taxable years beginning in 1997
and 1998, and 12 percent for taxable years beginning
in 1999. The basic