California Issues Guidance on R&D Credit Base Amount – Companies with $ 0 Gross Receipts Can Claim the Credit

The California Franchise Tax Board (FTB) issued new guidance relating to the way in which a company calculates its base amount for the state Research and Development Credit. California uses a definition of “gross receipts” that includes only sales of tangible goods shipped to a purchaser in state. Under this definition, software and service companies often have $ 0 in gross receipts. As a result, some eligible companies were told that they could not calculate the “base amount,” which is based on the company’s gross receipts.

The new guidance clarifies several points: First, California does not conform its definition of gross receipts to the federal IRC § 41(c)(7) definition. Second, and more importantly, companies that have $ 0 in gross receipts can still calculate the credit using the minimum base amount of 50% of qualified research expenses. As a result of this announcement, companies that have no gross receipts under the California definition can still calculate and claim the state R&D credit.

View the PDF here.