Small Business Grant Program for California R&D

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        California has recently introduced a bill that would serve to better utilize R&D tax credits for small businesses.  Bill AB-437, as last amended May 5, 2015, would provide qualifying small businesses with grants for unused tax credits.  Without the bill, small businesses that have no income and are not expected to make income within the foreseeable future, have no use for the tax credits.  If the bill becomes law however, non-profitable small businesses could simply redeem the incentive in the form of a cash grant. 

The following is an excerpt from AB 437:

This bill would, beginning January 1, 2016, establish the Research and Development-Small Business Grant Program, which would provide qualified small businesses, as defined, grants in amounts equal to either 10% or 15% of any excess credit amount attributable to the small business for specified years under the credit described above.

Qualified small businesses under AB 437 are those that meet the following requirements:

  • The taxpayer was allowed a research credit
  • The taxpayer has gross receipts under $5 million for the taxable year
  • The taxpayer is not an affiliated corporation that is properly treated as a member of a combined reporting group (no grant is awarded with respect to a credit that may be assigned)
  • The taxpayer has been certified by the Governor’s Office of Business and Economic Development as an eligible qualified small business.

        The purpose of the bill is in line with the legislative intent.  In a February 20, 2014 report, the legislature made certain findings disclosing their intentions in regards to the California State R&D Tax Credit:

It is the intent of the Legislature to do all of the following:

  • Capitalize on California's R&D spending to enhance the state's ability to leverage private and federal funding and enable the state to focus investment efforts strategically, drive innovation, impact scientific direction, and strengthen the state's economy.
  • Understand the present status and long term trends of R&D in California to maintain the state's ability to attract researchers, businesses, and industries.
  • Make strategic investments in R&D to capture the potential to create new technologies, products, and services that can drive the growth of business, industry, and jobs.
  • Maximize the state's R&D investments to maintain California's global leadership in innovation and technology.”
        Under the existing California Research Tax Credit, the four agendas as listed above are not being maximized because a majority of the tax credits available to small businesses go unused.  If AB 437 were to become law, innovative start-ups will finally be able to realize the benefit of the tax credit which will incentivize them to continue research activities from basic to cutting-edge.  This could be a huge win for innovative small businesses in the state of California.  

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Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

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