AB 544: Income taxes: credits: research activities.
- Session Year: 2015-2016
- House: Assembly
- Latest Version Date: 2015-05-20
The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws, including a credit for a percentage of specified research expenses. These laws, in modified conformity, apply the provisions of the Internal Revenue Code, relating to the election of alternative incremental credit. These laws provide that the provisions of the Internal Revenue Code relating to election of alternative simplified credit shall not apply.
This bill would, bill, for taxable years beginning on or after January 1, 2016, would not apply the provisions of the Internal Revenue Code relating to the election of alternative incremental credit. This bill would, bill, for taxable years beginning on or after January 1, 2016, and before January 1, 2023, 2021, would apply the provisions of the Internal Revenue Code relating to election of alternative simplified credit in modified conformity, and for taxable years beginning on or after January 1, 2016, would apply the provisions of the Internal Revenue Code, relating to the inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures.
This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature.
This bill would take effect immediately as a tax levy.
The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws, including a credit for a percentage of specified research expenses. These laws, in modified conformity, apply the provisions of the Internal Revenue Code, relating to the election of alternative incremental credit. These laws provide that the provisions of the Internal Revenue Code relating to election of alternative simplified credit shall not apply.
This bill would, for taxable years beginning on or after January 1, 2016, not apply the provisions of the Internal Revenue Code, Code relating to the election of alternative incremental credit. This bill would, for taxable years beginning on or after January 1, 2016, and before January 1, 2023, apply the provisions of the Internal Revenue Code, Code relating to election of alternative simplified credit in modified conformity, and for taxable years beginning on or after January 1, 2016, would apply the provisions of the Internal Revenue Code, relating to the inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures.
This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature.
This bill would take effect immediately as a tax levy.
The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws, including a credit for a percentage of specified research expenses. These laws, in modified conformity, apply the provisions of the Internal Revenue Code, relating to the election of alternative incremental credit. These laws provide that the provisions of the Internal Revenue Code relating to election of alternative simplified credit shall not apply.
This bill would, for taxable years beginning on or after January 1, 2016, not apply the provisions of the Internal Revenue Code, relating to the election of alternative incremental credit. This bill would, for taxable years beginning on or after January 1, 2016, and before January 1, 2023, apply the provisions of the Internal Revenue Code, relating to election of alternative simplified credit in modified conformity, and for taxable years beginning on or after January 1, 2016, would apply the provisions of the Internal Revenue Code, relating to the inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures.
This bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of 2/3 of the membership of each house of the Legislature.
This bill would take effect immediately as a tax levy.
For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the net tax, defined by Section 17039, for the taxable year an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:
(a)For each taxable year beginning before January 1, 1997, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.
(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.
(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.
(3)For each taxable year beginning on or after January 1, 2000, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.
(c)Section 41(a)(2) of the Internal Revenue Code shall not apply.
(d)Qualified research shall include only research conducted in California.
(e)In the case where the credit allowed under this section exceeds the net tax, the excess may be carried over to reduce the net tax in the following year, and succeeding years if necessary, until the credit has been exhausted.
(f)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales and use taxes, as provided by Section 6378.
(2)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read this part or Part 11 (commencing with Section 23001).
(g)(1)(A) For each taxable year beginning on or after January 1, 2000, and before January 1, 2016:
(i)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.
(ii)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.
(iii)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.
(B)Section 41(c)(4)(B) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998, and before January 1, 2016. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2016, unless revoked with the consent of the Franchise Tax Board.
(C)Section 41(h)(2) of the Internal Revenue Code, relating to termination of alternative incremental credit, is modified by substituting beginning on or after January 1, 2016 for beginning after December 31, 2008.
(2)(A)For taxable years beginning on or after January 1, 2016, and before January 1, 2023, 2021, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply, except as otherwise provided.
(i)(I)For taxable years beginning on or after January 1, 2016, and before January 1, 2019, the The reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 5 7 percent.
(II)For taxable years beginning on or after January 1, 2019, and before January 1, 2022, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 7.75 percent.
(III)For taxable years beginning on or after January 1, 2022, and before January 1, 2023, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 percent.
(ii)The reference to 6 percent in Section 41(c)(5)(B)(ii) of the Internal Revenue Code is modified to read 4.5 percent.
(B)Section 41(c)(5)(C) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 2016, and before January 1, 2023. 2021. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2023, 2021. unless revoked with the consent of the Franchise Tax Board.
(C)(i)For taxable years beginning on or after January 1, 2023, 2021, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall not apply.
(ii)No election under Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply to taxable years beginning after December 31, 2022. 2020.
(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(h) Except as otherwise provided in this section, Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(i)Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, is modified by each of the following:
(1)The last sentence shall not apply.
(2)If the amount determined under Section 41(a) of the Internal Revenue Code, relating to general rule, for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, that amount may be carried over to other taxable years under the rules of subdivision (e); except that the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, shall be taken into account in each subsequent taxable year.
(j)Section 41(a)(3) of the Internal Revenue Code shall not apply.
(k)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal laboratories, shall not apply.
(l)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.
(m)For taxable years beginning on or after January 1, 2016, the amendments made by subdivisions (b) and (c) of Section 301 of the American Taxpayer Relief Act of 2012 (Public Law 112-240), relating to inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures, shall apply, except as otherwise provided.
SEC. 2.Section 23609 of the Revenue and Taxation Code is amended to read:23609.For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the tax, as defined by Section 23036, an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:
(a)For each taxable year beginning before January 1, 1997, both of the following modifications shall apply:
(1)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.
(2)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 12 percent.
(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, both of the following modifications shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, both of the following shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(3)For each taxable year beginning on or after January 1, 2000, both of the following shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(c)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales and use taxes, as provided by Section 6378.
(2)Qualified research and basic research shall include only research conducted in California.
(d)The provisions of Section 41(e)(7)(A) of the Internal Revenue Code, relating to basic research, shall be modified so that basic research, for purposes of this section, includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, except that the term does not include any of the following:
(1)Basic research conducted outside California.
(2)Basic research in the social sciences, arts, or humanities.
(3)Basic research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors.
(4)Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).
(e)(1)In the case of a taxpayer engaged in any biopharmaceutical research activities that are described in codes 2833 to 2836, inclusive, or any research activities that are described in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, or any other biotechnology research and development activities, the provisions of Section 41(e)(6) of the Internal Revenue Code, relating to qualified organizations, shall be modified to include both of the following:
(A)A qualified organization as described in Section 170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an institution of higher education as described in Section 3304(f) of the Internal Revenue Code, relating to definition of institution of higher education.
(B)A charitable research hospital owned by an organization that is described in Section 501(c)(3) of the Internal Revenue Code, is exempt from taxation under Section 501(a) of the Internal Revenue Code, relating to exemption from taxation, is not a private foundation, is designated a specialized laboratory cancer center, and has received Clinical Cancer Research Center status from the National Cancer Institute.
(2)For purposes of this subdivision:
(A)Biopharmaceutical research activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(B)Other biotechnology research and development activities means research and development activities consisting of the application of recombinant DNA technology to produce commercial products, as well as research and development activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(f)In the case where the credit allowed by this section exceeds the tax, the excess may be carried over to reduce the tax in the following year, and succeeding years if necessary, until the credit has been exhausted.
(g)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read this part or Part 10 (commencing with Section 17001).
(h)(1)(A) For each taxable year beginning on or after January 1, 2000, and before January 1, 2016:
(i)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.
(ii)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.
(iii)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.
(B)Section 41(c)(4)(B) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998, and before January 1, 2016. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2016, unless revoked with the consent of the Franchise Tax Board.
(C)Section 41(h)(2) of the Internal Revenue Code, relating to termination of alternative incremental credit, is modified by substituting beginning on or after January 1, 2016 for beginning after December 31, 2008.
(2)(A)For taxable years beginning on or after January 1, 2016, and before January 1, 2023, 2021, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply, except as otherwise provided.
(i)(I)For taxable years beginning on or after January 1, 2016, and before January 1, 2019, the The reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 5 7 percent.
(II)For taxable years beginning on or after January 1, 2019, and before January 1, 2022, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 7.75 percent.
(III)For taxable years beginning on or after January 1, 2022, and before January 1, 2023, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 percent.
(ii)The reference to 6 percent in Section 41(c)(5)(B)(ii) of the Internal Revenue Code is modified to read 4.5 percent.
(B)Section 41(c)(5)(C) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 2016, and before January 1, 2023. 2021. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2023, 2021, unless revoked with the consent of the Franchise Tax Board.
(C)(i)For taxable years beginning on or after January 1, 2023, 2021, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall not apply.
(ii)No election under Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply to taxable years beginning after December 31, 2022. 2020.
(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(i) Except as otherwise provided in this section, Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(j)Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, is modified by each of the following:
(1)The last sentence shall not apply.
(2)If the amount determined under Section 41(a) of the Internal Revenue Code, relating to general rule, for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, that amount may be carried over to other taxable years under the rules of subdivision (f), except that the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, shall be taken into account in each subsequent taxable year.
(k)Section 41(a)(3) of the Internal Revenue Code shall not apply.
(l)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal laboratories, shall not apply.
(m)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.
(n)For taxable years beginning on or after January 1, 2016, the amendments made by subdivisions (b) and (c) of Section 301 of the American Taxpayer Relief Act of 2012 (Public Law 112-240), relating to inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures, shall apply, except as otherwise provided.
SEC. 3.This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.
For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the net tax, defined by Section 17039, for the taxable year an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:
(a)For each taxable year beginning before January 1, 1997, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.
(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.
(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.
(3)For each taxable year beginning on or after January 1, 2000, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.
(c)Section 41(a)(2) of the Internal Revenue Code shall not apply.
(d)Qualified research shall include only research conducted in California.
(e)In the case where the credit allowed under this section exceeds the net tax, the excess may be carried over to reduce the net tax in the following year, and succeeding years if necessary, until the credit has been exhausted.
(f)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales and use taxes, as provided by Section 6378.
(2)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read this part or Part 11 (commencing with Section 23001).
(g)(1)(A) For each taxable year beginning on or after January 1, 2000, and before January 1, 2016:
(i)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.
(ii)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.
(iii)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.
(B)Section 41(c)(4)(B) of the Internal Revenue Code Code, relating to election, shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998, and before January 1, 2016. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2016, unless revoked with the consent of the Franchise Tax Board.
(C)Section 41(h)(2) of the Internal Revenue Code, relating to termination of alternative incremental credit, is modified by substituting beginning on or after January 1, 2016 for beginning after December 31, 2008.
(2)(A)For taxable years beginning on or after January 1, 2016, and before January 1, 2023, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply, except as otherwise provided.
(i)The (I)For taxable years beginning on or after January 1, 2016, and before January 1, 2019, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 5 percent.
(II)For taxable years beginning on or after January 1, 2019, and before January 1, 2022, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 7.75 percent.
(III)For taxable years beginning on or after January 1, 2022, and before January 1, 2023, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 percent.
(ii)The reference to 6 percent in Section 41(c)(5)(B)(ii) of the Internal Revenue Code is modified to read 4.5 percent.
(B)Section 41(c)(5)(C) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 2016, and before January 1, 2023. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2023, unless revoked with the consent of the Franchise Tax Board.
(C)(i)For taxable years beginning on or after January 1, 2023, Section 41(c)(5) of the Internal Revenue Code Code, relating to election of alternative simplified credit, shall not apply.
(ii)No election under Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply to taxable years beginning after December 31, 2022.
(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(h) Except as otherwise provided in this section, Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(i)Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough pass-thru of credit, is modified by each of the following:
(1)The last sentence shall not apply.
(2)If the amount determined under Section 41(a) of the Internal Revenue Code Code, relating to general rule, for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, that amount may be carried over to other taxable years under the rules of subdivision (e); except that the limitation of Section 41(g) of the Internal Revenue Code Code, relating to special rule for pass-thru of credit, shall be taken into account in each subsequent taxable year.
(j)Section 41(a)(3) of the Internal Revenue Code shall not apply.
(k)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal laboratories, shall not apply.
(l)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.
(m)For taxable years beginning on or after January 1, 2016, the amendments made by subdivisions (b) and (c) of Section 301 of the American Taxpayer Relief Act of 2012 (Public Law 112-240), relating to inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures, shall apply, except as otherwise provided.
SEC. 2.Section 23609 of the Revenue and Taxation Code is amended to read:23609.For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the tax, as defined by Section 23036, an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:
(a)For each taxable year beginning before January 1, 1997, both of the following modifications shall apply:
(1)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.
(2)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 12 percent.
(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, both of the following modifications shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, both of the following shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(3)For each taxable year beginning on or after January 1, 2000, both of the following shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(c)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales and use taxes, as provided by Section 6378.
(2)Qualified research and basic research shall include only research conducted in California.
(d)The provisions of Section 41(e)(7)(A) of the Internal Revenue Code, relating to basic research, shall be modified so that basic research, for purposes of this section, includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, except that the term does not include any of the following:
(1)Basic research conducted outside California.
(2)Basic research in the social sciences, arts, or humanities.
(3)Basic research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors.
(4)Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).
(e)(1)In the case of a taxpayer engaged in any biopharmaceutical research activities that are described in codes 2833 to 2836, inclusive, or any research activities that are described in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, or any other biotechnology research and development activities, the provisions of Section 41(e)(6) of the Internal Revenue Code, relating to qualified organizations, shall be modified to include both of the following:
(A)A qualified organization as described in Section 170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an institution of higher education as described in Section 3304(f) of the Internal Revenue Code, relating to definition of institution of higher education.
(B)A charitable research hospital owned by an organization that is described in Section 501(c)(3) of the Internal Revenue Code, is exempt from taxation under Section 501(a) of the Internal Revenue Code, relating to exemption from taxation, is not a private foundation, is designated a specialized laboratory cancer center, and has received Clinical Cancer Research Center status from the National Cancer Institute.
(2)For purposes of this subdivision:
(A)Biopharmaceutical research activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(B)Other biotechnology research and development activities means research and development activities consisting of the application of recombinant DNA technology to produce commercial products, as well as research and development activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(f)In the case where the credit allowed by this section exceeds the tax, the excess may be carried over to reduce the tax in the following year, and succeeding years if necessary, until the credit has been exhausted.
(g)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read this part or Part 10 (commencing with Section 17001).
(h)(1)(A) For each taxable year beginning on or after January 1, 2000, and before January 1, 2016:
(i)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.
(ii)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.
(iii)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.
(B)Section 41(c)(4)(B) of the Internal Revenue Code Code, relating to election, shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998, and before January 1, 2016. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2016, unless revoked with the consent of the Franchise Tax Board.
(C)Section 41(h)(2) of the Internal Revenue Code, relating to termination of alternative incremental credit, is modified by substituting beginning on or after January 1, 2016 for beginning after December 31, 2008.
(2)(A)For taxable years beginning on or after January 1, 2016, and before January 1, 2023, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply, except as otherwise provided.
(i)The (I)For taxable years beginning on or after January 1, 2016, and before January 1, 2019, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 5 percent.
(II)For taxable years beginning on or after January 1, 2019, and before January 1, 2022, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 7.75 percent.
(III)For taxable years beginning on or after January 1, 2022, and before January 1, 2023, the reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 percent.
(ii)The reference to 6 percent in Section 41(c)(5)(B)(ii) of the Internal Revenue Code is modified to read 4.5 percent.
(B)Section 41(c)(5)(C) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 2016, and before January 1, 2023. That election shall apply to the taxable year for which made and all succeeding taxable years beginning before January 1, 2023, unless revoked with the consent of the Franchise Tax Board.
(C)(i)For taxable years beginning on or after January 1, 2023, Section 41(c)(5) of the Internal Revenue Code Code, relating to election of alternative simplified credit, shall not apply.
(ii)No election under Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply to taxable years beginning after December 31, 2022.
(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(i) Except as otherwise provided in this section, Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(j)Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough pass-thru of credit, is modified by each of the following:
(1)The last sentence shall not apply.
(2)If the amount determined under Section 41(a) of the Internal Revenue Code Code, relating to general rule, for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, relating to special rule for pass-thru of credit, that amount may be carried over to other taxable years under the rules of subdivision (f), except that the limitation of Section 41(g) of the Internal Revenue Code Code, relating to special rule for pass-thru of credit, shall be taken into account in each subsequent taxable year.
(k)Section 41(a)(3) of the Internal Revenue Code shall not apply.
(l)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal laboratories, shall not apply.
(m)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.
(n)For taxable years beginning on or after January 1, 2016, the amendments made by subdivisions (b) and (c) of Section 301 of the American Taxpayer Relief Act of 2012 (Public Law 112-240), relating to inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures, shall apply, except as otherwise provided.
SEC. 3.This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.
For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the net tax (as tax, defined by Section 17039) 17039, for the taxable year an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:
(a)For each taxable year beginning before January 1, 1997, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.
(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.
(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.
(3)For each taxable year beginning on or after January 1, 2000, the reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.
(c)Section 41(a)(2) of the Internal Revenue Code shall not apply.
(d)Qualified research shall include only research conducted in California.
(e)In the case where the credit allowed under this section exceeds the net tax, the excess may be carried over to reduce the net tax in the following year, and succeeding years if necessary, until the credit has been exhausted.
(f)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales or and use tax taxes, as provided by Section 6378.
(2)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read this part or Part 11 (commencing with Section 23001).
(g)(1)(A) For each taxable year beginning on or after January 1, 2000: 2000, and before January 1, 2016:
(A)
(i)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.
(B)
(ii)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.
(C)
(iii)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.
(2)
(B)Section 41(c)(4)(B) of the Internal Revenue Code shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998. 1998, and before January 1, 2016. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.
(C)Section 41(h)(2) of the Internal Revenue Code, relating to termination of alternative incremental credit, is modified by substituting beginning on or after January 1, 2016 for beginning after December 31, 2008.
(2)(A)For taxable years beginning on or after January 1, 2016, and before January 1, 2023, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply, except as otherwise provided.
(i)The reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 percent.
(ii)The reference to 6 percent in Section 41(c)(5)(B)(ii) of the Internal Revenue Code is modified to read 4.5 percent.
(B)Section 41(c)(5)(C) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 2016, and before January 1, 2023. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.
(C)(i)For taxable years beginning on or after January 1, 2023, Section 41(c)(5) of the Internal Revenue Code shall not apply.
(ii)No election under Section 41(c)(5) shall apply to taxable years beginning after December 31, 2022.
(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(4)Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall not apply.
(h) Except as otherwise provided in this section, Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(i)Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough of credit, is modified by each of the following:
(1)The last sentence shall not apply.
(2)If the amount determined under Section 41(a) of the Internal Revenue Code for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other taxable years under the rules of subdivision (e); except that the limitation of Section 41(g) of the Internal Revenue Code shall be taken into account in each subsequent taxable year.
(j)Section 41(a)(3) of the Internal Revenue Code shall not apply.
(k)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal laboratories, shall not apply.
(l)Section 41(f)(6), 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.
(m)For taxable years beginning on or after January 1, 2016, the amendments made by subdivisions (b) and (c) of Section 301 of the American Taxpayer Relief Act of 2012 (Public Law 112-240), relating to inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures, shall apply, except as otherwise provided.
SEC. 2.Section 23609 of the Revenue and Taxation Code is amended to read:23609.For each taxable year beginning on or after January 1, 1987, there shall be allowed as a credit against the tax (as tax, as defined by Section 23036) 23036, an amount determined in accordance with Section 41 of the Internal Revenue Code, relating to credit for increasing research activities, except as follows:
(a)For each taxable year beginning before January 1, 1997, both of the following modifications shall apply:
(1)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 8 percent.
(2)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 12 percent.
(b)(1)For each taxable year beginning on or after January 1, 1997, and before January 1, 1999, both of the following modifications shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 11 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(2)For each taxable year beginning on or after January 1, 1999, and before January 1, 2000, both of the following shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 12 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(3)For each taxable year beginning on or after January 1, 2000, both of the following shall apply:
(A)The reference to 20 percent in Section 41(a)(1) of the Internal Revenue Code is modified to read 15 percent.
(B)The reference to 20 percent in Section 41(a)(2) of the Internal Revenue Code is modified to read 24 percent.
(c)(1)With respect to any expense paid or incurred after the operative date of Section 6378, Section 41(b)(1) of the Internal Revenue Code Code, relating to qualified research expenses, is modified to exclude from the definition of qualified research expense any amount paid or incurred for tangible personal property that is eligible for the exemption from sales or and use tax taxes, as provided by Section 6378.
(2)Qualified research and basic research shall include only research conducted in California.
(d)The provisions of Section 41(e)(7)(A) of the Internal Revenue Code, relating to basic research, shall be modified so that basic research, for purposes of this section, includes any basic or applied research including scientific inquiry or original investigation for the advancement of scientific or engineering knowledge or the improved effectiveness of commercial products, except that the term does not include any of the following:
(1)Basic research conducted outside California.
(2)Basic research in the social sciences, arts, or humanities.
(3)Basic research for the purpose of improving a commercial product if the improvements relate to style, taste, cosmetic, or seasonal design factors.
(4)Any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).
(e)(1)In the case of a taxpayer engaged in any biopharmaceutical research activities that are described in codes 2833 to 2836, inclusive, or any research activities that are described in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard Industrial Classification (SIC) Manual published by the United States Office of Management and Budget, 1987 edition, or any other biotechnology research and development activities, the provisions of Section 41(e)(6) of the Internal Revenue Code Code, relating to qualified organizations, shall be modified to include both of the following:
(A)A qualified organization as described in Section 170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an institution of higher education as described in Section 3304(f) of the Internal Revenue Code. Code, relating to definition of institution of higher education.
(B)A charitable research hospital owned by an organization that is described in Section 501(c)(3) of the Internal Revenue Code, is exempt from taxation under Section 501(a) of the Internal Revenue Code, relating to exemption from taxation, is not a private foundation, is designated a specialized laboratory cancer center, and has received Clinical Cancer Research Center status from the National Cancer Institute.
(2)For purposes of this subdivision:
(A)Biopharmaceutical research activities means those activities that use organisms or materials derived from organisms, and their cellular, subcellular, or molecular components, in order to provide pharmaceutical products for human or animal therapeutics and diagnostics. Biopharmaceutical activities make use of living organisms to make commercial products, as opposed to pharmaceutical activities that make use of chemical compounds to produce commercial products.
(B)Other biotechnology research and development activities means research and development activities consisting of the application of recombinant DNA technology to produce commercial products, as well as research and development activities regarding pharmaceutical delivery systems designed to provide a measure of control over the rate, duration, and site of pharmaceutical delivery.
(f)In the case where the credit allowed by this section exceeds the tax, the excess may be carried over to reduce the tax in the following year, and succeeding years if necessary, until the credit has been exhausted.
(g)For each taxable year beginning on or after January 1, 1998, the reference to Section 501(a) in Section 41(b)(3)(C) of the Internal Revenue Code, relating to contract research expenses, is modified to read this part or Part 10 (commencing with Section 17001).
(h)(1)(A) For each taxable year beginning on or after January 1, 2000: 2000, and before January 1, 2016:
(A)
(i)The reference to 3 percent in Section 41(c)(4)(A)(i) of the Internal Revenue Code is modified to read one and forty-nine hundredths of one percent.
(B)
(ii)The reference to 4 percent in Section 41(c)(4)(A)(ii) of the Internal Revenue Code is modified to read one and ninety-eight hundredths of one percent.
(C)
(iii)The reference to 5 percent in Section 41(c)(4)(A)(iii) of the Internal Revenue Code is modified to read two and forty-eight hundredths of one percent.
(2)
(B)Section 41(c)(4)(B) of the Internal Revenue Code shall not apply and in lieu thereof an election under Section 41(c)(4)(A) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 1998. 1998, and before January 1, 2016. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.
(C)Section 41(h)(2) of the Internal Revenue Code, relating to termination of alternative incremental credit, is modified by substituting beginning on or after January 1, 2016 for beginning after December 31, 2008.
(2)(A)For taxable years beginning on or after January 1, 2016, and before January 1, 2023, Section 41(c)(5) of the Internal Revenue Code, relating to election of alternative simplified credit, shall apply, except as otherwise provided.
(i)The reference to 14 percent in Section 41(c)(5)(A) of the Internal Revenue Code is modified to read 10.5 percent.
(ii)The reference to 6 percent in Section 41(c)(5)(B)(ii) of the Internal Revenue Code is modified to read 4.5 percent.
(B)Section 41(c)(5)(C) of the Internal Revenue Code, relating to election, shall not apply and in lieu thereof an election under Sections 41(c)(5)(A) and 41(c)(5)(B) of the Internal Revenue Code may be made for any taxable year of the taxpayer beginning on or after January 1, 2016, and before January 1, 2023. That election shall apply to the taxable year for which made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board.
(C)(i)For taxable years beginning on or after January 1, 2023, Section 41(c)(5) of the Internal Revenue Code shall not apply.
(ii)No election under Section 41(c)(5) shall apply to taxable years beginning after December 31, 2022.
(3)Section 41(c)(7) of the Internal Revenue Code, relating to gross receipts, is modified to take into account only those gross receipts from the sale of property held primarily for sale to customers in the ordinary course of the taxpayers trade or business that is delivered or shipped to a purchaser within this state, regardless of f.o.b. point or any other condition of the sale.
(4)Section 41(c)(5) of the Internal Revenue Code, relating to election of the alternative simplified credit, shall not apply.
(i) Except as otherwise provided in this section, Section 41(h) of the Internal Revenue Code, relating to termination, shall not apply.
(j)Section 41(g) of the Internal Revenue Code, relating to special rule for passthrough of credit, is modified by each of the following:
(1)The last sentence shall not apply.
(2)If the amount determined under Section 41(a) of the Internal Revenue Code for any taxable year exceeds the limitation of Section 41(g) of the Internal Revenue Code, that amount may be carried over to other taxable years under the rules of subdivision (f), except that the limitation of Section 41(g) of the Internal Revenue Code shall be taken into account in each subsequent taxable year.
(k)Section 41(a)(3) of the Internal Revenue Code shall not apply.
(l)Section 41(b)(3)(D) of the Internal Revenue Code, relating to amounts paid to eligible small businesses, universities, and federal laboratories, shall not apply.
(m)Section 41(f)(6) of the Internal Revenue Code, relating to energy research consortium, shall not apply.
(n)For taxable years beginning on or after January 1, 2016, the amendments made by subdivisions (b) and (c) of Section 301 of the American Taxpayer Relief Act of 2012 (Public Law 112-240), relating to inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures, shall apply, except as otherwise provided.
SEC. 3.This act provides for a tax levy within the meaning of Article IV of the Constitution and shall go into immediate effect.
|
Date
|
Status
|
|---|---|
| Feb 23, 2015 | Read first time. To print. |
| Feb 24, 2015 | From printer. May be heard in committee March 26. |
| Mar 5, 2015 | Referred to Com. on REV. & TAX. |
| May 11, 2015 | From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended. |
| May 12, 2015 | Re-referred to Com. on REV. & TAX. |
| May 19, 2015 | From committee: Amend, and do pass as amended and re-refer to Com. on APPR. (Ayes 9. Noes 0.) (May 18). |
| May 20, 2015 | Read second time and amended. |
| May 21, 2015 | Re-referred to Com. on APPR. |
| May 27, 2015 | In committee: Set, first hearing. Referred to APPR. suspense file. |
| May 28, 2015 | In committee: Held under submission. |
| May 28, 2015 | Joint Rule 62(a), file notice suspended. (Page 1613.) |
| Jan 31, 2016 | Died pursuant to Article IV, Sec. 10(c) of the Constitution. |
| Feb 1, 2016 | From committee: Filed with the Chief Clerk pursuant to Joint Rule 56. |
|
Date
|
Description
|
Location
|
Votes
|
|
|---|---|---|---|---|
| May 18, 2015 | Do pass as amended and be re-referred to the Committee on [Appropriations] | Assembly Standing Committee on Revenue and Taxation |
Passed |
This list shows positions taken on this bill by organizations on the date displayed, which is linked to the original source.
Positions by individuals are not included.
AB 544
Page 3
Date of Hearing: May 27, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB 544
(Mullin) – As Amended May 20, 2015
Policy Committee: |
Revenue and Taxation |
Vote: |
9 - 0 |
Urgency: Yes State Mandated Local Program: No Reimbursable: No
SUMMARY:
This bill conforms California tax law with respect to the research and development credit, for taxable years beginning on or after January 1, 2016, to January 1, 2021, to the federal alternative simplified credit (ASC), and repeals the alternative incremental credit, and conforms to recent federal changes related to acquisitions, dispositions, and aggregations. Specifically, the bill conforms to the federal law relating to the alternative simplified credit, except as follows:
1) The credit for incremental qualified research expenses over 50% of the average qualified research expenses for the previous three years is 7% (instead of the federal 14%).
2) The credit for qualified research expenses where the taxpayer does not have qualified research expenses in any of the previous three years is 4.5% (instead of the federal 6%).
The bill provides that an election to use the ASC would apply to all succeeding taxable years unless revoked with the consent of the Franchise Tax Board (FTB); and conforms to federal law relating to the inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures.
FISCAL EFFECT:
1) Insignificant cost to FTB to implement the exclusion.
2) Estimated GF revenue decreases of $17 million, $60 million, and $75 million in FY 2015-16, FY 2016-17, and FY 2017-18, respectively.
COMMENTS:
1) Purpose. According to the author, California has long been a global leader in research and development (R&D), and to safeguard the growth of R&D in this state, the tax code should offer additional incentives for R&D investment. The author asserts the current R&D tax credit dates to a 1987 federal law, but since that time the federal law changed while the California credit remained the same. The author believes discrepancies between the two laws burdens research firms as they must maintain different accounting for the two credits.
Supporters, including Hewlett-Packard, argue the ASC proposed in this bill is a simpler and superior method of calculating the R&D tax credit, and shifts the focus to R&D conducted in relatively recent years. Supporters contend the current method can result in unintended or strategic consequences, such as significant disparities in credits among competitors based on activity conducted decades ago, and increased credits when revenue-generating activity is shifted out of state.
2) The R&D Tax Credit. The R&D tax credit is designed to achieve two goals: (i) increase the total amount of R&D activity, which results in enhanced productivity and economic growth, and (ii) encourage taxpayers to conduct R&D in the location where the credit is given. California's high and permanent R&D tax credit currently provides a strong incentive for private businesses to conduct R&D in this state. Unlike many other tax incentives, the R&D tax credit does not reward past behavior, but can only be claimed for incremental increases in the taxpayer's research activity.
The California R&D tax credit leads to increased R&D activity and jobs in this state, which may be more desirable than jobs in other industries. One of the advantages to the state, as explained by FTB, comes through economies of agglomeration – the benefits that inure to several firms located in close proximity. This agglomeration facilitates production and development efficiencies by allowing greater specialization among the firms. Businesses not directly engaged in R&D activities may also benefit from the presence of firms with extensive R&D activities.
Unlike the federal R&D tax credit, however, the benefits of enhanced productivity and technology cannot be confined to the state of California, and in this way the California R&D tax credit subsidizes advances and efficiencies that help people and firms outside this state. In effect, the "public good" created through increased R&D is shared throughout the world but paid for by California taxpayers.
3) Alternative Simplified Credit. Unlike the incremental method, which relies on a tiered system of average annual gross receipts, the ASC allows a credit for a percentage of research expenses (14% under federal law) that exceed 50% of the average research costs for the three preceding taxable years. By conforming to the ASC, taxpayers will be less likely to make mistakes and FTB will find it easier to conduct an audit.
4) Tax Credit vs. Direct Subsidy. Several scholars have suggested that direct investment in R&D activities can stimulate a greater amount of activity, and can help create equally high, if not higher, numbers of R&D related jobs in the relevant geographic area than tax credits. Direct investment also has the advantage of potentially benefitting all firms, particularly smaller firms, since the R&D credit is only useful to firms that have or will have taxable profits with which to offset against the credit. On the other hand, direct R&D subsidies can have the unintended effect of increasing the cost of R&D inputs – primarily highly-skilled labor – causing the overall increase in R&D expenditure to produce higher wages instead of increased productivity and technology.
Given one of the primary justifications for a state R&D tax credit is the creation of desirable jobs, the high cost of increasing the R&D credit, and the ample opportunities to invest in California's leading technology firms and universities, it may be worth considering whether the amounts spent by this bill would be better invested directly in R&D activity instead of distributed via a tax credit.
5) Related and Prior Legislation.
a) AB 437 (Atkins) of this session creates a $50 million per year R&D grant program for small businesses. AB 437 is currently awaits hearing on the Suspense File of this committee.
b) AB 2330 (Mullin) of last year was nearly identical to this bill, and was held on the Suspense File of this committee.
Analysis Prepared by: Joel Tashjian / APPR. / (916) 319-2081
AB 544
Page 8
Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 544 (
Mullin) – As Amended May 11, 2015
2/3 vote. Fiscal committee. Tax levy.
SUBJECT: Income taxes: credits: research activities.
SUMMARY: Conforms, under the Personal Income Tax (PIT) Law and the Corporation Tax (CT), to the federal alternative simplified credit (ASC), repeals the alternative incremental credit (AIRC), and conforms to recent federal changes related to acquisitions, dispositions, and aggregations. Specifically, this bill:
Repeals, on or after January 1, 2016, state conformity to Internal Revenue Code (IRC) Section 41(c)(A)(4), relating to the alternative incremental credit.
Conforms to IRC Section 41(c)(5), relating to the alternative simplified credit, except as follows:
On or after January 1, 2016, and before January 1, 2019, the reference to "14 percent" in IRC Section 41(c)(5)(A) is modified to read “5 percent”;
On or after January 1, 2019, and before January 1, 2022, the reference to “14 percent” in IRC Section 41(c)(5)(A) is modified to read “7.75 percent”; and,
On or after January 1, 2022, and before January 1, 2023, the reference to “14 percent” in IRC Section 41(c)(5)(A) is modified to read “10.5 percent.”
On or after January 1, 2016, and before January 1, 2023, the reference to “6 percent” in IRC Section 41(c)(5)(B)(ii) is modified to read “4.5 percent.”
Provides that an election to use the ASC would apply to all succeeding taxable years, on or after January 1, 2016, and before January 1, 2023, unless revoked with the consent of the Franchise Tax Board (FTB).
Conforms to federal law relating to the inclusion of qualified research expenses and gross receipts of an acquired person and aggregation of expenditures.
EXISTING LAW:
Allows taxpayers engaged in a trade or business to deduct all of the ordinary and necessary business expenses incurred.
Allows a R&D tax credit that is combined with several other credits to form the general business credit. The R&D credit is designed to encourage companies to increase their R&D activities.
Specifies that the R&D credit is equal to 20% of the qualified research expenses that exceed the base year amount, as defined, plus 20% of the amount paid or incurred during the taxable year on research undertaken by an energy research consortium.
Defines “base year amount” as the product of the average annual gross receipt of the taxpayer for the four taxable years preceding the taxable year the credit is earned times a fixed percentage, but under no circumstances may the base year amount be less than 50% of the qualified research for the taxable year.
Authorizes an additional credit to corporate taxpayers equal to 20% of expenses paid to fund "basic research" at universities and certain nonprofit scientific research organizations.
States that a taxpayer was allowed, prior to January 1, 2009, to elect an alternative incremental research credit for determining its R&D credit. The federal percentages are 3%, 4%, and 5%.
Allows an alternative simplified credit equal to 14% of research expenses that exceed 50% of the average research costs for the three preceding taxable year.
Specifies that, in order to qualify for the R&D credit, research expenses must qualify as an expense or be subject to amortization, be conducted in the U.S. and be paid by the taxpayer.
Provides that “qualified research” is research that is:
Undertaken to discover information that is technological in nature;
Primarily involves experimentation related to quality or to a new or improved function or performance; and,
Its application will be useful in developing new or improved business components for the taxpayer.
EXISTING STATE LAW:
Allows various tax credits designed to either provide tax relief for taxpayers who incur certain expenses or to influence taxpayers' behavior.
Conforms California to the federal R&D credit but with the following modifications:
The state R&D credit is not combined with other business credits.
Both "qualified research" and "basic research" must be undertaken in California.
The credit percentage for increasing qualified research activities in California is 15%.
Provides an alternative credit of 24% (versus the 20% federal credit) for "basic research", available for “C” corporations only.
Sets the percentages for the alternative incremental research portion of the credit lower than those of the federal credit.
Allows the R&D credit, which is permanent, for taxable years beginning on or after January 1, 1987.
Allows taxpayers that are members of a combined reporting group to make a one-time irrevocable assignment of eligible credits to another member. However, the assigned credits may be utilized to reduce tax only for taxable years beginning on or after January 1, 2010.
FISCAL EFFECT: Unknown
COMMENTS:
Author’s Statement: The author has provided the following statement in support of this bill:
California has long been a national and global leader in research and development (R&D). To ensure the continued growth and development of R&D, our tax code should offer effective incentives for these investments. The state currently offers an R&D Tax Credit that dates back to a 1987 federal law. Over time, the federal credit has been updated in important ways, while California’s credit remains largely unchanged. These discrepancies burden research firms, as they must decode state and federal law separately and are often subject to duplicative audits from both levels of government.
This bill conforms California’s credit calculation methods to federal law by allowing firms to calculate their credit amount using the “simplified method.” The simplified method was created federally in 2007 to modernize and streamline the credit calculation process. Bringing it to California would likewise improve our state’s R&D credit calculation system. This legislation has received widespread support from the tech and biotech industries, as well as from the California Franchise Tax Board. Please join me in coauthoring this important measure.
Arguments in Support: Hewlett-Packard states that, “A.B. 544 is a simpler and better method of calculating the R&D credit. Calculating the credit under A.B. 544 would rely only upon R&D conducted in relatively recent years, in line with the Federal simplified credit. When the standard method is used, the interaction of R&D activity with revenue generation can lead to unintended consequences (such as generating a larger credit by shifting revenue-generating activity outside of California and similar competitors getting significantly different credit amounts depending upon their characteristics in the mid-1980’s rather than today).”
R&D Credit Background: California enacted the credit for research expenses in 1987 as part of two general federal tax conformity bills [AB 1172 (Klehs), Chapter 1138, Statutes of 1987 and SB 572 (Garamendi), Chapter 1139, Statutes of 1987]. The original credit percentage was 8% of qualified research expenses. Since that time, the California R&D credit rate was amended several times and, finally, was increased from 12% to 15% in 2000 [AB 511 (Alquist), Chapter 107, Statutes of 2000.] The alternative incremental computation of the R&D credit was adopted in 1997 [AB 1042 (Wayne), Chapter 613, Statutes of 1997] and was subsequently amended to reflect the changes to the California research credit percentage [AB 2798 (Machado), Chapter 323, Statutes of 1998]. Unlike the federal R&D credit, the California R&D credit is permanent.
The Scope of the California R&D Credit. The California R&D credit is very similar to the federal R&D credit and is generally available with respect to incremental increases in qualified research. "Qualified research expenses" eligible for the credit consist of in-house expenses for wages and supplies attributable to that research, certain time-sharing costs for computer use, and 65% of the contract research expenses. However, "qualified research expenses" include 100% of amounts paid by the taxpayer to an eligible small business, university, or Federal laboratory for qualified energy research. Under California law, qualified research includes only research conducted in California.
Under the regular credit, the amount of the California R&D credit equals to the sum of: (i) 15% of the amount by which the taxpayer's qualified research expenses for a taxable year exceed its "base amount for that year", and (ii) 15% of the taxpayer's expenditures on research undertaken by an energy research consortium (the so-called 'energy research credit'). The energy research credit applies to all qualified expenditures, not just those in excess of a base amount. In addition, corporate taxpayers are also allowed a credit of 24% (in contrast to 20% allowed under federal law) of expenses paid to fund basic research at universities and certain nonprofit scientific research organizations.
What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill would replace an existing method of calculating the R&D credit, as provided for under the AIRC, by conforming to the federal ASC.
How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it generally takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. This bill conforms, with certain modifications, to the ASC beginning on or after January 1, 2016, and before January 1, 2023. In order to increase the frequency of legislative review, the Committee has generally required that all tax expenditures sunset within five years. Therefore, the Committee may wish to sunset the provisions in this bill on January 1, 2021.
What does this bill do? This bill would bring California into conformity with the federal calculation methods by allowing taxpayers to elect the ASC and eliminate the use of the AIRC. This bill modifies conformity by establishing a phase-in period for the normal ASC by providing 5% of the federal credit for the first three taxable years, 7.75% for the next three taxable years, and 10.5% in the final year. Additionally, this bill provides 4.5% of the federal credit for entities that have no QREs in the last three years. This bill also conforms to recent federal modifications to the special rules that apply for computing the R&D credit when a major portion of a trade or business changes hands, and for the aggregation of expenditures among commonly-controlled or otherwise-related entities.
Base Year Calculation. In 2009, the Government and Accountability Office (GAO) released a report analyzing the effectiveness of the R&D Credit. In general, the GAO found serious disparities in the incentives provided to different taxpayers. The GAO also found that a large number of the credit dollars to be a windfall because they were based on expenditures that would have occurred in the absence of the credit. In its conclusion, the GAO pointed to the use of the 84'-88' base year as a key reason for such disparities and results that were inconsistent with the program's intent. (GAO, Tax Policy: The Research Tax Credit's Design and Administration Can Be Improved, Nov. 2009.) As a way of rectifying the base year problem, Congress enacted the AIRC and provided for the use of a rolling base year. Later, it enacted the ASC and removed gross receipts from the method of calculation, which allowed for a simpler method of calculating the rolling average.
Calculating the Credit:
Regular Credit. Under the regular credit, the credit is calculated as follows:
Credit = 20% × [current-year QREs - base QREs],
Base QREs = greater of:
[Sum of QREs for 1984 to 1988 / the sum of gross receipts for 1984 to 1988] × average gross receipts for the 4 tax years immediately preceding the current one; or,
50% × current-year QREs
AIRC. Under the AIRC, the credit is calculated as follows:
Credit = 3% of Qualified Research Expenses (QRE) that are above 1% but not greater than 1.5% of average annual gross receipts in the 4 preceding tax years.
+ 4% of QREs that are above 1.5% but not greater than 2% of average annual gross receipts in the 4 preceding tax years
+ 5% of QREs that are above 2% of average annual gross receipts in the 4 preceding tax years
In California, the applicable AIRC rates are 1.49%, 1.98%, and 2.48%, respectively.
ASC. Under ASC, the credit is calculated as follows:
Credit = 14% × [current-year QREs - 50% × average QREs in the 3 preceding tax years]
If a taxpayer has no QREs in any of its 3 preceding tax years, then the credit is equal to 6% of its QREs in the current tax year. In California, the simplified credit is not allowed.
This bill establishes a phase-in period for the normal ASC by providing 5% of the federal credit for the first three taxable years, 7.75% of the federal credit for the next three taxable years, and 10.5% of the federal credit in year seven. Additionally, this bill provides a credit of 4.5% of the federal credit for entities that have no QREs in the last three years.
Benefits of ASC. As the name implies, calculation of the ASC is much easier for taxpayers to calculate. Unlike the incremental method, which relied on tiered system of average annual gross receipts, the ASC allows for a 14% of research expenses that exceed 50% of the average research costs for the three preceding taxable year. By conforming to the ASC, taxpayers will be much less likely to make mistakes, it would make it easier for FTB to conduct an audit, and it would allow companies to take advantage of the rolling average base without the difficulties of a tiered calculation. Furthermore, many companies that currently utilize the AIRC do so because they tend to have a relatively high fixed-base year percentages, spend less in research, or have sales growing at a faster rate than their research spending. (Gary Guenther, Research Tax Credits: Current Law, Legislation in the 112th Congress, and Policy Issues, Congressional Research Service, Nov., 2011) The enactment of the ASC will also maintain the benefits associated with an AIRC but with an easier method of calculation.
Percentage of California Credit. This bill establishes a phase-in period for the normal ASC by providing 5% of the federal credit for the first three taxable years, 7.75% of the federal credit for the next three taxable years, and 10.5% of the federal credit in year seven. Additionally, this bill provides a credit of 4.5% of the federal credit for entities that have no QREs in the last three years. The final credit percentage of 10.5% for the ASC is 75% of the federal ASC. This is in line with the credit percentage that California provides for the regular credit, but not in line with the percentage California provides for the current AIRC. The federal AIRC provides a tiered credit of 3%, 4%, and 5%. The applicable AIRC rates in California are 1.49%, 1.98%, and 2.48%, or roughly 49.6% of the federal credit. Because this bill replaces the AIRC with the ASC, Committee may wish to consider lowering the proposed state ASC credit percentages to more closely align with the credit percentages currently available under AIRC.
Conformity Issues. This bill only conforms to the federal provisions relating to the ASC. California does not automatically conform to federal law, but instead considers each provision individually. The last California-federal conformity bill was enacted in 2010 [SB 401 (Wolk), Chapter 14, Statutes of 2010]. An omnibus California-federal conformity bill may be a more appropriate vehicle for comprehensively reviewing California's R&D tax credit regime and the ways in which it differs from federal law. For example, California's definition of "gross receipts" excludes gross receipts other than those that are "sales of property held by the taxpayer primarily for sale to customers in the ordinary course of the taxpayer's trade or business that is delivered or shipped to a purchaser within this state." (R&TC Section 17052.12.) The decision to adopt a California-specific definition of "gross receipts" was made decades ago. The Committee may wish to consider whether this definition is still merited in light of recent legal and economic developments. To this end, the Court of Appeal recently struck down a California statute that allowed taxpayers a deferral for income received from the sale of stock in corporations maintaining assets and payroll in California, while providing no such deferral for income from the sale of stock in corporations maintaining assets and payroll elsewhere. [Cutler v. Franchise Tax Board (2012) 208 Cal.App.4th 1247, 1250.] The Court held that "the deferral provision discriminates on its face on the basis of an interstate element in violation of the commerce clause." (Ibid.) In light of this decision, the Committee may wish to consider whether the existing definition of "gross receipts" is legally sound.
The R&D credit: There are two main purposes for the federal and California R&D credit. First, the credit is intended to reduce the after-tax cost of R&D investments, which is expected to lead to an increase in R&D activity and to encourage taxpayers to conduct R&D in the U.S. rather than in another country. Similarly, the California R&D credit is designed to increase R&D activity and to encourage manufacturing related to R&D to be undertaken in California rather than elsewhere. The California’s R&D credit provides a powerful incentive for firms to conduct R&D in California because of its high credit percentages that exceed that of other states and because it is permanent. This credit, unlike many other tax incentives, does not serve as a reward for past behavior since it could only be claimed for incremental increases in the taxpayer's research activity. As explained by the Joint Committee on Taxation’s Report, "incremental credits attempt not to reward projects that would have been undertaken in any event but to target incentives to marginal projects." (Joint Committee on Taxation, Description of Revenue Provisions Contained in the President’s Fiscal Year 2010 Budget Proposal, Part Two: Business Tax Provisions, JCS-3-09, p. 17.) It is impossible, however, to determine which projects would be undertaken without the credit and, thus, "most incremental credit proposals rely on some measure of the taxpayer's previous experience as a proxy for a taxpayer's total qualified expenditures in the absence of a credit", i.e. "a base amount." (Id., p.18.) Nonetheless, the incentive effects of incremental credits per dollar of revenue loss can be many times larger than those of a flat credit.
The California R&D credit is believed to create additional R&D economic activity in the state, which, arguably, is more desirable than jobs in other industries. The credit also allows other California businesses to adopt innovations developed locally more rapidly than innovations developed elsewhere. As explained by the FTB, the advantage to California "may come through something economists call economies of agglomeration," which can be described as the benefits several firms receive when locating in close proximity. (California Income Tax Expenditures, Compendium of Individual Provisions, Updated December 2009, FTB, p.17.) Specifically, the cost of production may significantly decline because there is a greater chance for specialization and division of labor. If this is the case, many California businesses, not just those receiving this credit, will gain an advantage over their rivals in other states.Prior Legislation:
AB 2330 (Mullin), of the 2013-14 Legislative Session, would have conformed, under the PIT Law and the Corporation Tax CT, to the federal ASC, repeals the alternative incremental credit AIRC, and conforms to recent federal changes related to acquisitions, dispositions, and aggregations. AB 2330 was held on the Assembly Appropriation Committee’s Suspense file.
AB 1564 (V. Manuel Pérez), of the 2013-14 Legislative Session, would have temporarily increased the rates of the general research credit and the university "basic research" credit and allowed taxpayers to sell and purchase research credits, as provided, under the Research and Development Tax Credit Trade Program. AB 1564 was held on the Assembly Appropriation Committee’s Suspense file.
AB 653 (V. Manuel Pérez), of the 2013-14 Legislative Session, would have temporarily provided incremental increases to the general research credit percentage using the regular calculation method, up to a maximum credit rate of 30 percent, and would have temporarily provided incremental increases to the university "basic research" credit percentage, up to a maximum credit rate of 40%. AB 653 was held on the Assembly Appropriation Committee’s Suspense file.
AB 486 (Mullin), of the 2013-14 Legislative Session, would have provided manufacturers, software producers, biotechnology and life, engineering, and physical researchers and developers, a SUT exemption for qualifying TPP. AB 486 was held on the Assembly Appropriation Committee’s Suspense file.
REGISTERED SUPPORT / OPPOSITION:
Support
California Chamber of Commerce
California Healthcare Institute
California Manufacturers and Technology Association
California Taxpayer Association
Silicon Valley Leadership Group
Hewlett-Packard Company
TechAmerica
Opposition
None on file
Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098
