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					Research & Development Credit:
Frequently Asked Questions




                        California Franchise Tax Board
QUALIFIED R&D ACTIVITY

   1.   What is California's Research & Development (R&D) Credit?
   2.   How do you claim the California R&D Credit?
   3.   Does California conform to federal R&D Credit provisions?
   4.   What is "qualified research" for California's R&D Credit?
   5.   What research activities do not qualify for California's R&D Credit?


R&D COMPUTATION

   6. What are "qualified research expenses" (QRE) for California's R&D Credit?
   7. What are "basic research payments" for California's R&D Credit?
   8. How are “gross receipts” defined for California purposes?
   9. What are the aggregation rules?
  10. How are a “controlled group” and/or "controlled trades & businesses" defined for California's R&D Credit?
  11. Is the “controlled group” for R&D Credit aggregation purposes the same as a “unitary group” for combined
      reporting purposes?
  12. Is the “controlled group” restricted to entities either currently or historically conducting research?
  13. What is a start-up company for California R&D Credit purposes?


DOCUMENTATION REQUIREMENTS

  14.   Is there a documentation requirement?
  15.   What are the specific documentation requirements for the California R&D Credit?
  16.   Are we required to provide contemporaneous support?
  17.   Can we use estimates?
  18.   What is sufficient documentation?
  19.   What documents will FTB typically rely upon?
  20.   How should we document our research and expenditures when our company is small, organizationally flat, and
        not in a highly regulated industry?


MISCELLANEOUS

  21. How does the inclusion of a partnership affect the R&D Credit?
  22. How does the acquisition or disposition of a business entity affect the California R&D Credit computation?
  23. Does the R&D Credit have to be added back into income as a California state adjustment?
  24. Do we need FTB permission to change our election reducing our research and development expenses by the
      amount of credit, rather than applying the applicable reduced credit percentage to the credit?
  25. Can the credit reduce alternative minimum tax?
  26. Can we amend a prior year return to claim a qualified R&D Credit?
  27. Is California's R&D Credit a refundable credit?
1. What is California's Research & Development (R&D) Credit?
  The California R&D Credit reduces income or franchise tax. You qualify for the credit if you paid or incurred qualified
  research expenses while conducting qualified research in California. You receive 15 percent of the excess of current
  year research expenditures over a computed base amount (minimum of 50 percent of current year research
  expenses). You claim the credit on the return for the taxable year you incurred the qualified expenses.

2. How do you claim the California R&D Credit?
  You claim the California R&D Credit on FTB Form 3523, Research Credit, for the year you paid or incurred qualified
  research and development expenses in California.

3. 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.
  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 basic research rate is
     24 percent.
  4. California conformed to the Alternative Incremental Credit, except for some differences in the rates and the fact
     that California requires a separate election (from that of federal). For taxable years beginning on or after 1/1/2000,
     the percentages for the Alternative Incremental Credit are 1.49 percent, 1.98 percent, and 2.48 percent.
  5. California has not conformed to the 2006 federal amendments to IRC §41. Thus, the Alternative Simplified Credit
     is not available.
  6. The credit cannot be carried back.
  7. California does not conform to the federal definition of gross receipts.
  8. The termination dates provided under federal law do not apply. Currently, there is no California termination date
     for this credit.

4. What is "qualified research" for California's R&D Credit?
  Research activity is considered “qualified research” if it meets all of the following four requirements of Internal
  Revenue Code (IRC) §41(d)(1):
  1. Qualify as a business deduction under IRC §174.
  2. Be undertaken to discover information that is technological in nature.
  3. Be undertaken to discover information intended to be useful to develop a new or improved business component of
     the taxpayer.
  4. Substantially all activities involve a process of experimentation. "Substantially all" means 80 percent or more of
     the research activities involve a process of experimentation.
  A qualified research activity must meet all four tests to be considered for the California R&D Credit. Apply the tests
  separately to each business component of the taxpayer.

5. What research activities do not qualify for California's R&D Credit?
  The following research activities are specifically excluded by statute:
   1. Research undertaken outside California.
   2. Research conducted in the social sciences, arts, or humanities.
   3. Ordinary testing or inspection of materials or products for quality control.
   4. Market and consumer research.
   5. Research relating to style, taste, cosmetic, or seasonal design.
   6. Advertising and promotional expenses.
   7. Management studies and efficiency surveys.
   8. Computer software for internal use of the taxpayer, unless it meets additional tests.
   9. Research to locate and evaluate mineral deposits, including oil and gas.
  10. Acquisition and improvement of land and of certain depreciable or depletable property used in research (including
      the annual depreciation deduction).
  11. Research conducted after the beginning of commercial production.
  12. Research related to adaptation of an existing business component.
  13. Research related to duplication of an existing business component from a physical inspection, plans, blueprints,
      detailed specifications, etc....
  14. Funded research – Any research funded by any grant, contract, or otherwise by another person (or governmental
      entity).

6. What are "qualified research expenses" (QRE) for California's R&D Credit?
  Qualified research expenses generally include wages, supplies, and contract research costs.
  Wages – Qualified wages are for qualified services that directly relate to the research activities and are paid or
  incurred by the taxpayer. Qualified services include direct supervision, direct support, or direct performance of
  qualified research. General or administrative wages generally do not qualify. For example, an allocated portion of the
  purchasing or receiving department’s wages would not qualify because these are indirect costs and are incidental to
  research activity. Wages are defined under IRC §3401(a).
  Supplies – Supplies include tangible property that is consumed directly by the research activity or that is utilized in
  the development of a prototype. The supplies must be used in the conduct of qualified research. Supplies do not
  include land, improvements to land, or property subject to the allowance for depreciation. Utilities (phone and
  electricity), small tools, and allocations of total shipping cost do not qualify as supply expenses.
  Contract research – Contract research expenses are amounts paid to non-employees (outside consultants) to
  perform qualified research. The taxpayer must enter into written agreement prior to performance of the research and
  must bear the costs even if the research is unsuccessful. The consultant must perform the research within California.
  If the research is conducted within and without California, only the expenditures incurred within California qualify. Only
  65 percent of the California expense qualifies for the credit.

7. What are "basic research payments" for California's R&D Credit?
  The term “basic research payment” means any amount paid in cash during the taxable year by a corporation (other
  than S corporations, personal holding companies, and service organizations) to a qualified organization for basic
  research, but only if such payment is made pursuant to a written agreement and the basic research is to
  be performed by the qualified organization in California. Qualified organizations include educational institutions,
  certain scientific research organizations, and certain grant organizations. For California, “basic research” 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, but not if the improvements relate to
  style, taste, cosmetic, or seasonal design factors. For additional information, see the instructions for FTB Form 3523,
  Research Credit, regarding the taxable year the basic research payments may be claimed.

8. How are “gross receipts” defined for California purposes?
  California gross receipts include receipts minus returns and allowances from the sale of real, tangible, or intangible
  property held for sale to customers in the ordinary course of the taxpayer’s trade or business delivered or shipped to a
  purchaser within California, regardless of free on board shipping point or other condition of sale. This includes sales to
  the U.S. government, which could be identified as delivered in California. Excluded receipts are items such as
  California “throwback” sales for apportionment purposes, as well as, receipts from services, rents, operating leases
  and interest. In addition, royalties and license payments are generally excluded from the definition of gross receipts
  for research credit purposes.
  Qualified California gross receipts include any property sale defined above (delivered to a California customer) that
  has been excluded for apportionment purposes because of the application of Public Law 86-272 or any other
  provision.
  This California definition of gross receipts applies to both the average annual gross receipts for the prior four years
  and the base years (1984-1988). For aggregation purposes, the “gross receipts” figures used in the base amount
  calculations (the “average annual gross receipts” and the “aggregate gross receipts” of the fixed-base percentage)
  should reflect those from the entire “controlled group” (even when only one corporation has research expenses).
  Using the “gross receipts” of the entire controlled group reflects an accurate comparison of the research expenditures
  to the business as a whole.

9. What are the aggregation rules?
  All members of a "controlled group" are treated as a single taxpayer for purposes of the research credit. You must
  aggregate all components comprising the R&D Credit calculation. The total or "group" R&D Credit is assigned to the
  members of the controlled group based upon their proportionate share of their stand-alone credit over the total all
  computed stand-alone credits for the group. If the "group" credit exceeds the sum of the stand-alone credits, the
  excess "group" credit is allocated based on each member's qualified research expenses divided by the sum of all
   members’ qualified research expenses. The computed stand-alone credits are only used to determine the
   proportionate share of group credit to be allocated to a particular member. You compute the stand-alone credit
   utilizing the best method available (i.e. regular, AIRC, etc.); in other words, you compute to yield the largest credit
   possible as if you were not part of the controlled group.

10. How are a “controlled group” and "controlled trades & businesses" defined for California's R&D Credit?
   Treas. Reg. §1.41-6(a) provides a bright line ownership test for groups of organizations under common control. In
   general, taxpayers that are part of a parent/subsidiary groups and brother/sister groups, as defined under Treas.
   Reg. §1.52-1(b)-(g), will be considered members of the same controlled group for R&D Credit purposes. Treas.
   Reg. §1.52-1(b) defines "Organizations" as corporations, partnerships, estates & trusts, and sole proprietorships for
   aggregation purposes.
   In the case of a corporation that is part of a parent/subsidiary group, a controlling interest is defined as more than
   50 percent of the combined voting power of all classes of stock or more than 50 percent of the total value of shares of
   all classes of stock. The terms “interest” and “stock” do not include treasury stock or nonvoting stock that is limited
   and preferred regarding dividends. In the case of partnerships, a controlling interest is defined as more than
   50 percent of a profit or capital interest, and in the case of an estate or trust, a controlling interest is defined as more
   than 50 percent of an actuarial interest.
   In the case of a corporation that is part of a brother/sister group, a controlling interest is defined as more than
   80 percent of the combined voting power of all classes of stock or more than 80 percent of the total value of shares of
   all classes of stock held by the same five or fewer persons. The terms “interest” and “stock” do not include treasury
   stock or nonvoting stock that is limited and preferred regarding dividends. In the case of partnerships, a controlling
   interest is defined as more than 80 percent of a profit or capital interest held by same five or fewer individuals and in
   the case of an estate or trust, a controlling interest is defined as more than 80 percent of an actuarial interest held by
   same five or fewer individuals. The two groups differ in percentages and a brother/sister group considers the
   ownership control of multiple individuals within the member organizations.

11. Is the “controlled group” for R&D Credit aggregation purposes the same as a “unitary group” for combined
    reporting purposes?
   No. The “controlled group” is not necessarily restricted to the entities included in the combined report and may include
   non-unitary affiliates. It may also include multiple combined reporting groups.

12. Is the “controlled group” restricted to entities either currently or historically conducting research?
   No. The “controlled group” is generally comprised of all entities commonly owned by a single interest more than
   50 percent in the case of a parent/subsidiary group or commonly owned by the same five or fewer owners more than
   80 percent in the case of a brother/sister group. Controlled group members that are currently performing California.

13. What is a start-up company for California R&D Credit purposes?
   A start-up company is one that had both qualified California research expenses and gross receipts either:
   •   For the first time in a taxable year beginning after December 31, 1983; or
   •   For fewer than three taxable years beginning after December 31, 1983, and before January 1, 1989.
   The fixed-base percentage for a start-up company is 3 percent for each of the company’s first five taxable years
   beginning on or after January 1, 1994, that the company has a qualified research expense. There is a ten-year
   phase-in period leading up to a permanent fixed base percentage calculation based on five contiguous years of
                           th              th
   experience during the 6 through the 10 year. A progressively increasing rate applies during the period between the
    th      th
   6 and 10 year, see IRC §41(c)(3)(B)(ii) for further information.

14. Is there a documentation requirement?
   Yes. California taxpayers benefit from the R&D Credit as a valuable tax incentive. A taxpayer must maintain records in
   sufficiently usable form and detail to substantiate that the expenditures claimed qualify for the credit. Presenting
   detailed and well-maintained records to FTB upon request will help expedite the audit of your R&D Credit.
   Treasury Decision 9104 did eliminate the "unique" documentation requirements to define qualified research under
   Treas. Reg. §1.41-4(d). However, taxpayers are obligated to follow the broader language of the current Treas.
   Reg. §1.41-4(d), the requirements of IRC §6001, and established case law related to record keeping (Revenue and
   Taxation Code Section 19504; New Colonial Ice Co v. Helvering, 292 US 435 [78 L.Ed. 1348](1934)).
15. What are the specific documentation requirements for the California R&D Credit?
   With few exceptions, the State of California conforms to the federal research credit computation. A taxpayer must
   maintain records in sufficiently usable form and detail to substantiate that the expenditures claimed are eligible for the
   credit (Current Treas. Reg. §n 1.41-4(d)). Treas. Reg. §1.6001-1 requires the taxpayer to clearly establish full
   compliance with all of the relevant statutory and regulatory requirements. The regulation requires taxpayers to keep
   permanent books and records sufficient to establish the amount of gross income, deductions, credits, or other matters
   for as long as the contents thereof may become material in the administration of any internal revenue law, or in
   California's case the revenue and taxation law. Simply put, taxpayers must retain all relevant documentation for as
   long a period as may be required to address a material item: in this case the research credit and its related
   expenditures and components. Failure to maintain records in accordance with these rules is a basis for disallowing
   the credit.

16. Are we required to provide contemporaneous support?
   It is also clear from the above regulation and case law that contemporaneous documentation and support are
   generally required. Contemporaneous means the documentation or support should be from the time period of the
   underlying transactions, services, or activities. While the state can provide taxpayers with some degree of flexibility in
   substantiating their credit, this flexibility does not relieve the obligation to keep and provide a record of their qualified
   research and research expenditures. Extrapolations based upon data from a later period or estimated percentages
   developed years later are not contemporaneous and have no probative value. For example, if a taxpayer
   contemplates filing a research credit claim as an existing research entity, the taxpayer will need to establish and
   provide contemporaneous documentation of the qualified research expenditures and gross receipts performed during
   1984 through 1988.

17. Can we use estimates?
   The State of California is not required to accept estimates of qualified research expenses to verify the actual amount if
   documentation exists or should exist. Taxpayers are required to keep records substantiating the amount of any
   reported, claimed, or affirmatively raised deductions or credits (Appeal of Don A. Cookston, 83-SBE-048
   (January 3, 1983)). Failure to maintain records in accordance with the above requirements is a basis for disallowing
   the credit.
   However, the courts may allow the use of an estimation method, but only where the taxpayer can prove
   contemporaneous records do not exist and then only as long as the following two conditions are satisfied:
   1. The taxpayer must establish that it engaged in qualified research activities as defined in IRC §41(d), and
   2. The failure to maintain a proper system to capture relevant information cannot be an "inexactitude of their own
      making." (Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930.))
   Accordingly, taxpayers must have factual support for every assumption underlying their estimates to meet their
   burden of proof. A valid estimation requires some indirect basis at a minimum.

18. What is sufficient documentation?
   You should maintain all documents necessary to support your credit and its components. We generally look for
   contemporaneous documentation of a typical business nature supporting the item under examination. “A typical
   business nature” refers to customary documentation prepared in relation to a given transaction or process.
   Each section of IRC §41 requires different forms or types of support. For instance, the documentation necessary to
   support qualified services (IRC §41(b) wages, supplies, contract research) is different than that required to support
   qualified research (IRC §41(d) qualified research defined). These documentation types are, in turn, different from the
   documentation necessary to support the other computational elements of the credit (IRC §41(c) fixed base
   percentage and average annual gross receipts).
   The taxpayer’s situation determines what documentation is necessary. Taxpayers often refer to documents by
   different titles, and research operations vary in the degree to which their transactions and processes are documented.
   In most credit audits, documentation is being maintained for purposes other than the credit. For example, highly
   regulated industries (such as biopharmaceutical, defense, engineering, medical, or high technology industries) are
   usually required to maintain detailed documentation of their research and experimentation processes for regulatory
   requirements from a consumer product safety process, FDA approval process, patent application process, etc. In
   addition, documentation you compile and utilize for internal control, budget, or project analysis, and human resource
   purposes can be used to support the credit.
   You may support the gross receipts component with shipping and sales support records. Apportioning taxpayers may
   be able to utilize their tax apportionment work papers. However, sales by destination schedules should not include the
   application of Public Law 86-272, i.e. regardless of the sale's origination point.

19. What documents will FTB typically rely upon?
   Documents we typically rely on to support various research credit elements include:
   •   Materials explaining research activities, including brochures, pamphlets, press releases, and other similar
       documents.
   •   Submissions to management, the board of directors, review committees or other similar groups regarding
       research projects, activities, expenditures, and the research credit.
   •   Documents prepared by, or on behalf of, internal audit, including quarterly and annual reports that refer in any
       manner to research activities.
   •   Minutes, notes, or other similar recordings from budget, board of directors, managerial, or other similar meetings
       concerning research activities.
   •   Project authorizations, budgets, or work orders that initiate a research project.
   •   The internal authorization policies for approving a research project.
   •   Project summaries and/or progress reports and project meeting minutes.
   •   Field and lab verification data/summary data.
   •   Research credit studies conducted by outside consultants.
   •   Papers, treatises, patents and their supporting work papers, letters, scientific articles acknowledging the work,
       supply invoices, or other published documents about the taxpayer’s research.
   •   Human resource documents including self-appraisals, annual reviews, and time reports.
   •   Travel and entertainment reimbursement forms.
   •   Email.
   •   Original signed contracts (including all modifications), letter agreements, memoranda of understanding, or similar
       documents for research performed by, or on behalf of, a third party.
   •   Federal and state tax returns (including other state tax returns). This would also include apportionment work
       papers to prepare the various state tax returns.
   •   The general ledger.
   In addition to the documents listed above, credible oral testimony by individuals with personal knowledge of the issues
   may be helpful in supplementing a taxpayer’s contemporaneous documentation. However, oral or written testimony by
   itself is not a substitute for contemporaneous documentation. We may need to conduct interviews to provide
   documentation opportunities, or to confirm, clarify, or refute other documentary or testimonial evidence. We may
   disallow the credit for corporations who fail to maintain records in accordance with these rules. While there does exist
   a degree of flexibility in substantiating the credit, it neither relieves nor eliminates a taxpayer’s obligation to keep and
   provide a record of their qualified research and expenditures.

20. How should we document our research and expenditures when our company is small, organizationally flat,
    and not in a highly regulated industry?
   Again, you should maintain all documents necessary to support your credit and its components. It may be true that
   your circumstances may not provide documentation in a typical or structured format. The Franchise Tax Board
   recognizes this fact and tries to work with you to identify documentation opportunities. However, research is a
   coordinated activity. There is discussion of planning, methodology, goals, testing, etc.
   Some examples of alternative or less formal documentation that may help us verify your credit and its components
   include, but are not limited to, e-mails, calendars, notes, correspondences, etc. Again, taxpayers providing detailed
   and well-maintained records to FTB upon request will expedite audits of the R&D Credit.

21. How does the inclusion of a partnership affect the R&D Credit?
   If a partnership meets the ownership inclusion test then we treat the partnership as a group member. The partnership
   receives its appropriate share of group credit under the aggregation rules. The partnership's allocated group credit
   passes to its partners based on their proportionate distributive share of the research expense items. You report the
   allocated credit amount on line 40 of FTB Form 3523, Research Credit.
   If the partnership is not part of a parent/subsidiary or brother/sister group, the partnership's California research
   expenses and gross receipts will not be included in any controlled group computation.
22. How does the acquisition or disposition of a business entity affect the California R&D Credit computation?
    Acquisition or dispositions of trades or businesses should be identified and verified (from the base period to the
    current year) to confirm that they are properly reflected in the computation. The determination year’s QREs and the
    base period years’ QREs are determined based upon the application of the law in effect for the determination (current)
    year under examination. Consistency between these periods is required; see IRC §41(c)(5) for more information.

23. Does the R&D Credit have to be added back into income as a California state adjustment?
    For taxable years after December 31, 1989, IRC §280C(c) [Revenue & Tax Law §24440] disallows a deduction under
    IRC §174 for the taxable year equal to the amount of the R&D Credit determined for the year, so the taxpayer will not
    receive a tax benefit for the expenses twice. This creates an addition to income in the amount of the credit (in order to
    decrease the IRC §174 research and development expense deduction). Note that due to differences in the federal
    and California credit amounts, the California return may require state adjustments, especially if the California return
    begins with the federal taxable income.
    Taxpayers may avoid the reduction of their research and development expenses by electing to take a reduced credit
    in accordance with IRC §280C(c)(3). This election reduces the research credit by the amount of tax savings created
    by the double tax benefit. The maximum tax rates are used for this computation. On FTB Form 3523 Research Credit,
    corporations multiply their research credit by 91.16 percent (.9116), individuals and estates or trusts multiply their
    research credit by 90.7 percent (.907), and S corporations multiply their research credit by 98.5 percent (.985) to
    arrive at the reduced credit amount. This irrevocable election must be made on the original California return filed on or
    before the due date for filing the return, including extensions. The election cannot be made on an amended return.
    Note: Amounts received from S corporations, estates, trusts, partnerships, or LLCs taxed as partnerships, may be
    limited due to IRC §41(g) and the related regulations.

24. Do we need FTB permission to change our election reducing our research and development expenses by the
    amount of credit, rather than applying the applicable reduced credit percentage to the credit?
    No permission is needed on an original filed return. Taxpayers may annually choose between the election options.
    The reduction to R&D expenses or "add back" is required any time the annual IRC §280C(c) reduced credit option is
    not elected. In addition, taxpayers can make different elections for federal and state purposes.

25. Can the credit reduce alternative minimum tax?
    No. The credit cannot reduce the alternative minimum tax; however, the credit may reduce the regular tax below the
    tentative minimum tax. See Schedule P (Forms 100, 100W, 540, 540NR, or 541) for more information. Any research
    and development credit that is not used to offset the qualified taxpayer’s income or franchise tax must be carried over
    to future years.

26. Can we amend a prior year return to claim a qualified R&D Credit?
    Yes, as long as the applicable statute of limitations is open (generally four years from the original due date of the
    return, or one year from the date of the overpayment, whichever period expires later). However, the 280(C) election to
    reduce the credit cannot be made on an amended return.

27. Is California's R&D Credit a refundable credit?
    No. Any R&D Credit that is not used to offset the qualified taxpayer’s income or franchise tax must be carried over to
    future years.




FTB 1082 (REV 02-2008)
TAXABLE YEAR                                                                                                                                                                                        CALIFORNIA FORM


    2008                     Research Credit                                                                                                                                                           3523
Attach to your California tax return.                                                                                                                                        SSN or ITIN or California corporation no.


                                                                                                                                                                             FEIN

                                                                                                                                                                                          -
Name(s) as shown on return                                                                                                                                 Secretary of State (SOS) file number


Part I  Credit Computation. Read the instructions before completing this form.
Section A  Regular Credit. Skip this section and go to Section B, Alternative Incremental Credit, if you are electing the alternative incremental credit.
   Line  through line 4 are to be completed only by corporations (other than S corporations, personal holding companies, and service organizations).
   Individuals, estates, trusts, partnerships, S corporations, and limited liability companies (LLCs), begin on line 5.

  Basic research payments paid or incurred during the taxable year. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                                         00

 2 Base period amount. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             2                    00

 3 Subtract line 2 from line 1. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                3                    00

 4 Multiply line 3 by 24% (.24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       4                    00

     Qualified research expenses paid or incurred.

 5 Wages for qualified services. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               5                    00

 6 Cost of supplies. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         6                    00

 7 Rental or lease costs of computers. See instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                    7                    00

 8 Enter the applicable percentage of contract research expenses. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                    8                    00

 9 Total qualified research expenses. Add line 5 through line 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                       9                    00

0 Enter fixed-base percentage, but not more than 16% (.16). See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0                                                     %

 Enter average annual gross receipts. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                       00

2 Base amount. Multiply line 11 by the percentage on line 10. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2                                          00

3 Subtract line 12 from line 9. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3                                  00

4 Multiply line 9 by 50% (.50). See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4                                 00

5 Enter the smaller of line 13 or line 14. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5                           00

6 Multiply line 15 by 15% (.15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6                          00

7 a Regular credit. Add line 4 and line 16. If you do not elect the reduced credit under IRC Section 280C(c), enter the
      result here, and see instructions for the schedule to attach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7a                                        00
   b Reduced regular credit under IRC Section 280C(c). Multiply line 17a by the applicable percentage below:
	 	•	 90.7% (.907) for individuals and estates or trusts
   • 91.16% (.9116) for corporations
   • 98.5% (.985) for S corporations
   Enter the reduced credit amount and write “Section 280C(c)’’ on the dotted line to the left of line 17b. . . . . . . . . . . . . . . . . . . . 7b                                                              00




For Privacy Notice, get form FTB 1131.                                                                7311083                                                                                 FTB 3523 2008 Side 
Section B  Alternative Incremental Credit. Skip this section if you completed Section A, Regular Credit.
   Line 8 through line 2 are to be completed only by corporations (other than S corporations, personal holding companies, and service organizations).
   Individuals, estates, trusts, partnerships, S corporations, and LLCs, begin on line 22.
8 Basic research payments paid or incurred during the taxable year. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 00

9 Base period amount. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9               00

20 Subtract line 19 from line 18. If less than zero, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20                    00

2 Multiply line 20 by 24% (.24) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       2    00
   Qualified research expenses paid or incurred.
22 Wages for qualified services. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              22    00
23 Cost of supplies. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        23    00
24 Rental or lease costs of computers. See instructions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   24    00
25 Enter the applicable percentage of contract research expenses. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                   25    00
26 Total qualified research expenses. Add line 22 through line 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                        26    00
27 Enter average annual gross receipts. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   27    00
28 Multiply line 27 by 1% (.01). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     28    00
29 Subtract line 28 from line 26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     29    00
30 Multiply line 27 by 1.5% (.015) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       30    00
3 Subtract line 30 from line 26. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                3    00
32 Subtract line 31 from line 29. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                32    00
33 Multiply line 27 by 2% (.02). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     33    00
34 Subtract line 33 from line 26. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                34    00
35 Subtract line 34 from line 31. If zero or less, enter -0-. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                35    00
36 Multiply line 32 by 1.49% (.0149) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         36    00
37 Multiply line 35 by 1.98% (.0198) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         37    00
38 Multiply line 34 by 2.48% (.0248) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         38    00
39 a Alternative incremental credit. Add line 21, line 36, line 37, and line 38. If you do not elect the reduced credit
      under IRC Section 280C(c), enter the result here, and see instructions for the schedule that must be attached . . . . . . . . . . .                                                    39a   00
   b Reduced alternative incremental credit under IRC Section 280C(c). Multiply line 39a by the applicable percentage below:
      • 90.7% (.907) for individuals and estates or trusts
      • 91.16% (.9116) for corporations
      • 98.5% (.985) for S corporations
   Enter the reduced credit amount and write “Section 280C(c)’’ on the dotted line to the left of line 39b. . . . . . . . . . . . . . . . . . . .                                            39b   00
40 Pass-through research credit(s) from S corporations, estates, trusts, partnerships, and LLCs. See instructions . . . . . . . . . . . .                                                    40    00
4 Current year research credit. If you did not elect the reduced credit under IRC Section 280C(c), add line 17a or
   line 39a to line 40 and enter the result here. If you elected the reduced credit under IRC Section 280C(c),
   add line 17b or line 39b to line 40 and enter the result here . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                     4    00
42 Enter the amount of credit on line 41 that is from passive activities. If none of the amount on line 41 is from
   passive activities, enter -0- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   42    00

43 Subtract line 42 from line 41 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43        00

44 Enter the allowable credit from passive activities. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44                           00

45 Non-passive activity credit carryover from prior year. See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45                              00

46 Total available research credit. Add line 43 through line 45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46                       00
   Your credit may be limited. See instructions for line 46.
Part II Carryover Computation. Do not complete this part if you file Schedule P (100, 100W, 540, 540NR, or 541).

47 Amount of research credit claimed on current year tax return. See line 46 instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47                                         00

48 Credit carryover available to future years. Subtract line 47 from line 46 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48                              00




Side 2          FTB 3523 2008                                                                            7312083
Instructions for Form FTB 3523
Research Credit
References in the form and instructions are to the Internal Revenue Code (IRC) as of January 1, 2005, and to the California Revenue and Taxation Code (R&TC).

What’s New                                                                              For purposes of California income tax, references to a spouse, a husband,
                                                                                        or a wife also refer to a California registered domestic partner (RDP), unless
Business Tax Credit Limitation – For taxable years beginning on or after                otherwise specified. When we use the initials RDP they refer to both a
January 1, 2008, and before January 1, 2010, business tax credits can only              California registered domestic “partner” and a California registered domestic
offset 50% of the net tax, if a corporation’s taxable income is $500,000 or             “partnership,” as applicable. For more information on RDPs, get FTB
more or if an individual’s net business income is $500,000 or more.                     Pub. 737, Tax Information for Registered Domestic Partners.
Business tax credits disallowed due to the 50% limitation may be carried
over. The carryover period for disallowed credits is extended by the number
of taxable years the credits were not allowed.
                                                                                        General Information
Assigned Credits to Affiliated Corporations – For taxable years beginning               A Purpose
on or after July 1, 2008, credit earned by members of a combined reporting              Use form FTB 3523, Research Credit, to compute and claim the research credit
group may be assigned to an affiliated corporation. A credit assigned may               for increasing the research activities of a trade or business. Also use this form
only be applied by the affiliated corporation against their tax in a taxable year       to claim pass‑through research credits received from S corporations, estates,
beginning on or after January 1, 2010.                                                  trusts, partnerships, and limited liability companies (LLCs).
                                                                                        S corporations, estates, trusts, partnerships, and LLCs should complete
Important Information                                                                   form FTB 3523 to compute the amount of research credit generated. Attach
Federal/State Conformity                                                                this form to Form 100S, California S Corporation Franchise or Income
In general, California law conforms to the Internal Revenue Code (IRC) as of            Tax Return; Form 541, California Fiduciary Income Tax Return; Form 565,
January 2005. However, there are continuing differences between California              Partnership Return on Income; or Form 568, Limited Liability Company
and federal law. When California conforms to federal tax law changes, we                Return of Income. Show the distributive share of the pass‑through credit for
do not always adopt all of the changes made at the federal level. For more              each shareholder, beneficiary, partner, or member on Schedule K‑1 (100S,
information, go to our website at ftb.ca.gov and search for conformity.                 541, 565, or 568.) Get Schedule K‑1 (100S, 541, 565, or 568), Share of
Additional information can be found in FTB Pub. 1001, Supplemental                      Income, Deductions, Credits, etc., instructions for reporting requirements.
Guidelines to California Adjustments, the instructions for California
Schedule CA (540 or 540NR), and the Business Entity tax booklets.                       B Description
The instructions provided with California tax forms are a summary of                    The credit is 15% of the excess of qualified research expenses for the taxable
California tax law and are only intended to aid taxpayers in preparing their            year over the base period research expenses. Corporations are allowed the
state income tax returns. We include information that is most useful to the             15% credit amount plus credit for 24% of the basic research payments.
greatest number of taxpayers in the limited space available. It is not possible
to include all requirements of the California Revenue and Taxation Code                 Instead of the regular credit, taxpayers may elect the alternative incremental
(R&TC) in the tax booklets. Taxpayers should not consider the tax booklets              credit in which taxpayers are assigned a smaller three‑tiered fixed‑base
as authoritative law.                                                                   percentage and a reduced three‑tiered credit rate (1.49%, 1.98%, and 2.48%).
California has not conformed to the federal law for the additional                      To claim the California research credit, you do not have to claim the federal
first‑year depreciation of certain qualified property placed in service after           research credit.
January 3, 2008, and the election to claim additional research and minimum              California conforms to the federal definition for qualified research expenses
tax credits in lieu of claiming the bonus depreciation made to the IRC by               under IRC Section 41(b).
the Economic Stimulus Act of 2008 (Public Law 110‑185, enacted on                       IRC Section 41(b) states that the “qualified research expense” means the
February 13, 2008).                                                                     sum of the following amounts which are paid or incurred by the taxpayer
California has not conformed to the extension and modifications of the                  during the taxable year in carrying on any trade or business of the taxpayer:
Research Credit made to the IRC by the Tax Relief and Health Care Act of                • In‑house research expenses and contract research expenses.
2006 (Public Law 109‑43, section 104 enacted on December 20, 2006).                     • “Qualified services,” means engaging in qualified research e.g., direct
California has not conformed to the federal changes made to the IRC by                      supervision or direct support of research activities.
the 2005 Energy Tax Act (Public Law 109‑58), including, but not limited to              • “Qualified supplies,” means any tangible property other than land or
federal changes creating the “energy research consortium” credit (Public                    improvements to, and property of a character subject to the allowance for
Law 109‑58, section 1351(a) enacted on August 8, 2005).                                     depreciation.
Round Cents to Dollars – Round cents to the nearest whole dollar. For                   • Qualified wages.
example, round $50.50 up to $51 or round $25.49 down to $25. If you do                  Qualified research expenses do not include any amounts paid or incurred
not round, the Franchise Tax Board (FTB) will disregard the cents. This helps           on or after January 1, 1999, for tangible personal property eligible for the
process your return quickly and accurately.                                             exemption from sales or use tax under R&TC Section 6378. The eligible
Registered Domestic Partners (RDP) – RDPs under California law must                     property is tangible personal property used primarily for the following:
file their California income tax returns using either the married/RDP filing            1. In teleproduction or other postproduction services
jointly or married/RDP filing separately filing status. RDPs have the same              2. To maintain, repair, measure, or test any property described in 1
legal benefits, protections, and responsibilities as married couples unless             Get federal Form 6765, Credit for Increasing Research Activities, for
otherwise specified.                                                                    additional information on the federal definition. For the full definition
If you entered into in a same sex legal union in another state, other than a            of “qualified research expenses,” the taxpayer should refer to IRC
marriage, and that union has been determined to be substantially equivalent             Section 41(b).
to a California registered domestic partnership, you are required to file a             For payments made to certain nonprofit qualified research consortia, 75%
California income tax return using either the married/RDP filing jointly or             (instead of 65%) of the payments are treated as qualified research expenses.
married/RDP filing separately filing status. For more information on what               A qualified research consortium is a tax‑exempt organization described in
states have legal unions that are considered substantially equivalent, go to            IRC Section 501(c)(3) or Section 501(c)(6) that is organized and operated
our website at ftb.ca.gov and search for RDP.                                           primarily to conduct scientific research and is not a private foundation.




                                                                                                                          FTB 3523 Instructions 2008 Page 
C Limitations                                                                         whichever applies. Attach a statement showing how this member’s share of
                                                                                      the credit was computed, and write “See attached” next to the entry space
The research credit is not refundable.                                                for line 17 or line 39.
• The basic and qualified research must have been conducted within
    California.                                                                       Section A – Regular Credit
    If your business is conducted both within and outside of California, for
    purposes of determining the base amount, gross receipts are the receipts          Line 
    from the sale of property that is held primarily for sale to customers (in        Corporations (other than S corporations, personal holding companies, and
    the ordinary course of your trade or business) and that is delivered or           service organizations) may be eligible for a “basic research” credit if the cash
    shipped to customers in California.                                               payments exceed the base period amount as determined on line 2 of this
• A taxpayer and spouse/RDP may claim only one credit. If separate                    section.
    returns are filed, the credit may be taken by either or divided equally           Enter the basic research payments paid in cash during the 2008 taxable
    between them.                                                                     year and made to a qualified university or scientific research organization.
• S corporations may claim only 1/3 of the credit against the 1.5% entity‑level       To be eligible, the basic research must be performed pursuant to a written
    tax (3.5% for financial S corporations) after applying the limitations relating   contract, performed by a qualified organization, and be performed within
    to passive activity losses and credits. If you are an S corporation claiming      California. See IRC Section 41(e) and R&TC Section 23609 for more
    this credit, compute the credit at 100%. Multiply the credit computed on this     information.
    form by 1/3 and transfer the amount to Schedule C (100S).                         Biopharmaceutical and Biotech Research Activities
• S corporations can pass through 100% of this credit to their                        For taxable years beginning on or after January 1, 1996, corporations (other
    shareholders on a pro‑rata basis. Partnerships allocate the credit among          than S corporations, personal holding companies, and service organizations)
    the partners according to the partner’s distributive share as determined in       that are engaged in certain biopharmaceutical research and biotech research
    a written partnership agreement. See R&TC Section 17039(e).                       and development activities (as defined in the next column), and that make
                                                                                      payments to hospitals run by public universities (as defined in the next
• If a taxpayer owns an interest in a disregarded business entity (a Single           column) or qualified cancer centers (as defined in the next column), may be
    Member Limited Liability Company not recognized [disregarded] by                  eligible to claim the “basic research” credit if they meet specific criteria.
    California for tax purposes that is treated as a sole proprietorship owned
    by an individual or a branch owned by a corporation), the amount of               The taxpayer’s biopharmaceutical activities must satisfy both of the
    the credit that can be utilized is limited to the difference between the          following:
    taxpayer’s regular tax computed with the income of the disregarded                • Meet at least one of the biopharmaceutical research activities described
    entity, and the taxpayer’s regular tax computed without the income                     in Codes 2833 to 2836, inclusive, or any research activities that are
    of the disregarded entity. If the disregarded entity reports a loss, the               described in Codes 3826, 3829, or 3841 to 3845, inclusive, of the
    taxpayer may not claim the credit this year but can carry over the credit              Standard Industrial Classification Manual published by the United States
    amount received from the disregarded entity. For more information on                   Office of Management and Budget, 1987 Edition.
    disregarded business entities, get Form 568, Limited Liability Company            • Use organisms or materials derived from organisms, and their cellular,
    Tax Booklet.                                                                           subcellular, or molecular components to provide pharmaceutical
This credit cannot reduce the minimum franchise tax (corporations and                      products for human or animal therapeutics and diagnostics. For
S corporations), annual tax (partnerships and QSub), alternative minimum                   biotechnology research and development, taxpayers must be involved
tax (corporations, exempt organizations, individuals, and fiduciaries),                    in research and development activities regarding the application of
built‑in gains tax (S corporations), or excess net passive income tax                      recombinant DNA technology or pharmaceutical delivery systems.
(S corporations).                                                                     If the taxpayer’s activities meet the criteria mentioned in the previous
This credit can reduce regular tax below tentative minimum tax (TMT). Get             paragraphs and such payments are made to a cancer center, the cancer
Schedule P (100, 100W, 540, 540NR, or 541), Alternative Minimum Tax and               center must be a “qualified cancer center” which is defined as meeting all of
Credit Limitations, for more information.                                             the following criteria:
This credit may be limited further. See IRC Section 41(g) and line 17b                • Is owned by a tax‑exempt organization described in IRC Section 501(c)(3).
instructions more information.                                                        • Is tax‑exempt under federal law. See IRC Section 501 (a).
Corporate Members of a Unitary or Combined Group                                      • Is not a private foundation.
This credit cannot be allocated or otherwise transferred to another taxpayer,         • Has been designated a “specialized laboratory cancer center.”
even if the other taxpayer is a member of a unitary or combined group or              • Has received Clinical Cancer Research Center status from the National
otherwise affiliated with the taxpayer that earned the credit. For example, a              Cancer Institute.
subsidiary corporation that generates a research credit cannot allocate the           If the taxpayer’s activities meet the criteria mentioned above and such
credit to the parent corporation.                                                     payments are made to a hospital owned by a public university, the hospital
                                                                                      must be an organization described in IRC Section 170(b)(1)(A)(iii), and the
                                                                                      public university that runs such hospital must be an institution of higher
D Carryover                                                                           education as described in IRC Section 3304(f).
If the available credit exceeds the current year tax, the unused credit can be
carried over to succeeding years until exhausted. Apply the carryover to the          Line 
earliest taxable year(s) possible. In no event can this credit be carried back        Enter the base amount as defined in IRC Section 41(e) and R&TC
and applied against a prior year’s tax.                                               Section 23609. The base period will generally be the three taxable
                                                                                      years preceding the taxpayer’s first taxable year beginning after
                                                                                      December 31, 1983. If you were not in existence during the base period
Specific Line Instructions                                                            for California purposes, you are subject to a minimum floor amount equal
                                                                                      to 50% of your current basic research payments. If you do business both
Part I – Credit Computation                                                           within and outside California, see General Information C, Limitations. The
For purposes of computing the credit, all members of a controlled group               amount of line 2 may not exceed the amount of line 1. The current basic
of corporations, as defined in IRC Section 41(f)(5), and all members of a             research payments that do not exceed the base period amount shall be
group of businesses under common control, are treated as a single taxpayer.           treated as contract research expenses included on line 8, (subject to the 65%
The credit allowed for each member is based on its proportionate shares               or 75% limitation).
of the group’s qualified research expenses and basic research payments.
Use Section A or Section B of Part I to compute the credit for the entire             Lines 5 and 6
group, but enter only this member’s share of the credit on line 17 or line 39,        See General Information B, Description, for information regarding qualified
                                                                                      research expenses.


Page       FTB 3523 Instructions 2008
Line 7                                                                             Line 7b – S corporations, estates, trusts, partnerships, and
See IRC Section 41(b)(2)(A)(iii) for rules on leased computer property if          LLCs:
you receive payments from anyone for the rental or lease of substantially          The amount of research credit passed through to your shareholders,
identical property. Also, see General Information B, Description, for              beneficiaries, partners, or members is the pro‑rata or distributive share
information regarding qualified research expenses.                                 of the amount on line 17a multiplied by the shareholder’s, beneficiary’s,
                                                                                   partner’s, or member’s applicable credit reduction percentage as follows:
Line 8
Include 65% of any amount paid or incurred for qualified research performed        • 90.7% (.907) for individuals and estates or trusts
on your behalf, in California. For corporations only, include 65% of the           • 91.16% (.9116) for corporations
portion of line 1 basic research payments that does not exceed the line 2          • 98.5% (.985) for S corporations
base period amount.                                                                In some cases, the pass‑through entity may not know what type of entity
However, use 75% in place of 65% for payments made to a qualified                  the shareholder, beneficiary, partner, or member is. In these cases, the
research consortium. See General Information B, Description, for information       pass‑through entity will report the pro‑rata share or distributive amount of
regarding qualified research consortium.                                           research credit on Schedule K‑1 (100S, 541, 565, or 568) without the IRC
                                                                                   Section 280C(c) reduction. The pass‑through entity reduces the credit by
Line 0                                                                            the shareholder’s, beneficiary’s, partner’s, or member’s applicable credit
Compute the fixed‑base percentage as follows:                                      reduction percentage.
Existing companies – The fixed‑base percentage is the ratio that the               Example : For the taxable year ending December 31, 2008, ABC, Inc., an
aggregate qualified research expenses for at least three taxable years from        S corporation, generated $3,000 in research credit. ABC, Inc. elects the
1984 to 1988 bear to the aggregate gross receipts for such taxable years.          reduced regular research credit. ABC, Inc. figures its research credit as
Round off the percentage to the nearest 1/100th of 1% (i.e., four decimal          follows:
places).                                                                           Step 1: $3,000 x 1/3 = $1,000
Start-up companies – A start‑up company is one that had both gross                 Step 2: $1,000 x 98.5% (.985) = $985
receipts and qualified research expenses during either of the following            This amount is the research credit available to ABC, Inc. for its 2008 taxable
periods:                                                                           year.
1. For the first time in a taxable year beginning after December 31, 1983.         John Anderson is the sole shareholder (100%) in ABC, Inc. John materially
2. For fewer than three taxable years beginning after December 31, 1983,           participates in the business of ABC, Inc., holds no interest in any passive
    and before January 1, 1989.                                                    activity, and does not have any non‑passive activity credit carryover from
A start‑up company has a 10‑year phase‑in period leading up to a credit            previous years. The election by ABC, Inc. to the reduced research credit also
based on five years of experience. The fixed‑base percentage is three              applies to John and his taxable year 2008 pass‑through research credit is
percent for each of the company’s first five taxable years beginning on or         computed as follows:
after January 1, 1994, that the company has qualified research expenses. To        Step 1: $3,000 x 100% (1.0) = $3,000
determine the fixed‑bases percentage for the sixth through tenth years, see        Step 2: $3,000 x 90.7% (.907) = $2,721
IRC Section 41(c)(3)(B)(ii).
                                                                                   This amount is the pass‑through research credit available to John for his
The maximum percentage that can be entered on line 10 is 16% (.16).                2008 taxable year.
Line                                                                             Example : Partnership AB has two partners each with 50% ownership.
Enter the average annual gross receipts for the four taxable years preceding       Partner A is an individual, and Partner B is a corporation. The partnership
the taxable year for which the credit is being determined (called the              elects the reduced regular research credit. The amount of regular credit
credit year). You may be required to annualize gross receipts for any short        computed by the partnership on line 17a is $2,000. Partnership AB would
taxable year. See IRC Section 41(c)(1)(B) and Section 41(f)(4) for more            figure each partner’s credit from the line 17a amount as follows:
information.                                                                       Partner A – $2,000 x 50% (.50) x 90.7% (.907) = $907
For purposes of line 10 and line 11, reduce gross receipts for any taxable         Partner B – $2,000 x 50% (.50) x 91.16% (.9116) = $912
year by returns and allowances made during the taxable year. In the case of        These amounts are the research credit available to Partner A and Partner B
a business that operates within and outside of California, include only the        for their 2008 taxable years.
gross receipts from the sale of property held primarily for sale to customers      Amounts received from S corporations, estates, trusts, partnerships, and
in the ordinary course of your trade or business that is delivered or shipped      LLCs, may be limited due to IRC Section 41(g) and the related regulations.
to customers in California, regardless of “free on board’’ (f.o.b.) point or any
other condition of the sale. This includes sales to the U.S. government, that
are delivered or shipped to customers in California. Throwback sales and           Section B – Alternative Incremental Credit
receipts from services, rents, operating leases and interest, royalties and        Complete this section ONLY if you are electing the alternative incremental
licenses are excluded from the computation.                                        credit instead of the regular credit. For taxable years ending on or after
                                                                                   January 3, 2001, make the election on a timely filed original return for the
Line 4                                                                            taxable year to which the election applies. Once made, the election applies to
The base amount cannot be less than 50% of the current year qualified              the current taxable year and all later years unless you receive the FTB’s consent
research expenses. This rule applies both to existing and start‑up                 to revoke the election.
companies.
                                                                                   Line 8
Line 7a                                                                           Corporations (other than S corporations, personal holding companies,
Unless you made an election to reduce the research credit, deductions under        and service organizations) may be eligible for a “basic research” credit if
IRC Section 174 or any other deduction or credit provision for research            the 2008 taxable year payments in cash made to a qualified university or
expenses or basic research payments must be reduced by the amount of               scientific research organization (under a written contract) exceed a base
your current year’s research credit. Attach a schedule to your tax return that     period amount (based on your general university giving and certain other
lists the deduction amounts (or capitalized expenses) that were reduced.           maintenance‑of‑effort levels for the three preceding years). To be eligible,
Identify the lines of your return (schedule or forms for capitalized items) on     conduct the basic research within California.
which the reductions were made.                                                    Enter your 2008 taxable year payments on line 18. See IRC Section 41(e)
                                                                                   and R&TC Section 23609(d) for details. Also see line 1 instructions for more
                                                                                   information.




                                                                                                                    FTB 3523 Instructions 2008 Page 
Line 9                                                                          The amount of research credit passed through to you on Schedule(s) K‑1
Enter the base amount as defined in IRC Section 41(e) and R&TC                   (100S, 541, 565, or 568) may be limited due to IRC Section 41(g) and the
Section 23609. If you do business both within and outside of California, see     related regulations. Specifically, the amount of credit entered on this line is
General Information C, Limitations. The amount on line 19 may not be more        limited to the amount of tax attributable to your interest in the proprietorship,
than the amount on line 18. This amount may be classified as 2008 taxable        S corporation, estate, trust, or partnership generating the credit. Use the
year contract research expenses on line 25 (subject to the 65% or 75%            formula below to determine the credit limitation. If you have pass‑through
limitation).                                                                     research credits from more than one business interest, compute the research
                                                                                 credit limitation separately for each business interest by applying the formula
Lines  and                                                                   below to each pass‑through credit.
See General Information B, Description, for information regarding qualified
research expenses.                                                               Credit Limit =             Taxable income attributable to
                                                                                                               your interest in the sole    x (Net income tax)
Line 4                                                                                                    proprietorship or pass‑through
See line 7 instructions.                                                                                        entity (Schedule K‑1)
                                                                                                             Total taxable income for the
Line 5                                                                                                        year (Form 540, line 19;
Include 65% of any amount paid or incurred for qualified research performed
                                                                                                            Long Form 540NR, line 19; or
on your behalf. For corporations only, include 65% of the portion of line 18
                                                                                                                  Form 541, line 20)
basic research payments that does not exceed the line 19 base period amount.
                                                                                 For purposes of completing the above formula, net income tax is regular tax
However, use 75% in place of 65% for payments made to a qualified
                                                                                 (from Form 540, line 24; Long Form 540NR, line 27; or Form 541, line 21)
research consortium. See General Information B, Description, for information
                                                                                 plus alternative minimum tax (from Form 540, line 31; Long Form 540NR,
regarding qualified research consortium.
                                                                                 line 39; or Form 541, line 26).
Line 7                                                                          The percentage representing taxable income attributable to your interest in
Enter the average annual gross receipts for the four taxable years preceding     the business to your total taxable income for the year cannot exceed 100%.
the taxable year for which the credit is being determined (called the credit     If in the current taxable year you had no income attributable to a particular
year). You may be required to annualize gross receipts for any short taxable     business interest, you cannot claim any research credit related to that
year. See IRC Sections 41(c)(1)(B) and 41(f)(4) for more information.            business this year; however, the credit can be carried over to succeeding
For purposes of line 27, reduce gross receipts for any taxable year by returns   years until exhausted. Likewise, any current year pass‑through research
and allowances made during the taxable year. In the case of a business that      credit that exceeds the IRC Section 41(g) limitation may be carried over to
operates within and outside of California, include only the gross receipts       succeeding years until exhausted.
from the sale of property held primarily for sale to customers in the ordinary   All pass‑through credit carryovers will be subject to the IRC Section 41(g)
course of your trade or business that is delivered or shipped to customers       limitation in each subsequent year.
in California, regardless of f.o.b. point or any other condition of the sale.
This includes sales to the U.S. government, that are delivered or shipped to     Line 44
customers in California. Throwback sales and receipts from services, rents,      If any part of the amount on line 41 is from a passive activity, complete
operating leases and interest, royalties and licenses are excluded from the      form FTB 3801‑CR, Passive Activity Credit Limitations, or form FTB 3802,
computation.                                                                     Corporate Passive Activity Loss and Credit Limitations, to determine your
                                                                                 allowable credit. Complete form FTB 3801‑CR or form FTB 3802 (using
Line 9a                                                                         California amounts) before completing the rest of this form.
See line 17a instructions.
                                                                                 Line 45
Line 9b                                                                         Enter any prior year research credit carryover from non-passive activities
See line 17b instructions.                                                       only. Any prior year research credit carryover from passive activities should
                                                                                 have been included in the computation of allowable credits from passive
Line 40 – Individuals, shareholders, beneficiaries, partners,                    activities (form FTB 3801‑CR or form FTB 3802) on line 44.
and members:
If the S corporation, estate, trust, partnership, and LLC elected the reduced    Individuals, shareholders, beneficiaries, partners, and members: If the
research credit, the amount of research credit passed through to you on          non‑passive research credit carryover was generated from a pass‑through
Schedule(s) K‑1 (100S, 541, 565, or 568) should reflect a research credit        entity, apply the IRC Section 41(g) limitation to the credit carryover before
amount in which the applicable credit reduction percentage has been applied.     entering the allowable carryover on line 45. See the instructions for line 40
Make your election of the credit reduction consistent with that of the pass‑     above on how to compute the IRC Section 41(g) limitation.
through entity. However, the credit reduction percentage may differ from that
                                                                                 Line 46
of the pass‑through entity.
                                                                                 The amount of this credit you may claim on your tax return may be limited
In some cases, the pass‑through entity may not know what type of entity          further. Refer to the credit instructions in your tax booklet for more
the shareholder, beneficiary, partner, or member is. In these cases, the         information. These instructions also explain how to claim this credit on your
pass‑through entity will report the pro‑rata or distributive amount of           tax return. Use credit code number 8 to claim this credit. See General
research credit on Schedule K‑1 (100S, 541, 565, or 568) without the             Information C, Limitations, for more information.
IRC Section 280C(c) reduction. The pass‑through entity will note in the
other information section of the Schedule K‑1 (100S, 541, 565, or 568) to
reduce the credit by the shareholder’s, beneficiary’s, partner’s, or member’s
applicable credit reduction percentage as follows:
• 90.7% (.907) for individuals and estates or trusts
• 91.16% (.9116) for corporations
• 98.5% (.985) for S corporations




Page 4     FTB 3523 Instructions 2008

				
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