Pursuant to California Revenue and Taxation Code sections 17052.12 and 23609, in order for an activity or project to qualify for the research credit, the taxpayer must show that it meets all of the requirements in Internal Revenue Code section 41(d).
For expenses to qualify for the research credit, taxpayers must meet the following four tests:
1. The research must have qualified as a business deduction under IRC §174. [IRC §41(d)(1)(A)]
2. The research must be undertaken to “discover information which is technological in nature.” [IRC §41(d)(1)(B)(i)]
3. The taxpayer must intend to use the information to develop a new or improved business component. [IRC §41(d)(1)(B)(ii)]
4. The taxpayer must pursue a “process of experimentation” during substantially all of the research. [IRC §41(d)(1)(C)]
Note: Qualified research shall only include research conducted in California.