Assembly Bill 1042 (Wayne), as enacted on October 3, 1997, made the following changes to California law:
SUBJECT: Research Expenses Credit/Conformity to 1996 Federal Small Business Job Protection Act
Sections 17052.12 and 23609 of the Revenue and Taxation Code are amended.
This act conforms state law, with some modifications, to the changes made to the federal research credit by the Small Business Job Protection Act of 1996 (See attached). This act provides the following modifications:
- The state alternative incremental credit amount is a relative percentage of the federal alternative incremental credit amount using the ratio that exists in current law between the federal (20%) and state (11%) research tax credits.
- California taxpayers may make the alternative incremental credit election at any one time.
This act also contains a technical change that removes language that referred to the Congressional Public Law that enacted the Revenue Reconciliation Act of 1993. This Public Law reference no longer is necessary because the date-change conformity was enacted this year by Senate Bill 455 (Stats. 1997, Ch. 611).
This act applies to taxable or income years beginning on or after January 1, 1998.
NOTE: This act chapters out changes to Sections 17052.12 and 23609 made by Senate Bill 455 (Stats. 1997, Ch. 611), which provided that for 1997 taxable or income years the changes to the federal research credit do not apply for state purposes. Because this bill and SB 455 were not double-joined and this bill did not contain the same changes as SB 455, the enactment of this act eliminates the changes made by SB 455.
This act will not require any reports by the department to the Legislature.
ATTACHMENT
Legislative Change # 97-22
Assembly Bill 1042 (Stats. 1997, Ch. 613)
The federal Small Business Job Protection Act of 1996 (the 1996 Act) (PL 104-188, Sec. 1204) reinstated the federal research credit for the 11 month period from July 1, 1996, through May 31, 1997, with a special rule for taxpayers who elect an alternative incremental research credit rule, as discussed below.
The 1996 Act also expands the definition of "start-up firms" to include any firm if the first taxable year in which the firm had both gross receipts and qualified research expenses began after 1983. Because this change would allow these companies to use a base period for computing the credit based on the current five-year period, this change would allow the credit to qualifying companies who would not have been eligible for the prior law credit (because the research expenses in the current year do not exceed their expenses for the base year period of 1984-1988).
In addition, the 1996 Act allows taxpayers to elect an alternative incremental research credit, which is substituted for the regular research credit. For taxpayers who elect the alternative incremental credit for their first tax year beginning after June 30, 1996, and before July 1, 1997, the research credit applies to all qualified research expenses paid or incurred during the first 11 months of that tax year. If a taxpayer makes this election, the taxpayer is assigned a three-tiered fixed base percentage that is lower than the fixed base percentage allowed under the general research credit, and the credit rate is likewise reduced. An election to use this alternative incremental credit may be made only for the taxpayer’s first taxable year beginning after June 30, 1996, and before July 1, 1997, and the election applies to that taxable year and all subsequent years (in the event that the credit subsequently is extended by Congress) unless the election is revoked with the consent of the Secretary of the Treasury.
The 1996 Act also provides a special rule for payments made to certain nonprofit research consortia. This special rule increased from 65% to 75% the amount of contract research expenses that may be treated as qualified research expenses eligible for the research credit if those expenses are paid to certain nonprofit research consortia. To qualify, the research consortia must be a tax-exempt organization (other than a private foundation) organized and operated primarily to conduct scientific research, and the qualified research must be conducted by the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer.