California Assembly Speaker Toni Atkins has introduced legislation (AB 437) that would allow California small businesses the ability to receive a grant based on R&D credits they have earned but cannot utilize due to lack of tax liability. Atkins asserts the legislation would allow small businesses to reinvest the money into additional R&D or expansion in California (http://www.sddt.com/Commentary/article.cfm?SourceCode=20150427tza&Commentary_ID=350&_t=Helping+small+businesses+with+RD#.VUajDvnfs1R). However, others question whether the legislation presents another loophole in the state tax system (http://www.sacbee.com/news/politics-government/dan-walters/article19451610.html).
As currently drafted, the legislation provides that qualified small businesses can receive a one-time grant in an amount equal to 10% of the excess credit generated during the tax years beginning on or after January 1, 2014 and before January 1, 2016. Businesses could receive the grant any time on or after January 1, 2016 and before January 1, 2021.
The legislation also provides that qualified small businesses can annually apply for and receive a grant in an amount equal to 15% of the excess credit attributable to the tax year for which the credit is allowed. The grant would be available for tax years beginning on or after January 1, 2016 and before January 1, 2025.
Qualified small businesses would have to file for the grants on original filed tax returns. Upon the FTB issuing a certificate for a grant, the recipient would have to reduce its R&D credit carry forward by the amount of the credit utilized on the return to calculate the grant.
A qualified small business is defined as a taxpayer that is allowed a R&D credit and has gross receipts of $5 million or less for the tax year. A qualified small business cannot be an affiliated corporation that is treated as a member of a combined reporting group. The legislation also provides that no grant may be awarded with respect to a credit that may be assigned. The Governor’s Office of Business and Economic Development would have to certify the taxpayer as an eligible qualified small business.
Some states such as Iowa, Louisiana, Nebraska, and Virginia, provide refundable R&D credit opportunities for all taxpayers. Other states have established programs to allow growing businesses to exchange unused R&D credits for current funding. For example, Connecticut provides small businesses, defined as gross income of $70 million or less, to sell unused R&D credits to the state for 65% of their value. New Jersey allows unprofitable technology or biotechnology companies with fewer than 225 employees to sell R&D credits to unrelated profitable corporations for up to 80% of their value. The California legislation provides a different approach in that qualified small businesses would only receive a small portion of the claimed credit, 10% or 15%, in the form of a grant. The grant would not be includable in gross income. The legislation sets annual aggregate grant limits of $50 million with allocations provided on a first-come first-serve basis.
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