Form 3523 - California Research Credit - 2014 (Page 5 of 8) in pdf

Specific Line Instructions

• S corporations may claim only 1/3 of the credit against the 1.5% entity‑

level tax (3.5% for financial S corporations) after applying the limitations

Part I – Credit Computation

relating to passive activity losses and credits. If you are an S corporation

claiming this credit, compute the credit at 100%. Multiply the credit

For purposes of computing the credit, all members of a controlled

computed on this form by 1/3 and transfer the amount to Schedule C

group of corporations, as defined in IRC Section 41(f)(5), and all

(100S), S Corporation Tax Credits.

members of a group of businesses under common control, are treated

• S corporations can pass through 100% of this credit to their

as a single taxpayer. The credit allowed for each member is based on

shareholders on a pro‑rata basis. Partnerships allocate the credit

its proportionate shares of the group’s qualified research expenses

among the partners according to the partner’s distributive share

and basic research payments. Use Section A or Section B of Part I to

as determined in a written partnership agreement. See R&TC

compute the credit for the entire group, but enter only this member’s

Section 17039(e).

share of the credit on line 17 or line 39, whichever applies. Attach

If a C corporation had unused credit carryovers when it elected

a statement showing how this member’s share of the credit was

S corporation status, the carryovers were reduced to 1/3

computed, and write “See attached” next to the entry space for line 17

and transferred to the S corporation. The remaining 2/3 were

or line 39.

disregarded. The allowable carryovers may be used to offset the

Section A – Regular Credit

1.5% tax on net income in accordance with the respective carryover

rules. These C corporation carryovers may not be passed through to

Line 1

shareholders. For more information, get Schedule C (100S).

Corporations (other than S corporations, personal holding companies,

• If a taxpayer owns an interest in a disregarded business entity [a

and service organizations) may be eligible for a “basic research” credit

Single Member Limited Liability Company (SMLLC) not recognized

if the cash payments exceed the base period amount as determined on

(disregarded) by California and for tax purposes is treated as a

line 2 of this section.

sole proprietorship owned by an individual or a branch owned by a

corporation], the amount of the credit that can be utilized is limited

Enter the basic research payments paid in cash during the 2014

to the difference between the taxpayer’s regular tax computed with

taxable year and made to a qualified university or scientific research

the income of the disregarded entity, and the taxpayer’s regular

organization. To be eligible, the basic research must be performed

tax computed without the income of the disregarded entity. If the

pursuant to a written contract, performed by a qualified organization,

disregarded entity reports a loss, the taxpayer may not claim the

and be performed within California. See IRC Section 41(e) and R&TC

credit this year but can carry over the credit amount received from

Section 23609 for more information.

the disregarded entity. For more information on disregarded business

Biopharmaceutical and Biotech Research Activities

entities, get Form 568, Limited Liability Company Tax Booklet.

For taxable years beginning on or after January 1, 1996, corporations

This credit cannot reduce the minimum franchise tax (corporations

(other than S corporations, personal holding companies, and service

and S corporations), annual tax (partnerships and QSub), alternative

organizations) that are engaged in certain biopharmaceutical research

minimum tax (corporations, exempt organizations, individuals, and

and biotech research and development activities (as defined below), and

fiduciaries), built‑in gains tax (S corporations), or excess net passive

that make payments to hospitals run by public universities (as defined

income tax (S corporations).

below) or qualified cancer centers (as defined below), may be eligible to

claim the “basic research” credit if they meet specific criteria.

This credit can reduce regular tax below tentative minimum tax (TMT).

Get Schedule P (100, 100W, 540, 540NR, or 541), Alternative Minimum

The taxpayer’s biopharmaceutical activities must satisfy both of the

Tax and Credit Limitations, for more information.

following:

This credit may be limited further. See IRC Section 41(g) and line 17b

• Meet at least one of the biopharmaceutical research activities

instructions for more information.

described in Codes 2833 to 2836, inclusive, or any research activities

that are described in Codes 3826, 3829, or 3841 to 3845, inclusive,

D Assignment of Credits

of the Standard Industrial Classification Manual published by the

United States Office of Management and Budget, 1987 Edition.

Assigned Credits to Affiliated Corporations – For taxable years

• Use organisms or materials derived from organisms, and

beginning on or after July 1, 2008, credit earned by members of a

their cellular, subcellular, or molecular components to provide

combined reporting group may be assigned to an affiliated corporation

pharmaceutical products for human or animal therapeutics and

that is a member of the same combined reporting group. A credit

diagnostics. For biotechnology research and development, taxpayers

assigned may only be claimed by the affiliated corporation against its

must be involved in research and development activities regarding

tax in taxable years beginning on or after January 1, 2010. For more

the application of recombinant DNA technology or pharmaceutical

information, get form FTB 3544, Election to Assign Credit Within

delivery systems.

Combined Reporting Group, or form FTB 3544A, List of Assigned Credit

If the taxpayer’s activities meet the criteria mentioned in the previous

Received and/or Claimed by Assignee or go to ftb.ca.gov and search for

paragraphs and such payments are made to a cancer center, the cancer

credit assignment.

center must be a “qualified cancer center” which is defined as meeting

all of the following criteria:

E Carryover

• Is owned by a tax‑exempt organization described in

If the available credit exceeds the current year tax liability, the unused

IRC Section 501(c)(3).

credit can be carried over to succeeding years until exhausted. Apply the

• Is tax‑exempt under federal law. See IRC Section 501(a).

carryover to the earliest taxable year possible. In no event can this credit

• Is not a private foundation.

be carried back and applied against a prior year’s tax.

• Has been designated a “specialized laboratory cancer center.”

• Has received Clinical Cancer Research Center status from the

National Cancer Institute.

If the taxpayer’s activities meet the criteria mentioned above and such

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 education as described in IRC Section 3304(f).

Page 2 FTB 3523 Instructions 2014

Form 3523 - California Research Credit - 2014 Page 5

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