Form 3523 - Research Credit - 2015 Page 6

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Line 2
For purposes of line 10 and line 11, reduce gross receipts for any
taxable year by returns and allowances made during the taxable year.
Enter the base amount as defined in IRC Section 41(e) and R&TC
In the case of a business that operates within and outside of California,
Section 23609. The base period will generally be the three taxable
include only the gross receipts from the sale of property held primarily
years preceding the taxpayer’s first taxable year beginning after
for sale to customers in the ordinary course of your trade or business
December 31, 1983. If you were not in existence during the base period
that is delivered or shipped to customers in California, regardless of
for California purposes, you are subject to a minimum floor amount equal
“free on board’’ (f.o.b.) point or any other condition of the sale. This
to 50% of your current basic research payments. If you do business both
includes sales to the U.S. government, that are delivered or shipped to
within and outside California, see General Information C, Limitations. The
customers in California. Throwback sales and receipts from services,
amount of line 2 may not exceed the amount of line 1. The current basic
rents, operating leases and interest, royalties and licenses are excluded
research payments that do not exceed the base period amount shall be
from the computation.
treated as contract research expenses included on line 8, (subject to the
65% or 75% limitation).
If you have no California gross receipts for the previous four years
(under LDG 2012‑03‑01), enter $0 on line 11.
Lines 5 and 6
See General Information B, Description, for information regarding
Line 14
qualified research expenses.
The base amount cannot be less than 50% of the current year qualified
research expenses. This rule applies both to existing and start‑up
Line 7
companies.
See IRC Section 41(b)(2)(A)(iii) for rules on leased computer property if
If you have no California gross receipts (under LDG 2012‑03‑01), you
you receive payments from anyone for the rental or lease of substantially
must calculate your base amount using the ‘minimum base amount’
identical property. Also, see General Information B, Description, for
of 50% of the current year qualified research expenses. See IRC
information regarding qualified research expenses.
Section 41(c)(2).
Line 8
Line 17a
Include 65% of any amount paid or incurred for qualified research
Unless you made an election to reduce the research credit, deductions
performed on your behalf, in California. For corporations only, include
under IRC Section 174 or any other deduction or credit provision for
65% of the portion of line 1 basic research payments that does not
research expenses or basic research payments must be reduced by the
exceed the line 2 base period amount.
amount of your current year’s research credit. Attach a schedule to your
However, use 75% in place of 65% for payments made to a qualified
tax return that lists the deduction amounts (or capitalized expenses) that
research consortium. See General Information B, Description, for
were reduced. Identify the lines of your tax return (schedule or forms for
information regarding qualified research consortium.
capitalized items) on which the reductions were made.
Line 10
Line 17b – S corporations, estates, trusts, partnerships,
Compute the fixed‑base percentage as follows:
and LLCs:
Existing companies – The fixed‑base percentage is the ratio that the
The amount of research credit passed through to your shareholders,
aggregate qualified research expenses for at least three taxable years
beneficiaries, partners, or members is the pro‑rata or distributive share
from 1984 to 1988 bear to the aggregate gross receipts for such taxable
of the amount on line 17a multiplied by the shareholder’s, beneficiary’s,
years. Round off the percentage to the nearest 1/100th of 1% (i.e., four
partner’s, or member’s applicable credit reduction percentage as follows:
decimal places).
• 87.7% (.877) for individuals and estates or trusts
Start-up companies – A start‑up company is one that had both gross
• 91.16% (.9116) for corporations
receipts and qualified research expenses during either of the following
• 98.5% (.985) for S corporations
periods:
In some cases, the pass‑through entity may not know what type of entity
1. For the first time in a taxable year beginning after
the shareholder, beneficiary, partner, or member is, in these cases, the
December 31, 1983.
pass‑through entity will report the pro‑rata share or distributive amount
2. For fewer than three taxable years beginning after
of research credit on Schedule K‑1 (100S, 541, 565, or 568) without
December 31, 1983, and before January 1, 1989.
the IRC Section 280C(c) reduction. The pass‑through entity will note in
A start‑up company has a 10‑year phase‑in period leading up to a credit
the other information section of the Schedule K‑1 (100S, 541, 565, or
based on five years of experience. The fixed‑base percentage is three
568) to reduce the credit by the shareholder’s, beneficiary’s, partner’s, or
percent for each of the company’s first five taxable years beginning
member’s applicable credit reduction percentage.
on or after January 1, 1994, that the company has qualified research
Example 1: For the taxable year ending December 31, 2015, ABC, Inc.,
expenses. To determine the fixed‑bases percentage for the sixth through
an S corporation, generated $3,000 in research credit. ABC, Inc. elects
tenth years, see IRC Section 41(c)(3)(B)(ii).
the reduced regular research credit. ABC, Inc. figures its research credit
The maximum percentage that can be entered on line 10 is 16% (.16).
as follows:
If you have no California gross receipts (under LDG 2012‑03‑01), you
Step 1: $3,000 x 1/3 = $1,000
must calculate your fixed‑base percentage as a start‑up company, using
Step 2: $1,000 x 98.5% (.985) = $985
as “year one” the first taxable year beginning on or after January 1, 1994
This amount is the research credit available to ABC, Inc. for its 2015
in which you have qualified research expenses. In your sixth year and
taxable year.
beyond, if a mathematical calculation is impossible because division
John Anderson is the sole shareholder (100%) in ABC, Inc. John
by zero gross receipts results in a mathematical error, the statutory
materially participates in the business of ABC, Inc., holds no interest in
language of IRC Section 41(c)(3)(C) controls, and you must use a
any passive activity, and does not have any non‑passive activity credit
fixed‑base percentage of 16% (.16).
carryover from previous years. The election by ABC, Inc. to reduce the
Line 11
research credit also applies to John. His taxable year 2015 pass‑through
research credit is computed as follows:
Enter the average annual gross receipts for the four taxable years
preceding the taxable year for which the credit is being determined
Step 1: $3,000 x 100% (1.0) = $3,000
(called the credit year). You may be required to annualize gross
Step 2: $3,000 x 87.7% (.877) = $2,631
receipts for any short taxable year. See IRC Section 41(c)(1)(B) and
This amount is the pass‑through research credit available to John for his
Section 41(f)(4) for more information.
2015 taxable year.
FTB 3523 Instructions 2015 Page 3

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