BILL ANALYSIS Ó
AB 1564
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Date of Hearing: April 28, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1564 (V. Manuel Perez) - As Amended: April 22, 2014
2/3 vote. Fiscal committee
SUBJECT : Income taxes: research and development credit:
credit sale and purchase
SUMMARY : Temporarily increases the rates of the general
research credit and the university "basic research" credit and
allows taxpayers to sell and purchase research credits, as
provided, under the Research and Development Tax Credit Trade
Program (Program). Specifically, this bill :
1)Includes legislative findings and declarations relating to the
creation of an environment in California that is rich in
research and development and supportive of the innovation
economy with a highly skilled workforce and a tax system that
rewards capital expenditures.
2)Provide for an increased rate of the general research tax
credit applied to qualified research expenses under the
Personal Income Tax (PIT) Law, as follows:
a) 18% beginning on or after January 1, 2014, and before
January 1, 2015.
b) 21% beginning on or after January 1, 2015, and before
January 1, 2016.
c) 24% beginning on or after January 1, 2016, and before
January 1, 2017.
d) 27% beginning on or after January 1, 2017, and before
January 1, 2018.
e) 30% beginning on or after January 1, 2018, and before
January 1, 2019.
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f) 15% beginning on or after January 1, 2019.
3)Provide for an increased rate of the general research tax
credit applied to qualified research expenses, under the
Corporate Tax (CT) Law, as follows:
a) 18% beginning on or after January 1, 2014, and before
January 1, 2015.
b) 21% beginning on or after January 1, 2015, and before
January 1, 2016.
c) 24% beginning on or after January 1, 2016, and before
January 1, 2017.
d) 27% beginning on or after January 1, 2017, and before
January 1, 2018.
e) 30% beginning on or after January 1, 2018, and before
January 1, 2019.
f) 15% beginning on or after January 1, 2019.
4)Provide for an increased rate of the credit applied to
university "basic research" payments, under the CT Law, as
follows:
a) 27% beginning on or after January 1, 2014, and before
January 1, 2015.
b) 30% beginning on or after January 1, 2015, and before
January 1, 2016.
c) 33% beginning on or after January 1, 2016, and before
January 1, 2017.
d) 36% beginning on or after January 1, 2017, and before
January 1, 2018.
e) 39% beginning on or after January 1, 2018, and before
January 1, 2019.
f) 24% beginning on or after January 1, 2019.
5)Allows a taxpayer, under either the PIT or CT law, to sell or
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purchase the general research tax credit and the university
"basic research" tax credit (collectively referred to as "R&D
credits"), as provided.
6)Establishes the Research and Development Tax Credit Trade Fund
(Fund) in the State Treasury.
7)Requires the State Treasurer's Office to do all of the
following:
a) Develop and administer the Program to allow the sale or
purchase of R&D credits.
b) Create an Internet Web site through which approved
taxpayers may, by January 1, 2017, make a sale or purchase
of R&D credits.
c) Approve a taxpayer to sell its R&D credits, prior to the
sale, if that taxpayers has all of the following:
i) A facility in which research and development occurs
in California;
ii) Less than $50 million in earnings before income tax,
depreciation, and amortization;
iii) Unused R&D credits from a previous taxable year; and
iv) A determination from the Franchise Tax Board (FTB)
that the credits to be sold are valid.
d) Approve a taxpayer to purchase an R&D credit, prior to
the purchase, if both of the following requirements are
met:
i) The taxpayer has had qualified research expenses, as
defined in Revenue and Taxation Code (R&TC) Sections
17052.12 and 23609 and Internal Revenue Code (IRC)
Section 41, within the past five years; and,
ii) The taxpayer conducts a trade or business in
California.
e) Create an online account for approved taxpayers to allow
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the taxpayers to log into the Internet Web site to sell or
purchase the R&D credits.
f) Notify the FTB of each sale or purchase of a credit, the
identity of the seller, the identity of the purchaser, and
the amount of the credit sold quarterly.
8)Allows a taxpayer to request approval by the Treasurer's
Office to sell or purchase the R&D credit.
9)Prohibits the Treasurer's Office from approving a taxpayer to
sell or purchase more than $5 million in unused research and
development tax credits per taxable year.
10)Requires the FTB to notify the Treasurer's Office quarterly
of all taxpayers that claim an R&D credit and the amount of
the credit claimed.
11)Specifies that the price of the credit shall be based on the
open-market demand, but shall not be less than 75% of the face
value of the credit.
12)Provides that, if the taxpayer does not reinvest the money
received from the sale of the credit into the taxpayer's trade
or business, or if the purchased credits reduce the taxpayer's
tax liability by more than 50%, then all of the following will
occur:
a) Any remaining unapplied credit shall be canceled;
b) Any previously applied credit that was not reinvested or
that exceeds 50% of the taxpayer's tax liability shall be
recaptured; and,
c) The taxpayer shall be liable for any increase in tax
attributable to the recapture of any credit previously
allowed.
13)Limits the total amount of the R&D credits that may be sold
in a calendar year to $100 million.
14)Requires the Treasurer's Office to deposit into the Fund an
amount equal to 15% of the face value of each credit sold or
purchased on the Internet Web site, until the Office has been
fully reimbursed for its costs of developing, creating, and
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starting the Program and appropriates the money in the Fund as
follows:
a) Moneys in an amount equal to 13% of the face value of
each credit is appropriated to the Treasurer's Office for
the administrative and start-up costs of implementing the
Program.
b) Moneys in an amount equal to 2% of the face value of
each credit is appropriated to the FTB for the
administrative costs of implementing the Program.
15)Requires the Treasurer's Office to deposit into the Fund an
amount equal to 5% of the face value of each credit sold or
purchased on the Internet Web site, once the Office has been
fully reimbursed for its costs of developing, creating, and
starting the Program and appropriates the money in the Fund as
follows:
a) Moneys in an amount equal to 3% of the face value of
each credit is appropriated to the Treasurer's Office for
the administrative costs of implementing the Program.
b) Moneys in an amount equal to 2% of the face value of
each credit is appropriated to the FTB for the
administrative costs of implementing the Program.
16)Allows 85% of the face value of each credit to be used as a
credit against the "net tax" or
tax, whichever is applicable, of the taxpayer that purchased the
credit, as long as 15% of the face amount of each credit sold
or purchased is deposited in the Fund. Increases this
percentage to 95%, once the Treasurer's office has been fully
reimbursed for its costs of developing, creating, and starting
the Program and only 5% of each credit amount is deposited in
the Fund.
EXISTING FEDERAL LAW :
1)Allows taxpayers engaged in a trade or business to deduct all
of the ordinary and necessary business expenses incurred.
2)Allows a R&D tax credit that is combined with several other
credits to form the general business credit. The R&D credit
is designed to encourage companies to increase their R&D
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activities.
3)Specifies that the R&D credit is equal to 20% of the qualified
research expenses that exceed the base year amount, as
defined, plus 20% of the amount paid or incurred during the
taxable year on research undertaken by an energy research
consortium.
4)Defines "base year amount" as the product of the average
annual gross receipt of the taxpayer for the four taxable
years preceding the taxable year the credit is earned times a
fixed percentage, but under no circumstances may the base year
amount be less than 50% of the qualified research for the
taxable year.
5)Authorizes an additional credit to corporate taxpayers equal
to 20% of expenses paid to fund "basic research" at
universities and certain nonprofit scientific research
organizations.
6)States that a taxpayer was allowed, prior to January 1, 2009,
to elect an alternative incremental research credit (AIRC) for
determining its R&D credit. The federal percentages are 3%,
4%, and 5%.
7)Allows an alternative simplified credit (ASC) equal to 14% of
research expenses that exceed 50% of the average research
costs for the three preceding taxable year.
8)Specifies that, in order to qualify for the R&D credit,
research expenses must qualify as an expense or be subject to
amortization, be conducted in the U.S. and be paid by the
taxpayer.
9)Provides that "qualified research" is research that is:
a) Undertaken to discover information that is technological
in nature;
b) Primarily involves experimentation related to quality or
to a new or improved function or performance; and,
c) Its application will be useful in developing new or
improved business components for the taxpayer.
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EXISTING STATE LAW :
1)Allows various tax credits designed to either provide tax
relief for taxpayers who incur certain expenses or to
influence taxpayers' behavior.
2)Conforms California to the federal R&D credit but with the
following modifications:
a) The state R&D credit is not combined with other business
credits.
b) Both "qualified research" and "basic research" must be
undertaken in California.
c) The credit percentage for increasing qualified research
activities in California is 15%.
3)Provides an alternative credit of 24% (versus the 20% federal
credit) for "basic research", available for "C" corporations
only.
4)Sets the percentages for the alternative incremental research
portion of the credit lower than those of the federal credit.
5)Allows the R&D credit, which is permanent, for taxable years
beginning on or after January 1, 1987.
6)Allows taxpayers that are members of a combined reporting
group to make a one-time irrevocable assignment of eligible
credits to another member. However, the assigned credits may
be utilized to reduce tax only for taxable years beginning on
or after January 1, 2010.
FISCAL EFFECT : Unknown
COMMENTS :
1)The author's statement : The author provided the following
statement in support of this bill:
"California has traditionally been a pioneer of trends and
technologies that have transformed the world. As California
emerges from the recession, it needs an economic strategy that
focuses on research and development (R&D) to help spur new
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products and services, leading to business development and job
creation. AB 1564 would invest in the state's future by
doubling the state's existing R&D tax credit from 15% to 30%.
The bill would also create the Research and Development Tax
Credit Trade Program. ? Under the program, companies would be
authorized to purchase and sell available credits. A
centralized R&D tax credit program ? ensures the program is
part of a coordinated, state-wide economic development
strategy."
2)Arguments in support . The proponents of this bill state that
increasing the R&D credit percentage "will incent more
companies to engage R&D in California, producing badly needed
California jobs." The proponents also assert that this bill
would assist start-up companies "to continue to invest in
their product or service at a time when increased capital can
often mean the survival of the company."
3)Arguments in opposition . The opponents of this bill argue
that it would "raise research and development (R&D) tax
credits to an unjustifiably high level and create the
possibility for abuse by allowing these tax credits to be
purchased and sold." They state that California "already has
the nation's highest R&D tax credit - one that almost rivals
federal R&D tax credits and completely eliminates tax
liability for profitable corporations." The opponents also
object to the sale of tax credits as it would create
"opportunities for those who are not even involved in research
to profit from sheltering their own taxes." Finally, the
opponents conclude that while "encouraging more research in
California is a laudable goal, this bill would not help us
reach it."
4)R&D credit background : California enacted the credit for
research expenses in 1987 as part of two general federal tax
conformity bills [AB 1172 (Klehs), Chapter 1138, Statutes of
1987 and SB 572 (Garamendi), Chapter 1139, Statutes of 1987.]
The original credit percentage was 8% of qualified research
expenses. Since that time, the California R&D credit rate was
amended several times and, finally, was increased from 12% to
15% in 2000 [AB 511 (Alquist), Chapter 107, Statutes of 2000.]
The alternative incremental computation of the R&D credit
was adopted in 1997 [AB 1042 (Wayne), Chapter 613, Statutes of
1997] and was subsequently amended to reflect the changes to
the California research credit percentage [AB 2798 (Machado),
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Chapter 323, Statutes of 1998]. Unlike the federal R&D
credit, the California R&D credit is permanent.
5)The Scope of the California R&D Credit . The California R&D
credit is very similar to the federal R&D credit and is,
generally, available with respect to incremental increases in
qualified research. "Qualified research expenses" eligible
for the credit consist of in-house expenses for wages and
supplies attributable to that research, certain time-sharing
costs for computer use, and 65% of the contract research
expenses. However, "qualified research expenses" include 100%
of amounts paid by the taxpayer to an eligible small business,
university, or Federal laboratory for qualified energy
research. Under California law, qualified research includes
only research conducted in California.
a) General Rule . The amount of the California R&D credit
equals to the sum of: (i) 15% of the amount by which the
taxpayer's qualified research expenses for a taxable year
exceed its "base amount for that year", and (ii) 15% of the
taxpayer's expenditures on research undertaken by an energy
research consortium (the so-called 'energy research
credit'). The energy research credit applies to all
qualified expenditures, not just those in excess of a base
amount. In addition, corporate taxpayers are also allowed
a credit of 24% (in contrast to 20% allowed under federal
law) of expenses paid to fund basic research at
universities and certain nonprofit scientific research
organizations.
b) AIRC Regime . Taxpayers are allowed to elect an AIRC
regime, in which case the taxpayer is assigned a
three-tiered, fixed-base percentage and the credit rate,
likewise, is reduced. For example, under federal law, for
amounts paid after 2006, a credit rate of 3% applies to the
extent that a taxpayer's current-year research expenses
exceed a base amount computed by using a fixed-base
percentage of 1% (i.e., the base amount equals 1% of the
taxpayer's average gross receipts for the four preceding
years) but do not exceed a base amount computed by using a
fixed-base percentage of 1.5%. The other two applicable
tier percentages are 4% (of expenses between 1.5% and 2% of
the base amount) and 5% (of expenses exceeding 2% of the
base amount). In California, the applicable AIRC rates are
1.49%, 1.98%, and 2.48%, respectively. The federal AIRC,
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unlike the California AIRC, does not apply to any expenses
paid or incurred after December 31, 2009.
c) AS Credit . Under federal law, a taxpayer may elect to
claim an AS credit for qualified research expenses. For
taxable years beginning on or after January 1, 2009, the
credit amount is equal to 14% of qualified research
expenses that exceed 50% of the average qualified research
expenses for the three preceding taxable years. The rate
is reduced to 6% if a taxpayer has no qualified research
expenses in any one of the three preceding taxable years.
An election applies to all subsequent taxable years, unless
revoked with the consent of the Secretary of the U.S.
Treasury. In California, an AS credit is not allowed.
d) Deduction of research expenses . Under both the federal
and California laws, research and experimental expenditures
may be deducted currently, or may be amortized over a
60-month period at the election of the taxpayer.
Deductions allowed to a taxpayer are reduced by an amount
equal to 100% of the taxpayer's R&D tax credit determined
for the taxable year. Taxpayers may elect to claim a
reduced R&D credit amount in lieu of reducing the
deductions.
6)What does the bill do ? Under both the PIT and CT Law, the R&D
credit provision of this bill would incrementally increase the
credit percentage applied to qualified research expenses in
excess of the base amount from 15% to 30%. The increase will
occur over a five-year period beginning on January 1, 2014.
Additionally, under the CT Law, the R&D provision would
increase the credit percentage applied to basic research from
24% to 39%. The increase would occur at a rate of 3% for
three years. For taxable years beginning on or after January
1, 2019, the credit percentage applied for basic research will
be reduced from 39% to 24%.
AB 1564 also proposes to create the Program to allow taxpayers,
with $50 million or less of gross revenues, to sell their R&D
credit to unrelated parties. The Program would be
administered by the State Treasurer's Office and the total
amount of the R&D credit that may be sold by all taxpayers in
a calendar year is limited to $100 million. In addition, this
bill would limit the amount of the R&D credit that may be sold
or purchased by a taxpayer to $5 million per taxable year.
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The credits would be required to be sold at a minimum of 75%
of their face value.
7)The R&D credit : There are two main purposes for the federal
and California R&D credit. First, it is intended to reduce
the after-tax cost of R&D investments, which is expected to
lead to an increase in R&D activity and to encourage taxpayers
to conduct R&D in the U.S. rather than in another country.
Similarly, the California R&D credit is designed to increase
R&D activity and to encourage manufacturing related to R&D to
be undertaken in California rather than elsewhere. The
California's R&D credit provides a powerful incentive for
firms to conduct R&D in this state because of its high credit
percentages that exceed that of other states and because it is
permanent. This credit, unlike many other tax incentives,
does not serve as a reward for past behavior since it could
only be claimed for incremental increases in the taxpayer's
research activity. As explained by the Joint Committee on
Taxation's Report, "incremental credits attempt not to reward
projects that would have been undertaken in any event but to
target incentives to marginal projects." (Joint Committee on
Taxation, Description of Revenue Provisions Contained in the
President's Fiscal Year 2010 Budget Proposal, Part Two:
Business Tax Provisions, JCS-3-09, p. 17.) It is impossible,
however, to determine which projects would be undertaken
without the credit and, thus, "most incremental credit
proposals rely on some measure of the taxpayer's previous
experience as a proxy for a taxpayer's total qualified
expenditures in the absence of a credit", i.e. "a base
amount." (Id., p.18.) Nonetheless, the incentive effects of
incremental credits per dollar of revenue loss can be many
times larger than those of a flat credit.
The California R&D credit is believed to create additional R&D
economic activity in the state, which, arguably, is more
desirable than jobs in other industries. It also allows other
California businesses to adopt innovations developed locally
more rapidly than innovations developed elsewhere. As
explained by the FTB, the advantage to California "may come
through something economists call economies of agglomeration,"
which can be described as the benefits several firms receive
when locating in close proximity. (California Income Tax
Expenditures, Compendium of Individual Provisions, Updated
December 2009, FTB, p.17.) Specifically, cost of production
may significantly decline because there is a greater chance
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for specialization and division of labor. If this is the
case, many California businesses, not just those receiving
this credit, will gain an advantage over their rivals in other
states.
8)Why subsidize R&D ? Positive externalities are benefits
resulting from an economic activity that are enjoyed by third
parties. It is a benefit that is not received directly by the
seller or the buyer. California's R&D credit creates a number
of positive externalities such as reducing the costs of other
firms' innovative activity, and providing newer, better, and
less expensive products to the market. (Bronwyn Hall and
Marta Wosinka, The California R&D Tax Credit: Description,
History, and Economic Analysis, June 1999.) For example,
research conducted by a bio company may lead to the new
medication, which can increase sales, but the benefits may
also include an overall healthier population. Because the bio
company does not necessarily receive a direct benefit from
having a healthier population, it may limit itself from
conducting additional R&D even though a greater amount of
research would be better for society. If this is the case,
the state can choose several avenues to encourage additional
research. The most common types are subsidies and mandates.
In a supply and demand model, the supply curve can be thought
of as marginal cost and the demand curve can be thought of as
marginal benefit. Equilibrium is reached where the marginal
cost equals marginal benefit. Everything to the left of the
equilibrium point and between the marginal benefit and
marginal cost curves is a benefit to society because the
marginal benefit is greater than the marginal cost. However,
in terms of R&D, the marginal benefit curve of a firm
investing in research may not necessarily capture the positive
externalities received by society. Because of this, a company
may choose to curtail R&D investment. Ideally, society would
want the private marginal benefit curve to be the same as
society's marginal benefit curve. The disparity can be
thought of as a "market failure," because the amount of
research conducted by individual firms is less than what is
needed to capture the additional marginal benefits enjoyed by
society. This could be remedied by providing a subsidy to a
researching firm. The subsidy will lower the cost of
production and increasing the amount of research conducted by
a firm. The subsidy works so long as investment is increased
up to the point where the marginal social benefit equals
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marginal cost. Assuming current investment in research is
less than the optimal level, increasing the R&D tax credit can
provide a larger benefit to society than the cost of the
subsidy.
It should also be noted that not all R&D activity provides the
same level of positive externalities. In other words, the
benefits received by society from increased research in
medicine are probably greater than the benefits received from
other forms of research. According to the Legislative
Analyst's Office (LAO), the following sectors claimed more
than $100 million per year in credits: computer and
peripheral equipment manufacturing, communications equipment
manufacturing, semiconductor and other electronic component
manufacturing, pharmaceuticals and medicine manufacturing, and
software publishers. The subsidy may be better utilized by
focusing the tax credit on industries that provide the
greatest benefit to California.
9)Should the R&D credit be increased ? As noted above, the
quantity of R&D is optimal at the point where marginal social
benefit equals marginal cost. According to the Joint
Committee on Taxation, "there is evidence that the current
level of research undertaken in the United States, and
worldwide, is too little to maximize society's well-being."
(JCS-3-09, p. 11.) However, the report also explained that
"it is difficult to determine whether, at the present levels
and allocation or additional tax benefits for research would
increase or decrease overall economic efficiency." (Id.)
Additionally, the purpose of the California R&D credit has
less to do with capturing the positive externalities and
spillovers associated with R&D and more to do with simply
bringing R&D research to California. Because barriers
preventing the flow of information across state lines are
virtually non-existent, encouraging companies to conduct
research in California may not necessarily confine the
benefits of that research in the state. (California R&D Tax
Credit, p. 4.) It may be possible that the manufacturing
developed from research conducted in California will take
place in other states.
It has, however, been reported that state R&D credits are,
indeed, effective at increasing R&D in the state. (D. Wilson,
Beggar thy Neighbor? The In-State, Out-of-State, and
Aggregate Effects of R&D Tax Credits, Federal Reserve Bank of
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San Francisco, January 2008.) Specifically, it has been found
that a 1% point increase in a state's effective R&D credit
rate leads, in the long run, to a 3% to 4% in R&D spending
within the state. (Id., pp. 14-15.) However, the study has
shown that nearly all of this R&D increase "comes at the
expense of reduced R&D spending in other states," such that
R&D nationwide, essentially, has remained unchanged. (Id.)
Undoubtedly, it is easier for some R&D firms to move their
activity to California than it would be for them to move it to
another country. Thus, a California credit appears to be
necessary for the state to remain competitive with other
states in attracting and maintaining research and development
business activity, which not only creates desirable jobs but
also allows other California businesses to adopt innovations
developed locally more rapidly.
While additional state subsidies for research appear to be
warranted, California's budgetary limitations need to be taken
into account. There are various private transactions among
individuals that create positive externalities, (e.g.
education, healthcare, technology) but California's limited
budget allows for only so much in subsidies. It is true that
additional R&D could increase the benefits California receives
from medical research, but it can also receive such benefits
by investing directly in educational institutions.
Additionally, the Committee may wish to consider whether the
benefits of the marginal increase in the amount of California
research activities outweigh the costs of reduced state
funding for other important public services. In 2003, The LAO
prepared an overview of the California R&D Tax Credit and
suggested that no further expansion of the state R&D tax
credit occur without convincing evidence that it is warranted.
The LAO further recommended that the Legislature consider
reducing the credit or phasing it out over time, especially in
light of the substantial direct revenue losses of the existing
R&D tax credit and the state's potential budgetary position
after 2018.
10)A sale and purchase of R&D credits . The inability to fully
use a credit, in the case of a taxpayer that does not have
sufficient tax liability, undoubtedly reduces the value of the
credit. One approach to increase the utilization of a credit
would be to make it refundable. Another one is to make the
credit transferable, i.e. allow taxpayers to sell the credit
in order to raise funds.
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This bill would create a program to allow qualified taxpayers,
i.e. those with less than $50 million in earnings, to sell
their R&D tax credits to unrelated parties. The proposed
program would be a new unprecedented development in California
tax law. Admittedly, a taxpayer may sell a credit to an
unrelated party under existing law, but only if it is a film
tax credit attributable to the production of an independent
film. However, unlike the R&D tax credit, the film tax credit
is targeted, capped and allocated. In many respects, it is
similar to a grant program. It is effective only for a
limited number of years, and the California Film Commission is
required to allocate and certify the credit on the first-come
first-serve basis, up to $100 million every fiscal year. The
ability to sell the film credit is limited to a small number
of taxpayers. Furthermore, the FTB has ability to collect
from either the buyer or the seller of a film tax credit if it
is determined that a credit has been claimed by more than one
individual or that the taxpayer that generated the credit was
not entitled to claim the credit. In contrast, the R&D credit
is not capped, is not allocated and does not have a sunset
date. In 2010, $1.8 billion in R&D tax credits were claimed
by corporate taxpayers, more than 97% of which was claimed by
companies with gross receipts of more than $1 billion.
Under existing law, a transfer of the R&D tax credit is allowed,
but only to related parties. Specifically, taxpayers that are
members of a combined reporting group may make a one-time
irrevocable assignment of eligible credits to another member.
This bill would instead allow a sale of this credit to
unrelated parties doing business in California, provided they
have had qualified research expenses in the five years
preceding the sale. It should be noted that this bill allows
only small companies, i.e. those with annual revenues of less
than 50 million, to sell their R&D credits. As noted above,
companies with gross receipts under $1 billion historically
claim 3% of the total amount of the R&D credit in California.
Generally, tax incentives are created to encourage taxpayers to
engage in an activity that they would not have engaged
otherwise, in the absence of the incentives. While the R&D
credit appears to generate additional economic activity, the
economic benefits of a sale of that credit are less apparent.
Committee staff appreciates the author's intent to target
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small businesses to help them generate needed capital.
However, the Committee may wish to consider whether converting
the existing R&D credit into a refundable one would achieve
the same goal of infusing startup companies with capital,
without creating a questionable precedent for state tax
purposes. With a refundable credit, businesses would get a
check from the state when they file their taxes. Although
with transferable credits taxpayers could raise capital
without filing tax return, refundable credits provide a bigger
benefit to the company at the same cost to the state-since
companies don't have to sell them at a discounted price.
Furthermore, a sale of a state tax credit will potentially
trigger a federal tax liability for the seller, reducing the
financial benefits of the sale. The Committee may also wish to
consider granting FTB the ability to collect from either the
buyer or the seller of an R&D tax credit if the credit has
been claimed by more than one taxpayer, or if the taxpayer
that generated the credit was not entitled to claim the
credit.
11)FTB Implementation Concerns . The FTB staff noted several
implementation concerns in its analysis of this bill.
a) Recapture requirement . The recapture rule provides that
if a taxpayer sells a credit and does not reinvest the
money received from the sale of the credit into the
taxpayer's trade, then any remaining unapplied credit would
be cancelled and any previously applied credit that was not
reinvested or that exceeds 50% of the taxpayer's tax
liability would be recaptured. "It is unclear what the
phrase "reinvest the money from the sale of the credit into
the taxpayer's trade or business" would mean. Without a
specific definition, credit recapture based on this
condition would seldom, if ever, occur."
b) Amounts to be deposited into the Fund . This bill
requires that a specified percentage of each credit sold be
deposited in the Fund for administrative costs
reimbursement. "It is unclear whether the percentage would
be applied to the face amount of the credit sold or
purchased, or if sold at a discount the price paid to
acquire the credit. For example, if $100 of credit is
purchased for $80, and the 15% rate applied, would the
amount to be deposited in the Fund be 15% of $100 or 15% of
$80?"
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12)Additional administrative issues : Committee staff has
identified additional administrative issues with this bill,
ranging from the recapture requirement to the intended scope
and application of the Program. Committee staff is available
to work with the author's office to address these and any
other issues that may subsequently be identified.
13)Double-Referral : This bill was referred to this Committee
and to the Assembly Committee on Jobs, Economic Development,
and the Economy.
14)Related Legislation :
a) AB 653 (V. Manuel Pérez) would have temporarily provided
incremental increases to the general research credit
percentage using the regular calculation method, up to a
maximum credit rate of 30 percent, and would have
temporarily provided incremental increases to the
university "basic research" credit percentage, up to a
maximum credit rate of 40%. AB 653 was held in the
Assembly Appropriations Committee.
b) AB 486 (Mullin) provides manufacturers, software
producers, biotechnology and life, engineering, and
physical researchers and developers, a SUT exemption for
qualifying TPP. AB 486 was held in the Assembly Committee
on Appropriations.
c) SB 235 (Wyland) would have increased the general
research credit percentage using the regular calculation
method to the federal credit rate of 20%, and would have
increased the incremental credit rates to the federal
credit rates of three, four, and five percent. SB 235
failed passage in the Senate Committee on Governance and
Finance.
15)Prior Legislation :
a) AB 2278 (Anderson), of the 2009-10 Legislative Session,
conforms to the federal credit percentage for increasing
research activities and conforms to the federal alternative
incremental research credit. AB 2278 was held in this
Committee.
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b) AB 1484 (Anderson), of the 2009-10 Legislative Session,
conforms to the federal credit percentage for increasing
research activities and conforms to the federal alternative
incremental research credit. AB 1484 was never heard in
this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
The California Hispanic Chambers
Opposition
The American Federation of State, County and Municipal Employees
(AFSCME)
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098