California Legislature—2015–16 Regular Session

Assembly Bill No. 437

Introduced by Assembly Member Atkins

(Principal coauthor: Assembly Member Mullin)

February 19, 2015

An act to amend Sections 17052.12 and 23609 of, to add Sections 17131.8 and 24304 to, and to add and repeal Division 3 (commencing with Section 70000) of, the Revenue and Taxation Code, relating to small businesses, and making an appropriation therefor.

LEGISLATIVE COUNSEL’S DIGEST

AB 437, as introduced, Atkins. Research and Development: Small Business Grant Program.

Existing law provides for several programs supporting small businesses, including the Office of Small Business Advocate, the director of which duties include, among other things, representing the views and interests of small businesses before other state agencies whose policies and activities may affect small businesses.

The Personal Income Tax Law imposes taxes on taxable income at specified rates based upon the amount of taxable income. The Corporation Tax Law imposes taxes upon, according to, or measured by, net income, as specified. The Personal Income Tax Law and the Corporation Tax Law, in modified conformity to a credit allowed under federal law, allow a credit against taxes imposed by those laws for increasing research expenses, as defined. Existing law allows a taxpayer to carryover any excess amounts of that credit to succeeding taxable years, until the credit is exhausted.

This bill would, beginning January 1, 2016, establish the Research and Development-Small Business Grant Program, which would provide qualified small businesses, as defined, grants in amounts equal to either 10% or 15% of any unused credit amount allowed to the small business for specified years under the credit described above. This bill would continuously appropriate moneys from the General Fund to award these grants. This bill would specify that any grant money received by a qualified small business would be excluded from its income and would provide that any excess credit amount accrued by the qualified small business would be reduced by the amount allowed as a grant.

Vote: ²⁄₃. Appropriation: yes. Fiscal committee: yes. State-mandated local program: no.

The people of the State of California do enact as follows:

SECTION 1.  

Section 17052.12 of the Revenue and Taxation
Code is amended to read:

17052.12.  

For each taxable year beginning on or after January
1, 1987, there shall be allowed as a credit against the “net begin delete tax” (as end delete
begin insert “tax,” as end insert defined by Section begin delete 17039) for the taxable year end delete begin insert 17039, end insert
an amount determined in accordance with Section 41 of the Internal
Revenue Code, begin insert relating to credit for increasing research activities, end insert
except as follows:

(a) For each taxable year beginning before January 1, 1997, the
reference to “20 percent” in Section 41(a)(1) of the Internal
Revenue Code is modified to read “8 percent.”

(b) (1) For each taxable year beginning on or after January 1,
1997, and before January 1, 1999, the reference to “20 percent”
in Section 41(a)(1) of the Internal Revenue Code is modified to
read “11 percent.”

(2) For each taxable year beginning on or after January 1, 1999,
and before January 1, 2000, the reference to “20 percent” in Section
41(a)(1) of the Internal Revenue Code is modified to read “12
percent.”

(3) For each taxable year beginning on or after January 1, 2000,
the reference to “20 percent” in Section 41(a)(1) of the Internal
Revenue Code is modified to read “15 percent.”

(c) Section 41(a)(2) of the Internal Revenue Code shall not
apply.

(d) “Qualified research” shall include only research conducted
in California.

(e)  begin insert (1) end insert begin insert   end insert In the case where the credit allowed under this section
exceeds the “net tax,” the excess may be carried over to reduce
the “net tax” in the following year, and succeeding years if
necessary, until the credit has been exhausted.

begin insert

(2) For taxable years beginning on or after January 1, 2016,
and before January 1, 2025, the excess credit amount that may be
carried over shall be reduced for that taxable year by the amount
received as a grant pursuant to Division 3 (commencing with
Section 70000).

end insert

(f) (1) With respect to any expense paid or incurred after the
operative date of Section 6378, Section 41(b)(1) of the Internal
Revenue Code begin insert , relating to qualified research expenses, end insert is modified
to exclude from the definition of “qualified research expense” any
amount paid or incurred for tangible personal property that is
eligible for the exemption from sales or use tax provided by Section
6378.

(2) For each taxable year beginning on or after January 1, 1998,
the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
Internal Revenue Code, relating to begin delete contract research expenses end delete
begin insert amounts paid to certain research consortia end insert , is modified to read
“this part or Part 11 (commencing with Section 23001).”

(g) (1) For each taxable year beginning on or after January 1,
2000:

(A) The reference to “3 percent” in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read “one and forty-nine
hundredths of one percent.”

(B) The reference to “4 percent” in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read “one and
ninety-eight hundredths of one percent.”

(C) The reference to “5 percent” in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read “two and forty-eight
hundredths of one percent.”

(2) Section 41(c)(4)(B) begin insert of the Internal Revenue Code, relating
to election, end insert shall not apply and in lieu thereof an election under
Section 41(c)(4)(A) of the Internal Revenue Code begin insert , relating to in
general, end insert may be made for any taxable year of the taxpayer
beginning on or after January 1, 1998. That election shall apply
to the taxable year for which made and all succeeding taxable years
unless revoked with the consent of the Franchise Tax Board.

(3) Section 41(c)(7) of the Internal Revenue Code, relating to
gross receipts, is modified to take into account only those gross
receipts from the sale of property held primarily for sale to
customers in the ordinary course of the taxpayer’s trade or business
that is delivered or shipped to a purchaser within this state,
regardless of f.o.b. point or any other condition of the sale.

(4) Section 41(c)(5) of the Internal Revenue Code, relating to
election of alternative simplified credit, shall not apply.

(h) Section 41(h) of the Internal Revenue Code, relating to
termination, shall not apply.

(i) Section 41(g) of the Internal Revenue Code, relating to
special rule for begin delete passthrough end delete begin insert pass-thru end insert of credit, is modified by
each of the following:

(1) The last sentence shall not apply.

(2) If the amount determined under Section 41(a) of the Internal
Revenue Code begin insert , relating to general rule, end insert for any taxable year
exceeds the limitation of Section 41(g) of the Internal Revenue
Code, begin insert relating to special rule for pass-thru of credit, end insert that amount
may be carried over to other taxable years under the rules of
subdivision (e); except that the limitation of Section 41(g) of the
Internal Revenue Code begin insert , relating to special rule for pass-thru of
credit, end insert shall be taken into account in each subsequent taxable year.

(j) Section 41(a)(3) of the Internal Revenue Code shall not apply.

(k) Section 41(b)(3)(D) of the Internal Revenue Code, relating
to amounts paid to eligible small businesses, universities, and
begin delete federal end delete begin insert Federal end insert laboratories, shall not apply.

(l) Section 41(f)(6), begin insert of the Internal Revenue Code end insert relating to
energy research consortium, shall not apply.

SEC. 2.  

Section 17131.8 is added to the Revenue and Taxation
Code, to read:

17131.8.  

For taxable years beginning on or after January 1,
2016, and before January 1, 2025, gross income does not include
any grant received by a taxpayer pursuant to Division 3
(commencing with Section 70000).

SEC. 3.  

Section 23609 of the Revenue and Taxation Code is
amended to read:

23609.  

For each taxable year beginning on or after January 1,
1987, there shall be allowed as a credit against the begin delete “tax” (as end delete begin insert “tax,” end insert
defined by Section begin delete 23036) end delete begin insert 23036, end insert an amount determined in
accordance with Section 41 of the Internal Revenue Code, begin insert relating
to credit for increasing research activities, end insert except as follows:

(a) For each taxable year beginning before January 1, 1997,
both of the following modifications shall apply:

(1) The reference to “20 percent” in Section 41(a)(1) of the
Internal Revenue Code is modified to read “8 percent.”

(2) The reference to “20 percent” in Section 41(a)(2) of the
Internal Revenue Code is modified to read “12 percent.”

(b) (1) For each taxable year beginning on or after January 1,
1997, and before January 1, 1999, both of the following
modifications shall apply:

(A) The reference to “20 percent” in Section 41(a)(1) of the
Internal Revenue Code is modified to read “11 percent.”

(B) The reference to “20 percent” in Section 41(a)(2) of the
Internal Revenue Code is modified to read “24 percent.”

(2) For each taxable year beginning on or after January 1, 1999,
and before January 1, 2000, both of the following shall apply:

(A) The reference to “20 percent” in Section 41(a)(1) of the
Internal Revenue Code is modified to read “12 percent.”

(B) The reference to “20 percent” in Section 41(a)(2) of the
Internal Revenue Code is modified to read “24 percent.”

(3) For each taxable year beginning on or after January 1, 2000,
both of the following shall apply:

(A) The reference to “20 percent” in Section 41(a)(1) of the
Internal Revenue Code is modified to read “15 percent.”

(B) The reference to “20 percent” in Section 41(a)(2) of the
Internal Revenue Code is modified to read “24 percent.”

(c) (1) With respect to any expense paid or incurred after the
operative date of Section 6378, Section 41(b)(1) of the Internal
Revenue Code begin insert , relating to qualified research expenses, end insert is modified
to exclude from the definition of “qualified research expense” any
amount paid or incurred for tangible personal property that is
eligible for the exemption from sales or use tax provided by Section
6378.

(2) “Qualified research” and “basic research” shall include only
research conducted in California.

(d) The provisions of Section 41(e)(7)(A) of the Internal
Revenue Code, begin insert relating to basic research, end insert shall be modified so
that “basic research,” for purposes of this section, includes any
basic or applied research including scientific inquiry or original
investigation for the advancement of scientific or engineering
knowledge or the improved effectiveness of commercial products,
except that the term does not include any of the following:

(1) Basic research conducted outside California.

(2) Basic research in the social sciences, arts, or humanities.

(3) Basic research for the purpose of improving a commercial
product if the improvements relate to style, taste, cosmetic, or
seasonal design factors.

(4) Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of any deposit
of ore or other mineral (including oil and gas).

(e) (1) In the case of a taxpayer engaged in any
biopharmaceutical research activities that are described in codes
2833 to 2836, inclusive, or any research activities that are described
in codes 3826, 3829, or 3841 to 3845, inclusive, of the Standard
Industrial Classification (SIC) Manual published by the United
States Office of Management and Budget, 1987 edition, or any
other biotechnology research and development activities, the
provisions of Section 41(e)(6) of the Internal Revenue Code begin insert ,
relating to qualified organization, end insert shall be modified to include
both of the following:

(A) A qualified organization as described in Section
170(b)(1)(A)(iii) of the Internal Revenue Code and owned by an
institution of higher education as described in Section 3304(f) of
the Internal Revenue Code begin insert , relating to definition of institution of
higher education end insert .

(B) A charitable research hospital owned by an organization
that is described in Section 501(c)(3) of the Internal Revenue Code,
is exempt from taxation under Section 501(a) of the Internal
Revenue Code, begin insert relating to exempt from taxation, end insert is not a private
foundation, is designated a “specialized laboratory cancer center,”
and has received Clinical Cancer Research Center status from the
National Cancer Institute.

(2) For purposes of this subdivision:

(A) “Biopharmaceutical research activities” means those
activities that use organisms or materials derived from organisms,
and their cellular, subcellular, or molecular components, in order
to provide pharmaceutical products for human or animal
therapeutics and diagnostics. Biopharmaceutical activities make
use of living organisms to make commercial products, as opposed
to pharmaceutical activities that make use of chemical compounds
to produce commercial products.

(B) “Other biotechnology research and development activities”
means research and development activities consisting of the
application of recombinant DNA technology to produce
commercial products, as well as research and development
activities regarding pharmaceutical delivery systems designed to
provide a measure of control over the rate, duration, and site of
pharmaceutical delivery.

(f)  begin insert (1) end insert begin insert   end insert In the case where the credit allowed by this section
exceeds the “tax,” the excess may be carried over to reduce the
“tax” in the following year, and succeeding years if necessary,
until the credit has been exhausted.

begin insert

(2) For taxable years beginning on or after January 1, 2016,
and before January 1, 2025, the excess credit amount that may be
carried over shall be reduced for that taxable year by the amount
received as a grant pursuant to Division 3 (commencing with
Section 70000).

end insert

(g) For each taxable year beginning on or after January 1, 1998,
the reference to “Section 501(a)” in Section 41(b)(3)(C) of the
Internal Revenue Code, relating to begin delete contract research expenses, end delete
begin insert amounts paid to certain research consortia, end insert is modified to read
“this part or Part 10 (commencing with Section 17001).”

(h) (1) For each taxable year beginning on or after January 1,
2000:

(A) The reference to “3 percent” in Section 41(c)(4)(A)(i) of
the Internal Revenue Code is modified to read “one and forty-nine
hundredths of one percent.”

(B) The reference to “4 percent” in Section 41(c)(4)(A)(ii) of
the Internal Revenue Code is modified to read “one and
ninety-eight hundredths of one percent.”

(C) The reference to “5 percent” in Section 41(c)(4)(A)(iii) of
the Internal Revenue Code is modified to read “two and forty-eight
hundredths of one percent.”

(2) Section 41(c)(4)(B) begin insert of the Internal Revenue Code, relating
to election, end insert shall not apply and in lieu thereof an election under
Section 41(c)(4)(A) of the Internal Revenue Code begin insert , relating to in
general, end insert may be made for any taxable year of the taxpayer
beginning on or after January 1, 1998. That election shall apply
to the taxable year for which made and all succeeding taxable years
unless revoked with the consent of the Franchise Tax Board.

(3) Section 41(c)(7) of the Internal Revenue Code, relating to
gross receipts, is modified to take into account only those gross
receipts from the sale of property held primarily for sale to
customers in the ordinary course of the taxpayer’s trade or business
that is delivered or shipped to a purchaser within this state,
regardless of f.o.b. point or any other condition of the sale.

(4) Section 41(c)(5) of the Internal Revenue Code, relating to
election of begin delete the end delete alternative simplified credit, shall not apply.

(i) Section 41(h) of the Internal Revenue Code, relating to
termination, shall not apply.

(j) Section 41(g) of the Internal Revenue Code, relating to
special rule for begin delete passthrough end delete begin insert pass-thru end insert of credit, is modified by
each of the following:

(1) The last sentence shall not apply.

(2) If the amount determined under Section 41(a) of the Internal
Revenue Code begin insert , relating to general rule, end insert for any taxable year
exceeds the limitation of Section 41(g) of the Internal Revenue
Code, begin insert relating to special rule for pass-thru of credit, end insert that amount
may be carried over to other taxable years under the rules of
subdivision (f), except that the limitation of Section 41(g) of the
Internal Revenue Code begin insert , relating to special rule for pass-thru of
credit, end insert shall be taken into account in each subsequent taxable year.

(k) Section 41(a)(3) of the Internal Revenue Code shall not
apply.

(l) Section 41(b)(3)(D) of the Internal Revenue Code, relating
to amounts paid to eligible small businesses, universities, and
begin delete federal end delete begin insert Federal end insert laboratories, shall not apply.

(m) Section 41(f)(6) of the Internal Revenue Code, relating to
energy research consortium, shall not apply.

SEC. 4.  

Section 24304 is added to the Revenue and Taxation
Code, to read:

24304.  

For taxable years beginning on or after January 1, 2016,
and before January 1, 2025, any grant received by a taxpayer
pursuant to Division 3 (commencing with Section 70000).

SEC. 5.  

Division 3 (commencing with Section 70000) is added
to the Revenue and Taxation Code, to read:

 

Division 3.  Research and Development-Small
Business Grant Program

 

70000.  

For purposes of this division, a “qualified small
business” means a taxpayer that was allowed a credit under either
Section 17052.12 or 23609 that has five million dollars
($5,000,000) or less in gross receipts, as described in paragraph
(3) of subdivision (g) of Section 17052.12 or 23609, per taxable
year. A “qualified small business” does not include a taxpayer that
has a parent company that may apply any excess credit amount
accrued by the qualified small business under Section 17052.12
or 23609 to reduce its “net tax,” as defined in Section 17039, or
“tax,” as defined in Section 23609.

70001.  

(a) On or after January 1, 2016, and before January 1,
2025, a qualified small business may apply for and receive a grant
as follows:

(1) Beginning January 1, 2016, a qualified small business may
apply for and receive a one-time grant in an amount equal to 10
percent of any excess credit accrued over taxable years beginning
on or after January 1, 2014, and before January 1, 2016, for credits
allowed under Section 17052.12 or 23609.

(2) For taxable years beginning on or after January 1, 2016, and
before January 1, 2025, a qualified small business may apply for
and receive an annual grant in an amount equal to 15 percent of
any excess credit accrued for the taxable year in which the credit
is allowed under Section 17052.12 or 23609.

(b) (1) In order to receive a grant under paragraph (1) of
subdivision (a), the qualified small business shall apply to the
Franchise Tax Board for a certificate indicating the amount equal
to 10 percent of any excess credit accrued over taxable years
beginning on or after January 1, 2014, and before January 1, 2016,
for a credit allowed under Section 17052.12 or 23609. The
Franchise Tax Board shall supply the qualified small business with
a certificate within 30 days of receiving the application.

(2) In order to receive a grant under paragraph (2) of subdivision
(a), the qualified small business shall request, on an original, timely
filed return, a certificate indicating the amount equal to 15 percent
of any excess credit accrued over for that taxable year in which a
credit is allowed under Section 17052.12 or 23609. The Franchise
Tax Board shall supply the qualified small business with a
certificate within 30 days of receiving the return.

70002.  

(a) The Controller, upon a receipt of a certificate issued
to a qualified small business under Section 70001, shall pay the
qualified small business the grant amount indicated upon the
certificate. Notwithstanding Section 13340 of the Government
Code, the amounts necessary to provide the grants are hereby
continuously appropriated from the General Fund.

(b) (1) Notwithstanding Section 10231.5 of the Government
Code, on or before January 1, 2017, and each January 1 thereafter,
the Controller shall provide a report to the Assembly Committee
on Revenue and Taxation including the recipients of the grants for
the previous calendar year and the grant amount each recipient
received.

(2) A report submitted pursuant to paragraph (1) shall be
submitted in compliance with Section 9795 of the Government
Code.

70003.  

This division shall remain in effect only until January
1, 2026, and as of that date is repealed, unless a later enacted
statute, that is enacted before January 1, 2026, deletes or extends
that date.