Amended in Assembly May 28, 2015

Amended in Assembly May 5, 2015

Amended in Assembly April 13, 2015

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 amended, 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, and ending January 1, begin delete 2022, end delete begin insert 2023, end insert 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 excess credit amount attributable 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, in specified amounts per calendar year, to be allocated by the Franchise Tax Board. 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 attributable begin delete by end delete begin insert to end insert 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 tax,” as
defined by Section 17039, an amount determined in accordance
with Section 41 of the Internal Revenue Code, relating to credit
for increasing research activities, 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) (1) In the case where the credit allowed by 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.

(2) For taxable years beginning on or after January 1, 2016, in
the case where the Franchise Tax Board has issued a certificate
for a grant pursuant to Division 3 (commencing with Section
70000) the following rules shall apply:

(A) The excess credit amount that may be carried over by a
taxpayer shall be reduced by the amount reflected on the certificate.

(B) (i) In the case of a pass-thru entity, the amount of credit
that may be passed through to a partner or shareholder shall be
reduced by the amount reflected on the certificate.

(ii) For purposes of this subparagraph, “pass-thru entity” means
a partnership or an “S” corporation.

(C) If any amount of a credit finally allowed is less than the
amount of the credit that provided the basis for a grant pursuant
to Division 3 (commencing with Section 70000), the amount of
the grant attributable to the credit not allowed shall be treated as
a deficiency pursuant to Section 19043, and assessed and collected
pursuant to Part 10.2 (commencing with Section 18401).

(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, relating to qualified research expenses, 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 amounts paid to certain research
consortia, 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) of the Internal Revenue Code, relating
to election, shall not apply and in lieu thereof an election under
Section 41(c)(4)(A) of the Internal Revenue Code, relating to in
general, 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 pass-thru 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, relating to general rule, for any taxable year
exceeds the limitation of Section 41(g) of the Internal Revenue
Code, relating to special rule for pass-thru of credit, 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, relating to special rule for pass-thru of
credit, 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
Federal laboratories, shall not apply.

(l) Section 41(f)(6), of the Internal Revenue Code 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, begin delete 2025, end delete begin insert 2023, end insert 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 “tax,” defined
by Section 23036, an amount determined in accordance with
Section 41 of the Internal Revenue Code, relating to credit for
increasing research activities, 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, relating to qualified research expenses, 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, relating to basic research, 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,
relating to qualified organization, 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, relating to definition of institution of
higher education.

(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, relating to exempt from taxation, 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) (1) 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.

(2) For taxable years beginning on or after January 1, 2016, in
the case where the Franchise Tax Board has issued a certificate
for a grant pursuant to Division 3 (commencing with Section
70000) the following rules shall apply:

(A) The excess credit amount that may be carried over by a
taxpayer shall be reduced by the amount reflected on the certificate.

(B) (i) In the case of a pass-thru entity, the amount of credit
that may be passed through to a partner, taxable under this part,
shall be reduced by the amount reflected on the certificate.

(ii) For purposes of this subparagraph, “pass-thru entity” means
a partnership.

(C) If any amount of a credit finally allowed is less than the
amount of the credit that provided the basis for a grant pursuant
to Division 3 (commencing with Section 70000), the amount of
the grant attributable to the credit not allowed shall be treated as
a deficiency pursuant to Section 19043, and assessed and collected
pursuant to Part 10.2 (commencing with Section 18401).

(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 amounts paid to certain research
consortia, 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) of the Internal Revenue Code, relating
to election, shall not apply and in lieu thereof an election under
Section 41(c)(4)(A) of the Internal Revenue Code, relating to in
general, 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.

(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 pass-thru 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, relating to general rule, for any taxable year
exceeds the limitation of Section 41(g) of the Internal Revenue
Code, relating to special rule for pass-thru of credit, 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, relating to special rule for pass-thru of
credit, 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
Federal 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, begin delete 2025, end delete begin insert 2023, end insert 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) (1) Except as provided in paragraph (2), “excess credit
amount” means the amount of credit under Section 17052.12 or
23609 that exceeds the “net tax,” as defined by Section 17039, or
the “tax,” as defined by Section 23036, as applicable, for the first
taxable year the credit is allowable and may be carried over to
reduce “net tax” or “tax,” as applicable, in the following begin insert taxable end insert
year.

(2) In the case of a pass-thru entity, for credits attributable to
taxable years beginning on or after January 1, 2016, “excess credit
amount” means the amount of credit allowed under Section
17052.12 or 23609 to be passed through to partners or shareholders.

(b) “Qualified small business” means a taxpayer that meets all
of the following requirements for the taxable year with respect to
the credit for which a grant is authorized under this division:

(1) The taxpayer was allowed a credit under either Section
17052.12 or 23609.

(2) The taxpayer has gross receipts of five million dollars
($5,000,000) or less for the taxable year. For purposes of this
paragraph, “gross receipts” has the same definition as begin insert in end insert Section
41(c)(7) of the Internal Revenue Code, relating to gross receipts,
modified to provide that the last sentence shall not apply.

(3) (A) The taxpayer is not an affiliated corporation that is
properly treated as a member of a combined reporting group
pursuant to Section 25101 or 25110.

(B) Notwithstanding any other provision, no grant may be
awarded pursuant to this division with respect to a credit that may
be assigned pursuant to Section 23663.

(4) The taxpayer has been certified by the Governor’s Office
of Business and Economic Development as an eligible qualified
small business for purposes of this division.

70001.  

(a) On or after January 1, 2016, and before January 1,
begin delete 2021, end delete begin insert 2023, end insert a qualified small business may apply for 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 amount that is attributable to taxable
years beginning on or after January 1, 2014, and before January
1, 2016, available for carryover into taxable years beginning on
or after 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, 2021, a qualified small business may annually
apply for a grant in an amount equal to 15 percent of any excess
credit amount attributable to 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, partner, or “S”
corporation shareholder of a qualified small business shall be
required to apply for a grant on a timely filed original return filed
with the Franchise Tax Board using electronic technology in a
form and manner prescribed by the Franchise Tax Board for the
taxable year beginning on or after January 1, 2015, by applying
to the Franchise Tax Board for a certificate indicating the amount
equal to 10 percent of the excess credit amount that is attributable
to taxable years beginning on or after January 1, 2014, and before
January 1, 2016, available for carryover into taxable years
beginning on or after 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 90 days of
receiving the begin insert return with the end insert application.

(2) In order to receive a grant under paragraph (2) of subdivision
(a), the qualified small business shall be required to apply for a
grant on a timely filed original return with the Franchise Tax Board
using electronic technology in a form and manner prescribed by
the Franchise Tax Board for each taxable year beginning on or
after January 1, 2016, by applying to the Franchise Tax Board for
a certificate indicating the amount equal to 15 percent of the excess
credit amount that is attributable to the taxable year in which a
credit is allowed under Section 17052.12 or 23609, and available
for carryover to the following year. The Franchise Tax Board shall
supply the qualified small business with a certificate within 90
days of receiving the begin delete return. end delete begin insert return with the application. end insert

(c) (1) The Franchise Tax Board shall allocate the certified
amounts based on the aggregate applicable amount for the calendar
year in which the certificate is issued.

(2) The aggregate applicable amount that may be certified for
the calendar year beginning January 1, 2016, shall be one hundred
million dollars ($100,000,000), not to exceed fifty million dollars
($50,000,000) for each taxable year beginning January 1, 2014,
and January 1, 2015.

(3) The aggregate applicable amount shall not exceed fifty
million dollars ($50,000,000) for each calendar year beginning on
or after January 1, 2017, and before January 1, begin delete 2022, end delete begin insert 2023, end insert
regardless of the taxable year to which the grant relates.

(4) (A) The Franchise Tax Board shall allocate the certificates
to the qualified small business, partners, or “S” corporation
shareholder, as applicable, on a first-come-first-served basis,
determined by the date the taxpayer’s original tax return is received
by the Franchise Tax Board. If the returns of two or more qualified
small businesses are received on the same day and the amount of
credit remaining to be allocated is insufficient to be allocated fully
to each, the credit remaining shall be allocated to those qualified
small businesses on a pro rata basis.

(B) For purposes of this paragraph, the date an application or
return is received shall be determined by the Franchise Tax Board.
The determination of the Franchise Tax Board as to the date an
application or return is received and whether an application or
return has been timely filed for purposes of this paragraph may
not be reviewed in any administrative or judicial proceeding.

(d) In the case of a qualified small business that is a pass-thru
entity, the following shall apply:

(1) (A) For purposes of the credit allowed under Section
17052.12, a “pass-thru entity” means a partnership or an “S”
corporation.

(B) For purposes of the credit allowed under Section 23609, a
“pass-thru entity” means a partnership.

(2) (A) For grants with respect to taxable years beginning on
or after January 1, 2014, and before January 1, 2016, the Franchise
Tax Board shall issue the certificate to the qualified small business,
partners, or “S” corporation shareholders, as applicable.

(B) For grants with respect to taxable years on or after January
1, 2016, the Franchise Tax Board shall issue the certificate to the
partnership or “S” corporation.

(3) A certificate shall not be issued to an “S” corporation with
respect to the credit allowed under Section 23609.

(e) To the extent the amount of the certificate issued by the
Franchise Tax Board is based on a request from a qualified small
business, partner, or “S” corporation shareholder, as applicable,
any amount of a credit finally allowed that is less than the amount
of the credit that provided the basis for a grant under this division,
the amount of the grant attributable to the credit not allowed shall
be treated as a deficiency pursuant to Section 19043, and assessed
and collected pursuant to Part 10.2 (commencing with Section
18401).

(f) The Franchise Tax Board may prescribe rules, guidelines,
or procedures necessary or appropriate to carry out the purposes
of this division, including any guidelines regarding the allocation
of the certificates issued pursuant to this section. Chapter 3.5
(commencing with Section 11340) of Part 1 of Division 3 of Title
2 of the Government Code does not apply to any rule, guideline,
or procedure prescribed by the Franchise Tax Board pursuant to
this section.

70002.  

(a) The Controller, upon a receipt of a certificate issued
to a qualified small business, partner, or “S” corporation
shareholder, as applicable, under Section 70001, shall pay the
qualified small business the grant amount indicated upon the
certificate issued to the qualified small business, partner, or “S”
corporation shareholder. 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.  

On and after January 1, 2016, the Governor’s Office
of Business and Economic Development, upon application by a
taxpayer, shall certify the taxpayer as a qualified small business
that meets the requirements of paragraphs (1) to (3), inclusive, of
subdivision (b) of Section 70000 and eligible to receive a grant
pursuant to this division.

70004.  

This division shall remain in effect only until January
1, begin delete 2022, end delete begin insert 2023, end insert and as of that date is repealed, unless a later enacted
statute, that is enacted before January 1, begin delete 2022, end delete begin insert 2023, end insert deletes or
extends that date.