The California R&D tax credit differs from the Federal R&D credit in a notable way – for California purposes, sales of property are included in the gross receipts calculation, but services income, rent, lease income, interest and other non-property income sources are excluded from the calculation.
In FTB Legal Division Guidance 2011-06-01 (6/1/2011), the question was posed as to whether for California purposes a purely service company with no “gross receipts” within the meaning of RTC section 23609(h)(3) can claim the California R&D credit.
The answer was NO – a taxpayer that has no California gross receipts, because it has only service receipts, is not allowed to claim the California R&D credit. To claim the R&D credit, at some point in time, a taxpayer must have had both qualified research expenses and gross receipts in the same year. This is also true with respect to the “start-up” method of IRC section 41(c)(3)(B), as this method too requires a taxpayer to have both gross receipts and qualified research expenses in the same year.