Where San Diego companies find qualifying work
The federal research credit is not limited to big labs. It looks at the work, not the label on the door. A company may qualify if it tried to develop or improve a product, process, formula, technique or software and had to experiment to get there.
In San Diego, examples might include a diagnostics startup developing a new assay, a medical device team iterating on a prototype, a defense technology firm building sensor software, a craft brewery developing a new fermentation process at scale, or an electronics maker in Carlsbad redesigning a board to pass testing.
The four tests, in plain words
The IRS uses four tests. The work has to meet all of them:
- Purpose: the work aims to create a new or improved function, performance, reliability or quality in a product or process
- Technological: it relies on the principles of engineering, physics, chemistry, biology or computer science
- Uncertainty: at the start, the team did not know if it could be done, how to do it, or the right design
- Experimentation: the team tested alternatives, by modeling, simulation, trial and error or similar methods
Treat this as a plain summary, not tax advice. Whether work qualifies depends on the facts and your tax advisor's review.
Costs that usually feed the claim
| Cost type | What the books should show |
|---|---|
| Wages for people doing, supervising or directly supporting research | Payroll tied to the books, by employee and, if possible, by project |
| Supplies used up in research, such as reagents or prototype parts | Supply purchases coded apart from general operating costs |
| Contract research, such as a CRO or outside test lab | Vendor invoices coded to a contract research account, with the contracts on file |
| Paid use of computers for research, such as cloud servers | Charges split from general software spend, where your advisor says they apply |
California's research credit
California has its own research credit, claimed on Form FTB 3523. The research must be done in California. You do not have to claim the federal credit to claim the California one. California follows the federal definition of qualified research expenses, with its own rules for computing the credit, and the credit is not refundable.
For a San Diego company with research staff and labs in the county, it is worth asking your tax advisor about both credits.
Payroll tax election for startups
A qualified small business can elect to apply part of the federal research credit against payroll tax instead of income tax. That helps a company with research costs but no taxable profit yet. For tax years beginning after 2022, the election is capped at $500,000 a year. It must be made on a timely filed original return, not an amended one.
How the work fits together
- Clean the books Accounts are reconciled and research wages, supplies and contract costs are coded so they can be traced.
- Talk through the projects The partner team, which specializes in R&D credit work, reviews what your team built and tested.
- Build the support Project records, payroll data and invoices are gathered to support qualifying costs.
- Coordinate with your CPA Your CPA receives the credit figures and files them with your return.
Where we work
We keep books for businesses across the City of San Diego, North County, the South Bay and East County.
- Carlsbad
- Chula Vista
- Downtown San Diego
- El Cajon
- Encinitas
- Escondido
- La Mesa
- Oceanside
- San Diego
- San Marcos
- Vista
Questions
Does my company qualify?
The answer turns on what your team did, not on your industry. A short call helps decide whether a closer review makes sense.
What records do I need?
Payroll, supply and contractor invoices, and some record of the projects and testing, such as notes, tickets, lab notebooks or test reports.
Will this replace my CPA?
No. Your CPA still files the return. The partner team shares the credit figures and support with them.
Can earlier years be claimed?
Sometimes. It depends on filing deadlines and the rules for amended returns. The payroll tax election cannot be made on an amended return.