Multi-State R&D Credit Conformity and QBI Effects (CA & NY) — 2023 Facts

Federal backdrop (what the S corporation did in 2023)

The federal research credit equals "20 percent of the excess" of current-year qualified research expenses (QREs) over the base amount, plus amounts for basic research and energy research consortia, and QREs include in-house "wages" for "qualified services," supplies, and certain computer costs.1234

For the shareholder's § 199A, the deduction equals the lesser of the "combined qualified business income amount" or 20% of taxable income above net capital gain, with W-2 wage/UBIA limitations potentially applying at higher income levels.5

1) Deductibility of wages at the state level

California

California computes a separate R&D credit under Cal. Rev. & Tax. Code § 23609 (corporations) by reference to IRC § 41 but with California-specific modifications and requiring that "qualified research" be conducted "in California."678

New York

New York personal income tax for S corporation shareholders starts from federal adjusted gross income. Because the S corporation's ordinary income flows into the shareholder's federal AGI, that reduction typically carries into New York.1112

2) Availability and treatment of the R&D credit

Federal

Structure, definitions, and recordkeeping for the credit and QREs are governed by IRC § 41 and Treas. Reg. §§ 1.41-1 through 1.41-4.13141516

California

California provides its own R&D credit under Cal. Rev. & Tax. Code § 23609, determined "in accordance with Section 41 of the Internal Revenue Code" but with California-specific rates and rules.171819

3) Shareholder's § 199A deduction (QBI) effect

Federal: The § 199A deduction is calculated at the shareholder level based on QBI, subject to wage/UBIA and taxable income thresholds.2324

California and New York do not offer state-level QBI deductions.2526