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The California Research & Development (R&D) Tax Credit incentivizes businesses to invest in qualified research activities within the state, offsetting income or franchise tax liabilities via the Franchise Tax Board. Subject to a $5 million annual cap on combined business incentive tax credits for tax years 2024 through 2026.
Credits are available to businesses performing qualified research activities in California. Eligibility depends on entity type and the nature of your activities and expenses.
California applies unique R&D credit provisions for startups and S corporations that differ from both federal and other state rules.
Real results from a California technology company
The California R&D tax credit is a state incentive that allows businesses to offset their California income or franchise tax based on qualified research expenses (QREs) incurred in California. It rewards companies for investing in innovation and technological advancement.
Activities must meet the IRS four-part test: they must eliminate uncertainty, follow a process of experimentation, be technological in nature, and aim to develop or improve a product or process. Research must be performed physically within California.
The regular credit is 15% of QREs above your base amount. Corporations can also claim 24% of basic research payments. Credits are nonrefundable but carry forward indefinitely, and refund elections may be available under certain conditions.
The credits are nonrefundable, meaning they cannot directly generate a tax refund. However, unused credits carry forward indefinitely, and businesses may elect a partial refund option via Form FTB 3870 for credits disallowed due to the annual cap.
You claim the credit by completing Form FTB 3523 (California Research Credit) and filing it with your California tax return. Detailed documentation of qualified research activities and expenses must be maintained for at least four years (preferably seven).
Yes, you can claim both California and federal R&D tax credits for the same qualified research expenses. However, California has unique rules for base calculations and credit percentages that differ from federal provisions.
New businesses start at 3% for their first five credit years and phase into their permanent percentage by year ten. The first year with California gross receipts begins this period. California's fixed-base percentage is capped at 10% (unlike the federal 16%).
No. Credits cannot reduce the $800 minimum franchise tax, California Alternative Minimum Tax (AMT), or built-in gains tax. They can only offset regular income or franchise tax above these minimums.
Refund election credits apply over five years, starting in the third taxable year after the election, at 20% per year. The election must be made on Form FTB 3870 filed with the original, timely filed return.
No. Only research conducted physically within California qualifies for the California R&D tax credit. Out-of-state research expenses do not qualify, even if they benefit California operations.
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The California R&D tax credit is a state incentive that allows businesses to offset their California income or franchise tax based on qualified research expenses (QREs) incurred in California. It rewards companies for investing in innovation and technological advancement.
Activities must meet the IRS four-part test: they must eliminate uncertainty, follow a process of experimentation, be technological in nature, and aim to develop or improve a product or process. Research must be performed physically within California.
The regular credit is 15% of QREs above your base amount. Corporations can also claim 24% of basic research payments. Credits are nonrefundable but carry forward indefinitely, and refund elections may be available under certain conditions.
The credits are nonrefundable, meaning they cannot directly generate a tax refund. However, unused credits carry forward indefinitely, and businesses may elect a partial refund option via Form FTB 3870 for credits disallowed due to the annual cap.
You claim the credit by completing Form FTB 3523 (California Research Credit) and filing it with your California tax return. Detailed documentation of qualified research activities and expenses must be maintained for at least four years (preferably seven).
Yes, you can claim both California and federal R&D tax credits for the same qualified research expenses. However, California has unique rules for base calculations and credit percentages that differ from federal provisions.
New businesses start at 3% for their first five credit years and phase into their permanent percentage by year ten. The first year with California gross receipts begins this period. California's fixed-base percentage is capped at 10% (unlike the federal 16%).
No. Credits cannot reduce the $800 minimum franchise tax, California Alternative Minimum Tax (AMT), or built-in gains tax. They can only offset regular income or franchise tax above these minimums.
Refund election credits apply over five years, starting in the third taxable year after the election, at 20% per year. The election must be made on Form FTB 3870 filed with the original, timely filed return.
No. Only research conducted physically within California qualifies for the California R&D tax credit. Out-of-state research expenses do not qualify, even if they benefit California operations.
