Can Companies Claim
R&D Tax Credits in California?
Yes. California provides a Research and Development (R&D) Tax Credit similar to the federal version, including the definition of qualifying research. Only qualified research expenses (QREs) incurred in California are eligible.
Calculation Methods
California offers two methods to calculate the R&D credit:
Regular Credit Method
15% of QREs that exceed a base amount, calculated using a fixed-base percentage applied to the average annual gross receipts for the prior four years.
24% of basic research payments.
Alternative Incremental Credit Method
1.49% of QREs in excess of a base amount computed using a fixed-base percentage of 1%, but not exceeding 1.5%.
1.98% of QREs in excess of a base amount computed using a fixed-base percentage of 1.5%, but not exceeding 2%.
2.48% of QREs in excess of a base amount computed using a fixed-base percentage of 2%.
Other Key Points
Unused California research credits must be applied to the earliest tax year possible and may then be carried forward indefinitely.
This differs from the federal R&D credit, which must be carried back one year and forward twenty.
California Tax Credit Case Study
A San Francisco company developing client software claimed R&D credits for a four-year project with a three-year lookback.
Federal R&D Tax Credit: $330,000
California State R&D Tax Credit: $247,500
FEDERAL | CALIFORNIA | |||
Year | Total QREs | Credit | Total QREs | Credit |
2024 | $1,300,000 | $130,000 | $1,300,000 | $97,500 |
2023 | $900,000 | $90,000 | $900,000 | $67,500 |
2022 | $650,000 | $65,000 | $650,000 | $48,750 |
2021 | $450,000 | $45,000 | $450,000 | $33,750 |
Total | $3,300,000 | $330,000 | $3,300,000 | $247,500 |
Federal R&D Tax Credit Summary
| Year | Total QREs | Federal Credit |
|---|---|---|
| 2024 | $1,300,000 | $130,000 |
| 2023 | $900,000 | $90,000 |
| 2022 | $650,000 | $65,000 |
| 2021 | $450,000 | $45,000 |
| Total | $3,300,000 | $330,000 |
California R&D Tax Credit Summary
| Year | California Credit |
|---|---|
| 2024 | $97,500 |
| 2023 | $67,500 |
| 2022 | $48,750 |
| 2021 | $33,750 |
| Total | $247,500 |
Criteria for Qualifying Research Activities
The four-part test below defines what counts as qualified research activities
Purpose of the Research
The activity should develop or improve a business component, such as a product, process, software, formula, technique, or invention, by enhancing functionality, performance, reliability, or quality.
Resolving Uncertainty
The work must address technical uncertainties, such as determining the optimal design, method, or approach to achieve the desired outcome. The results should not be known in advance.
Systematic Experimentation
Eligible research must follow a structured experimentation process, including trial and error, modeling, simulation, or testing alternatives to reach the intended improvement.
Technological Basis
The activity must rely on hard sciences such as engineering, physical or biological sciences, or computer science. Artistic, social science, or routine data collection work does not qualify.
Why the R&D Tax Credit Matters ?
Since 1981, the R&D Tax Credit has helped businesses save billions in federal and state taxes. The credit enables companies to hire more staff, expand R&D, invest in facilities, and drive innovation. Thousands of businesses across multiple industries take advantage of this benefit each year.