The California R&D tax credit, explained
California offers a state R&D credit worth 15% of qualified research spending above a base amount, on top of the federal credit.
Last verified July 2026 against California Franchise Tax Board guidance.
The short answer
Yes. California has run its own research credit for decades, and it stays separate from the federal R&D credit. The state credit equals 15% of qualified research expenses that exceed a base amount, plus 24% of payments for basic research done through California universities.
How the California credit works
Most companies use the traditional method above. Starting with tax years that begin in 2025, California also allows an alternative simplified method: 3% of the year's qualified research spending above half of the prior three years' average, or 1.3% if the company had no qualified spending in any of those three years.
The credit is not refundable. It offsets California franchise tax or personal income tax, and any credit a company cannot use in the current year carries forward with no expiration date. A temporary $5 million annual cap on total business credits applies for tax years 2024 through 2026, which mostly affects larger, profitable companies rather than early-stage startups.
How it stacks with the federal credit
California's credit stacks with the federal R&D credit. The federal credit runs roughly 6% to 10% of qualified spending, and startups under $5 million in revenue can apply up to $500,000 of it against payroll tax each year instead of waiting for income tax liability. California's credit works alongside that, though it only offsets state tax and carries forward instead of reducing payroll tax.
Say a California software startup has 20 engineers working on product development, with an average loaded salary of $160,000. That is roughly $2.4 million in wages, and after excluding time spent on non-research work, the company might report $2 million in qualified research expenses for the year.
At a federal rate near 8%, that produces about $160,000 in federal credit, most of which the startup can apply directly against its payroll tax bill. If the company's California base amount works out to $600,000, the remaining $1.4 million in qualified spending produces about $210,000 in state credit at 15%. The state amount will not generate cash back this year, but it lowers California tax once the company owes it, and it carries forward until then. This is an example, and actual numbers depend on each company's wages, contractor costs, and base-amount calculation.
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Eligibility and how to claim it
Any company doing qualified research in California can claim the credit, from an early-stage software startup to an established manufacturer. The research has to meet the same four-part test used for the federal credit: it has to be technological, aimed at eliminating uncertainty, involve a process of experimentation, and try to improve a product or process.
Companies claim the credit on FTB Form 3523, Research Credit, filed with the California corporation or personal income tax return. Pass-through owners of an S corporation, partnership, or LLC that generates the credit also use Form 3523 to claim their share.
Claimship prepares the underlying research study and the supporting documentation your CPA needs. Your CPA is the one who files Form 3523 with the California Franchise Tax Board, along with the state return.
Official source: California Franchise Tax Board.
Carryforward and deadlines
There is no separate application window. Companies calculate and claim the credit when they file their annual California return, on the same schedule as the federal credit.
Unused credit carries forward indefinitely, so a company that is not yet profitable in California does not lose the benefit. It simply waits until the company owes California tax, then applies the credit at that point.