Introduction
Founders often ask: “Can I claim the R&D credit at both federal and California levels?” In 2025, the answer is yes but with key differences in calculation, rules, and refundability.
In this blog, we compare the California Research Credit with the Federal R&D Credit under IRC §41 and guide founders on how to maximize both without triggering audits.
IRS and California Tax Code References
- IRC §41 – Credit for increasing research activities (Federal)
- Cal. R&TC §23609 – California Research Credit (Corporation)
- FTB Pub. 1082 – CA Research Credit Guide
Federal vs. California R&D Credit: Key Differences
| Feature | Federal Credit | California Credit |
|---|---|---|
| Base Method | Regular/Alternative Simplified | Only Regular (no ASC) |
| Refundable? | Yes, partially (Payroll offset for startups) | No (Non-refundable) |
| Qualified Wages | Includes U.S.-based R&D | Must be California-sourced |
| Credit % | ~6 -14% (variable) | 15% of excess + 24% basic research |
| Carryforward | 20 years | Indefinite |
Example: SaaS Startup with CA Payroll
Example: ByteStack Inc., a Delaware C-Corp based in Los Angeles, has:
- $500,000 in CA payroll for software development
- $150,000 in contractor payments for UI/UX design in San Diego
They:
- Claim ~$60,000 Federal Credit (using ASC method)
- Claim ~$75,000 California Credit (15% wage-based calculation)
But the CA credit only offsets CA Franchise Tax not payroll.
Step-by-Step: Claiming R&D Credit in California and Federally (2025)
- Identify Qualified Research Activities (QRAs)
Ensure projects meet IRS and CA standards: new/improved products, processes, prototypes. - Allocate by Jurisdiction
Break down wages, supplies, and contractors by state. CA credit only applies to in-state expenses. - Claim Federal Credit on Form 6765
If startup, use Form 8974 to offset payroll taxes. - Claim CA Credit on Form 3523
Attach to your CA Form 100 or Form 540, depending on entity type. - Keep Contemporaneous Documentation
Include timesheets, project specs, org charts, and research logs.
Conclusion
Yes founders can double-dip on R&D credits in California and federally, but only if the activities and expenses are properly allocated.
Understand what’s allowed where, and don’t miss out on tens of thousands in tax relief for your innovation.
Call to Action
Want to claim the R&D credit for both federal and California in 2025?
Schedule a strategy session with Anshul Goyal, CPA, EA, FCA
Anshul helps:
- Optimize your federal vs. CA R&D allocations
- Prepare Forms 6765, 8974, and 3523
- Avoid double-counting and audit exposure
Turn your innovation into savings:
https://calendly.com/anshulcpa/
Anshul Goyal, CPA, EA, FCA
Anshul brings 15+ years of U.S. and international tax experience. He specializes in helping online sellers, foreign founders, and U.S. residents with IRS and multi-state compliance. Known for his deep knowledge in Shopify and Amazon seller tax strategy, Anshul has helped hundreds of entrepreneurs minimize taxes and scale legally.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified tax professional regarding your individual tax situation.
Top 5 High-Searched FAQs for 2025
1. Can I claim both federal and California R&D credits?
Yes, but with separate rules and forms.
2. Is the California R&D credit refundable?
No. It can only offset CA income or franchise tax.
3. Can contractors qualify for California R&D credit?
Yes, if they perform work in California and meet IRS control standards.
4. Does California allow ASC method?
No. California only permits the regular method.
5. What if I miss the deadline to claim R&D credit?
You may file an amended return within the statute of limitations.