Introduction
California rewards businesses that invest in research and development with one of the most lucrative state tax credits available. If your company develops software, processes, or products, you may be eligible to reduce or eliminate your state tax liability using the R&D tax credit in 2025.
What Is the California R&D Credit?
Applicable Code: California Revenue & Taxation Code §23609 (corporations), §17052.12 (individuals and pass-throughs)
The California R&D Credit mirrors the federal R&D credit under IRC §41, offering a 20% credit on qualified research expenses (QREs) above a base amount. It is non-refundable, but can be carried forward indefinitely.
It applies to:
- C Corporations
- S Corporations
- LLCs taxed as corporations
- Partnerships (credit flows to individual members)
Who Qualifies for the Credit?
Businesses that engage in qualifying R&D in California can claim the credit. Common industries include:
- Software and app development
- Biotech and pharma
- Advanced manufacturing
- Clean energy and automotive
- Food science and agriculture
- Aerospace and defense
Even startups in pre-revenue stages can qualify.
How Much Is the R&D Tax Credit Worth?
Calculation:
- 20% of QREs over the base amount
- Plus 24% of basic research payments (if applicable)
Example:
- Base amount: $150,000
- 2024 R&D expenses: $300,000
- Excess: $150,000
- Credit = $30,000 (20% of $150,000)
The credit can offset your California corporate income tax or franchise tax, and any unused portion rolls forward.
Qualified Research Activities and Expenses
Eligible Activities:
- Developing or improving a product, process, or formula
- Software development
- Testing prototypes
- Experimenting with materials or designs
- Conducting technical research and modeling
Eligible Expenses (QREs):
- Wages of engineers, designers, and scientists
- Supplies consumed in research
- 65% of contractor costs
- Patent costs (in some cases)
Activities must meet the IRS 4-part test (per IRC §41), including technological in nature and eliminating technical uncertainty.
Documentation Required by the FTB
The California Franchise Tax Board (FTB) expects robust documentation. Keep:
- Payroll records showing employee time on R&D
- Project plans, designs, and test results
- Expense logs for materials and software
- Contractor agreements and invoices
- Summary of each research project’s objectives
Attach Form 3523 to your Form 100 (C Corp) or Form 568 (LLC).
Step-by-Step Guide to Claim the R&D Credit in California
Step 1: Identify eligible research activities and expenses
Step 2: Calculate the base amount and excess qualified expenses
Step 3: Complete and attach Form 3523 to your state tax return
Step 4: Maintain all documentation for at least 4 years
Step 5: Consult a CPA to review IRS and FTB compliance before claiming
Conclusion
California’s R&D tax credit provides a powerful opportunity to lower your tax bill while investing in innovation. But proper planning, documentation, and compliance are key to claiming it safely and successfully. Don’t leave this money on the table in 2025.
Call to Action
Want help calculating and claiming your R&D credit in California?
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent who has helped startups and enterprises secure six-figure R&D credits legally and efficiently.
📅 Book your appointment here
FAQs – California R&D Tax Credit
Q1: Can a pre-revenue startup claim the R&D credit?
Yes, as long as the expenses qualify and the activity occurred in California.
Q2: Is the California R&D credit refundable?
No. But unused credit can be carried forward indefinitely to offset future taxes.
Q3: Can I claim both federal and California R&D credits?
Yes. They’re separate credits with similar rules, but different forms.
Q4: Do I need a formal R&D department?
No. Any qualified research under IRC §41 can be eligible—even if done by a small team.
Q5: Can I amend prior returns to claim the credit?
Yes. You may amend prior-year returns to claim the credit within the statute of limitations.
About Our CPA
Anshul Goyal, CPA EA FCA is a Certified Public Accountant in the U.S., IRS Enrolled Agent, and Fellow Chartered Accountant. He specializes in R&D tax credit planning, entity structuring, and IRS/FTB compliance. With over 15 years of experience, Anshul has helped clients across tech, healthcare, and manufacturing secure millions in state and federal tax credits.
Disclaimer
This blog is for educational purposes only and does not constitute legal or tax advice. The R&D credit rules and thresholds are subject to change. Always consult a licensed CPA before claiming or calculating the R&D credit.