Introduction
California might have high taxes, but it also offers generous incentives to small businesses and startups that invest, hire, and innovate. In 2025, qualifying businesses can significantly reduce their tax burden by claiming state and federal credits—if they know where to look.
Overview of Tax Incentives Available in 2025
Applicable Code: California Revenue & Taxation Code §§17052.12, 23609, 17053.73; IRC §§41, 51
Here are some of the most widely used and high-value incentives available to California-based businesses in 2025:
- Research & Development (R&D) Credit
- California Competes Tax Credit (CCTC)
- New Employment Credit (NEC)
- Work Opportunity Tax Credit (WOTC)
- Sales Tax Exemptions for manufacturers
- Zone-based credits for operating in designated areas
California R&D Credit (Form 3523)
One of the most powerful state credits for startups and tech companies.
- 20% credit on qualified research expenses exceeding base amount
- Can offset income and franchise taxes
- Must be filed with Form 3523
- Can be carried forward indefinitely
- Available to C Corps, S Corps, and LLCs taxed as corporations
Example:
If you spend $200,000 on eligible software development, you could claim a $40,000 R&D credit (subject to base-year limits).
New Employment Credit (NEC)
Applies to employers hiring workers in Designated Geographic Areas (DGAs).
- Must hire from a targeted group (e.g., veterans, long-term unemployed)
- Credit is up to $56,000 per qualified full-time employee over five years
- File Form FTB 3554
- Must reserve credits via FTB’s online reservation system
California Competes Tax Credit (CCTC)
Administered by GO-Biz, this is a competitive award for businesses planning to expand or relocate in California.
- Credit based on job creation, wages, and investment plans
- Businesses apply via CalCompetes online portal
- Nonrefundable, but can offset income/franchise tax
- Excellent for growing startups seeking capital efficiency
Work Opportunity Tax Credit (WOTC)
A federal credit (but available to California employers) for hiring disadvantaged workers:
- Up to $9,600 per employee
- Must file IRS Form 8850 and ETA Form 9061 within 28 days of hire
- Must be coordinated with California’s Employment Development Department (EDD)
Local and Industry-Specific Incentives
- Sales tax exemptions for manufacturers and clean tech businesses
- Local hiring grants in cities like Los Angeles, Oakland, and San Diego
- Opportunity Zones for investors and developers
- Film & TV production tax credits
- Cannabis business deductions (at local levels, limited federally)
Each county may offer custom incentives—contact your local Economic Development Agency (EDA).
Step-by-Step Guide to Claim Business Credits
Step 1: Track all eligible expenses (hiring, research, development, investment)
Step 2: Verify business location and eligibility (DGA, Opportunity Zone, etc.)
Step 3: File the appropriate forms (e.g., Form 3523, 8850, 3554) on time
Step 4: Submit CCTC applications during open windows on GO-Biz portal
Step 5: Consult with a CPA to maximize your credit usage and carryforwards
Conclusion
If you’re a small business or startup in California, you’re leaving money on the table by not claiming available credits. With careful planning and compliance, these incentives can drastically reduce your effective tax rate and free up capital for growth in 2025.
Call to Action
Want help applying for California’s business tax incentives?
Schedule a consultation with Anshul Goyal, CPA EA FCA, a U.S.-licensed CPA and IRS Enrolled Agent, who has helped startups and founders secure six-figure credits while staying compliant with both IRS and California FTB requirements.
📅 Book your appointment here
FAQs – California Business Tax Incentives
Q1: Can I claim the R&D credit as an LLC?
Yes, if taxed as a corporation. Pass-through LLCs may need to restructure to fully benefit.
Q2: Is the California Competes Credit available year-round?
No. It has application windows during the year via GO-Biz.
Q3: Can I claim both federal and state R&D credits?
Yes. California’s credit is in addition to the federal one under IRC §41.
Q4: Do I need to pre-register for the NEC?
Yes. You must reserve the credit online through the Franchise Tax Board’s system.
Q5: Can startups with no profit benefit from these credits?
Yes. Many credits can be carried forward to offset future taxes, and in some cases, may be refundable if structured properly.
About Our CPA
Anshul Goyal, CPA EA FCA is a U.S.-licensed Certified Public Accountant, IRS Enrolled Agent, and Fellow Chartered Accountant with 15+ years of experience. He specializes in startup tax planning, credit claims, R&D filings, and multi-jurisdictional compliance. Anshul has helped clients secure over $200 million in credits and savings.
Disclaimer
This blog is for informational purposes only and does not constitute tax or legal advice. Tax credits and incentives are subject to eligibility, documentation, and change. Consult a licensed CPA before applying or claiming any California tax incentives.