Are R&D Tax Credits Available in California?

Yes. As of 2026, the state of California provides the Research and Development (R&D) Tax Credit very similar to the federal version, including the definition of qualifying research.  However, only qualified research expenses (QREs) incurred in California are eligible for the California research credit. 

In 2026, there are two methods with which the California research credit may be calculated: Regular Credit method and Alternative Simplified Credit (“ASC”) method. 

The Regular Method credit is equal to the sum of the following: 

  • 15% of QREs that exceed a base amount, which is calculated by applying a fixed-base percentage to the average annual gross receipts for the four prior years, plus  
  • 24% of basic research payments  

Under the ASC method, the credit is calculated by taking 3% of QREs that exceed 50% of the average QREs for the three previous tax years. If the taxpayer has no QREs in any one of the three previous tax years, the credit is equal to 1.3% of the current year QREs. Note that an election to use this method applies to all tax years following the election. 

Unused California research credits must be applied to the earliest tax year possible and then may be carried forward indefinitely, as opposed to federal credits, which must be carried back one year and carried forward twenty. 

California R&D Tax Credit Case Study

A San Francisco Company develops software used by its clients. It had never before claimed the R&D credit for the development activities of its software programmers. This project involved a four-year study with a three-year look back.

The Company qualified for the federal R&D Tax Credit of $330,000 and an additional $247,500 in California state R&D Tax Credit. 

FEDERAL
CALIFORNIA
Year
Total QREs
Credit
Total QREs
Credit
2021
$1,300,000
$130,000
$1,300,000
$97,500
2020
$900,000
$90,000
$900,000
$67,500
2019
$650,000
$65,000
$650,000
$48,750
2018
$450,000
$45,000
$450,000
$33,750
Total $3,300,000 $330,000 $3,300,000 $247,500

Get More Information About the R&D Tax Credit

The R&D Tax Credit, first enacted in 1981, has been one of the most valuable credits leveraged by companies. Every year, the R&D credit yields billions of dollars in federal and state benefits to companies engaged in qualifying research. This credit provides much-needed cash to hire additional employees, increase R&D, expand facilities, and more. Thousands of companies take advantage of the credit across several industries. » Learn More

Four-Part Test

For 2026, qualified research activities for the California research credit are defined by the four-part test outlined below.

  • Technological in Nature
    Activities must fundamentally rely on the principles of physical or biological science, engineering, or computer science.

  • Permitted Purpose
    Activities must be performed in an attempt to improve the functionality, performance, reliability, or quality of a new or existing business component.

  • Eliminate Uncertainty
    Activities intended to discover information that could eliminate technical uncertainty concerning the development or improvement of a product.

  • Experimentation
    All activities must include a process of experimentation including testing, modeling, simulating, and systematic trial and error.

Research and Development Tax Insights

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