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California R&D Tax Credit

The California research and development tax credit is intended to encourage companies to bring their innovation to California. It generally follows the parameters of the federal R&D tax credit, with additional modifications from California Revenue & Taxation Code (RTC) §17052.12 (Personal Income Tax) and RTC §23609 (Corporation Tax).

The California R&D tax credit is:

  • Valued at 15% of qualified research expenses (QRE) above a base, and 24% of basic research payments for qualified university-based research during the taxable year.

  • A permanent part of the tax code so can be relied on for business tax planning

  • Unlimited – there is no annual limit on the amount of funds that can be claimed for the credit

  • Eligible to be claimed against both corporate income tax and franchise tax

The California research credit can also be carried forward indefinitely until the full amount of the credit has been used. Read more here about California’s R&D credit.

Does your business qualify for the California research and development tax credit?

  • Does your company conduct business in California? If your company is doing research and development in California, you may be eligible for the California R&D credit. Note: In a few states, a company can be eligible for the R&D tax credit if it is doing any kind of R&D at all, even if the R&D is located in another state in which the company also does business. This is not the case in California – the company must be conducting the R&D in California.

  • The company must be an S or C corporation, an LLC, or a partnership. Sole proprietors may not claim the credit.

  • Do your R&D expenditures meet the federal four-part test? The expenditures must meet all four standards to qualify for the credit.

    • Qualified purpose – the expenses must have the purpose of inventing a new business product or updating a current one. Note that this product only has to be new to the company, and not necessarily new altogether. Research to keep up with a competitor who may have already achieved the goal that your company is trying to reach.

    • The elimination of uncertainty test requires that the company have a plan for their ultimate goal and how they will get there.

    • Process of experimentation – the company must show that they are following a scientific process, or iterating through different options by a process of elimination.

    • Technological in nature – the research in question must be based on one of the hard sciences. Common examples that California businesses might engage in include engineering, computer science, robotics, or biotech.

If your R&D expenses meet all four tests, you can submit proof of the expenditures and their purpose to the California Franchise Tax Board to claim the credit.

Once you have determined that your business is eligible for the California research tax credit, you must file Form 3523, Research Credit, along with your corporate tax return. You must also include proof of the expenditures. The proof can be anything that shows that your R&D expenses meet the four-part test, including:

  • general ledger detail

  • payroll records

  • project notes

  • lab results

  • emails or other business communications.

Ready to claim your research tax credit? Contact Endeavor Advisors to get started with the process.

More California R&D tax credit resources:

R&D Tax Credits by State: