California gives its own research credit on top of the federal one, for research done in California. It changed for tax years starting in 2025, and it works differently from the federal credit for early-stage companies.
If your company pays people in California to build or improve a product or process, it may earn a California research credit as well as the federal one. The California credit isn't refundable and can't be used against payroll tax. It lowers California income or franchise tax, and any credit you can't use yet carries forward until you can.
Regular credit. 15% of qualified research expenses above a base amount. Corporations also get 24% of basic research payments, such as payments to universities for basic research.
Alternative simplified credit (new for 2025). 3% of qualified research expenses above half of the average for the prior three years. If a company had no qualified research expenses in any of those three years, it's 1.3% of the current year's expenses.
California adopted the simplified method through SB 711 in 2025. The same law repealed the old alternative incremental credit, so a company that used that method has to pick the regular credit or the simplified one on Form FTB 3523. You choose the simplified method on a timely original return, and you can't switch methods on an amended return.
| Federal | California | |
|---|---|---|
| Where the research happens | In the United States | In California only |
| Payroll tax offset | Yes, up to $500,000 a year for qualified small businesses | No |
| Form | Form 6765 | Form FTB 3523 |
You can claim the California credit even if you don't claim the federal one. For a pre-revenue company, the federal payroll tax offset is usually what helps first. It's open to companies with under $5 million in gross receipts and no gross receipts more than five years back. The California credit waits on the books until there's California tax to use it against.
Software teams building new products, medical device and life science companies, hardware and aerospace suppliers, and manufacturers improving how they make things are the usual places to look. In Orange County, Irvine has a lot of all four. Whether a project counts depends on the work itself, so the check starts with what your team actually built.
See R&D tax credits for Irvine and Orange County, Los Angeles and San Diego, or read the full R&D tax credit guide for the federal rules.
Not right away. The credit isn't refundable and California doesn't allow a payroll tax offset, so it only lowers California income or franchise tax. Any credit you earn but can't use carries forward with no time limit, so it's there once the company owes California tax.
No. The FTB says you can claim the California research credit without claiming the federal credit. Most companies that qualify for one look at both, since they're built from the same project and payroll records.
Not for the California credit. Only research done in California counts. If part of your team works in other states, their work may still count for the federal credit.
Form FTB 3523, Research Credit, attached to your California return. If you want the new simplified method, you choose it on a timely original return.
Tell us what your team built this year. We'll tell you if there's a federal or California credit in it.