California RD Tax Credit

For CA businesses in multiple industries looking to reduce Federal and franchise tax liability.

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Documentation is often enough to suffice as proof of qualified expenses. Financial records, payroll records, and invoices are some of the documentation you need to support your qualified expenses.

The California Research and Development Tax Credit, also known as the CA R&D credit, provides businesses with a potentially significant tax benefit when research and development business activities are conducted within the state of CA. Documentation is often enough to suffice as proof of qualified expenses. Financial records, payroll records, and invoices are some of the documentation you need to support your qualified expenses.

The research credit in CA is different from the Federal R&D credit in several significant ways.


First off, the credit is equal to the sum of the following:

  • 15% of qualified expenses that exceed a base amount (rather than the Federal amount of 20%)
  • 24% of basic research payments


The CA research credit also contains the below key elements:

  • Any research conducted must take place in the state of CA in order for the research activity to qualify for the tax credit.
  • The Alternative Simplified Credit (ASC) method cannot be applied.
  • Gross receipts under California’s research credit do not include rents, interest, services, and/or operating leases. Gross receipts do include U.S. government sales, and the sale of property (as long as the sale was made to someone within the state of CA).
  • The credit cannot be carried back, it can only be carried forward.
  • There is no limit on how far forward the research credit can be carried forward (the Federal R&D tax credit limits the carryforward to 20 years).
  • Additionally, there is no limitation (in terms of dollars) on the total amount of qualified research expenses.


You can read more about the CA research credit here.

What is the California R&D Tax Credit?

R&D tax credits, also known as the Research and Development credit, enable businesses to potentially reduce their federal income tax or franchise tax. Taxpayers might qualify for the credit if they paid for (or incurred) qualified research expenses.

What are Qualified Research Activities in CA?

Qualified Research Activities can include the below. As mentioned, all qualified activities must take place in the state of CA.

Creating improved products, processes, formulas, software, and techniques
Automating or improving internal manufacturing processes
Designing tools, jigs, fixtures, and molds
Integrating new equipment
Development of data centers, big data, and data mining tools
Integration of APIs and other technologies
Development of financial or pricing models
Hiring outside consultants to perform any of the listed activities
Manufacturing new or improved products
Developing prototypes, first articles, models
Evaluation of alternative materials
Development of firmware
Network hardware and software development and optimization
Developing simulators
Development of risk management systems

What is a Qualified Small Business?

Your business might qualify if it paid for:
Employees or sub-consultants performing research within CA
Raw materials within CA
Consumable supplies during development that were within CA
Cloud computing services related to development operations that were within CA
The R&D tax credit can be applied to a wide variety of industries that extend beyond research labs and includes startups.

The R&D tax credit can be applied to a wide variety of industries that extend beyond research labs and includes startups.

Find out if you qualify for the CA research credit.

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How the R&D Tax Credit Works in California

What Information is Needed?

Properly claiming the R&D tax credit can be difficult without the right expertise - That’s where GOAT.tax comes in. Our R&D tax credit software identifies any qualified research expenses your company paid and qualified research activities to ensure you receive the largest refund possible.

These qualified expenses typically include employee compensation, contracted services, and materials. Typical forms needed for proof often include payroll records, detailed financial records, and vendor invoices.

Meeting the Four-Part Test

All companies in California (regardless of industry, size, or revenue) that perform these qualified research activities must satisfy the following criteria of the IRS Four-Part Test as outlined in IRC §41(d):

1. Business Component Test
The activity must be related to the performance, quality, reliability, or new or improved function of a business component of the taxpaying company. A business component is defined to be “any product, process, software, technique, formula or invention used by the taxpaying company in trade or business.”
2. Technological Uncertainty Test
The activity must involve the elimination of uncertainty. An activity entails uncertainty if the taxpayer did not know one or more of the following:

  • Whether the desired results could be achieved.
  • The specific means of achieving the desired result.
  • The appropriate design of the business component is being developed.
    3. Process-of-Experimentation Test
    “Substantially all” of the activity must involve a “process of experimentation” involving more than one possible approach toward achieving the result, where the capability or method of achieving the result is uncertain at the outset of the activity.
    4. Technological‐in‐Nature Test
    Activities that are undertaken to discover information must be technological in nature. For example, experiments used to eliminate uncertainty must rely on principles of physical or biological sciences, engineering, or computer science.

    Credit Carryforward

    In California, the carryover must be applied to the earliest tax year possible and the unused credit may be carried over until it is exhausted.

    CA Alternative Incremental Credit (AIC)

    You can choose this alternative method on a timely filed original return. If at a later year you decide to cancel this method, you will need to receive approval prior to filing your original return. California does not allow the change to be made on an amended return.

    R&D Tax Credit Calculation Method

    The CA research credit requires that Form FTB 3523 be completed. While the Federal R&D Tax Credit allows for two primary calculation methods, the Regular Credit (RC) and the Alternative Simplified Credit (ASC), only the RC method is permitted in CA.

    How To Claim Your CA R&D Tax Credit

    STEP 1

    File Your Income Tax Return

    STEP 2

    Visit Instructions for Form FTB 3523

    STEP 3

    Attach Research Credit (FTB 3523)

    STEP 4

    Review Credit Assignments

    California R&D Tax Credit From The Experts: GOAT.tax

    GOAT.tax was created for the purpose of educating businesses on the R&D tax credit and assisting companies that qualify for the credit to claim it. Through the 305+ years of collective automating R&D tax credit experience across our nationwide team of over 50 R&D tax professionals, we have been able to take all the guesswork out of this complex tax credit incentive. The experts at GOAT.tax can help your business with automating R&D credit through our innovative platform.
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    Hire US-based engineers, developers, or scientists.
    Designs and develops product prototypes and/or software.
    Performs experimentation and validation on products, manufacturing processes, and/or software.
    None of the above.

    This calculator has been developed utilizing data from a variety of studies conducted in the industries listed. This is only an approximation based on a variety of assumptions and should be treated as such.

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    Based on your responses, we believe that you are not currently eligible for the R&D tax credit.

    Please check back with us if you perform any product or software development-related work in the future.

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