Golden (State) Incentives: California’s R&D Tax-Credit Updates for 2025

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Posted by Laura Whittenburg, MSBME, Technical Writer on Nov 7, 2024 9:32:38 AM

R&D Tax Credits For CPAs Tax Incentives > California R&D Tax Credits > State Programs

Are you California Dreamin’ of a bigger bottom line? Welcome to The Golden State, where innovation isn’t just a buzzword: it’s a tax break.

The state of California established its Research Credit (i.e., R&D tax credit) in 1987, which allows California-based businesses investing in research & development (R&D) to offset a portion of their state income tax liability. 

Better still, the Research Credit carries forward and can be partially refunded!

As we approach the first business day of 2025, companies interested in the R&D tax credit should ensure they meet all criteria when preparing to file their state income tax returns.

Here’s a comprehensive breakdown of new policy changes and filing tips for tax year 2024.

Key Updates to California’s R&D Tax Credit

You may have heard that California lawmakers temporarily suspended the Research Credit during the COVID-19 pandemic for businesses with annual taxable incomes exceeding $1 million. Governor Gavin Newsom signed legislation that restored the Research Credit, effective for tax years beginning on or after January 1, 2022. 

For tax year 2024, the credit equates to the sum of 15 percent of qualified research expenses (QREs) exceeding the base amount and 25 percent of basic research payments (i.e., to external research organizations).

Better still, the Research Credit carries forward. If you cannot use the full credit during the current tax year, then any unused credit (i.e., carryover) can be carried forward indefinitely until it’s exhausted. However, the carryover must be applied to the earliest tax year possible.

The subsequent enactment of SB-167 and SB-175 in 2023 introduced the following changes for tax year 2024:

Credit cap: California implemented a $5 million cap on the total amount of state tax credits that businesses can claim in a single year. 

  • This cap applies to multiple credits, including the Research Credit. 

  • In other words, even if a company has eligible expenses exceeding the amount that would generate $5 million in tax credits, that company can only utilize $5 million of credits in that year.

Elective partial refunds: For tax years 2024 to 2026, taxpayers can make an irrevocable election to receive annual, partial refunds of particular state tax credits – including the Research Credit – beginning in the third taxable year after the election is made.

  • This refund amounts to 20 percent of the qualified credit amount that would have been otherwise available but for the $5 million cap.

  • Any excess is carried forward and refundable for the following five years.

Finally, the state of California does not follow federal requirements under Section 174 Capitalization for corporations to capitalize and amortize R&D expenditures.

Acena Consulting will ensure accelerated, accurate, and on-time completion of your tax forms and documentation. Schedule a free consultation today for immediate assistance.

Deadlines and the Application Process

The California Franchise Tax Board (CFTB) administers the Research Credit via Form FTB 3523, although neither the form nor the instructions have been updated for tax year 2024 at the time of writing. The CFTB allows taxpayers and their tax professionals to file online using the CalFile portal – directly, for free – or by mail. 

March 15, 2025: The deadline to file state income tax returns for Limited Liability Corporations (LLCs) and S Corporations.

April 15, 2025: The deadline to file state income tax returns for C Corporations. 

The complete list of filing and payment deadlines for tax year 2024 can be found on the CFTB website. These deadlines apply to both fiscal and calendar-year taxpayers.

Next Stop, Hawaii!

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Special thanks to Stanley Heyman, Esq., CPA, Partner at Barnes & Thornburg LLP.

Edited by Randy Eickhoff, Founder & Head Coach and Nick Pyzow, Director at Acena Consulting. Photo courtesy of rjshade on Flickr.
Laura Whittenburg, MSBME, Technical Writer

Laura Whittenburg, MSBME, Technical Writer

Laura most recently hails from the worlds of medicine and pharmaceutical R&D. She attended a U.S. medical school where she conducted research in Anesthesiology and Acute Care Surgery, passed the USMLE Step 1 "Boards" exam, and completed clinical rotations before transitioning her career to scientific writing. She sports the color purple at an alarming frequency to celebrate her alma mater, Northwestern University, where she earned her Bachelor's in Biological Sciences and Master's in Biomedical Engineering. Away from her desk, Laura reads fantasy novels and plays with her two schnauzers, Lyra and Vivenna, who make guest appearances during her video calls.