Key figures
California advisory
2026, with sources
- R&D credit
- 15%Of qualified research above a base amount, plus 24% of basic research payments for corporations.
- Alternative simplified credit
- 3%Available for tax years beginning on or after Jan 1, 2025; 1.3% with no QREs in any of the prior three years.
- R&D credit carryover
- IndefiniteCarries forward until used; no carryback. Not refundable outside the cap election below.
- Business credit cap
- $5,000,000 a yearCredits can’t reduce tax by more than this; extended by SB 122 through tax years beginning before Jan 1, 2030.
The research credit after SB 711
California has its own research credit on Form FTB 3523: 15% of qualified research expenses above a base amount, plus 24% of basic research payments for corporations. Research must be done in California. From tax years beginning on or after January 1, 2025, the alternative incremental credit is gone and the alternative simplified credit is available at 3% (1.3% for a company with no qualified research in any of the three prior years).
The credit is not refundable and carries forward until used. For tax years beginning in 2024 through 2029, business credits can’t reduce tax by more than $5 million a year; the excess can be carried over, or an annual election on Form FTB 3870 makes it refundable over later years. That ceiling rarely binds a seed-stage company.
Where founders get caught
California’s differences from federal law tend to surface late: at a liquidity event, at the first profitable year, or in diligence. Most can be seen coming from the books.
- QSBS: California taxes the full gain on qualified small business stock.
- NOLs: for 2024–2026, a profitable year with $1 million or more of California income can’t use past losses.
- Contractors: the ABC test makes many “contractors” employees in California, with back payroll taxes and penalties.
- The $800 minimum: owed every year after the first, profitable or not, until the company formally withdraws.
- SaaS sales tax: it starts January 1, 2027, for customers and vendors alike.
The federal baseline
This page covers what California adds. The federal rules underneath it apply here too.
Common questions
Does California honor the federal QSBS exclusion?
No. California follows neither Section 1202 nor Section 1045, so a founder or employee who lives in California when they sell qualified small business stock pays California tax on the whole gain, at personal rates up to 12.3% plus the 1% Behavioral Health Services Tax on income over $1 million, even if the gain is excluded federally.
Is the California R&D credit worth claiming before we owe tax?
Only against California tax, and only later. The credit is not refundable and has no time limit, so a pre-revenue company banks it as a carryforward. The repeal of the alternative incremental credit and the new 3% alternative simplified credit both apply from the 2025 return, and the method has to be chosen on a timely original return.
What usually puts a startup into California without meaning to?
Usually it is the first California employee. A remote hire means EDD registration, SDI withholding, California wage law, and often enough California payroll to be “doing business”, which triggers FTB filing and the $800 minimum tax from the second year.
Advisory next door
- AZArizona advisoryArizona’s R&D credit is 24% on the first $2.5 million and 15% above, no longer refundable from 2026 but carried forward ten years. QSBS follows the federal rule.
- NVNevada advisoryNo income tax means no R&D credit and no QSBS question. Incentives are GOED abatements, and the real risks are in wage rules and Secretary of State filings.
- OROregon advisoryOregon disconnects from the federal QSBS exclusion and bonus depreciation from 2026, offers no general R&D credit, and adds a $1,000-per-job credit for 2026–2031.
Founder guides on this
- R&D taxThe R&D tax credit and Section 174A for startupsEngineering salaries can earn a federal R&D credit against payroll tax, and Section 174A lets you deduct US research again. What qualifies, what to track.
- EquityStock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.
- PeopleContractor or employee? Classification for startupsContractor or employee depends on control, not the contract. The IRS test, state rules, 1099s, payroll registration and the cost of getting it wrong.
More of the California guide
- AccountingAccounting and state tax in CaliforniaCorporate tax, conformity to federal rules, apportionment and what it does to your books
- ReceivablesReceivables and sales tax in CaliforniaSales tax registration, economic nexus, whether SaaS is taxable, and collecting from customers
- PayablesPayables and contractors in CaliforniaPaying vendors and contractors: 1099 filing, use tax, contractor tests and withholding
- PayrollPayroll taxes and employer rules in CaliforniaWithholding, unemployment insurance, paid leave, minimum wage and the rules on paydays
- ComplianceCompliance and filings in CaliforniaRegistering to do business, annual reports, franchise tax and the filing calendar
Sources
Checked against each agency’s own page on . Rates and thresholds change, usually on January 1.
General information for US companies, not tax, legal or accounting advice for yours. Rules and thresholds change; confirm the specifics with a CPA or the agency before you act on them.