The federal R&D tax credit gets most of the attention. But 37 states offer their own R&D credit programs — and they stack on top of the federal credit. A company with $2 million in qualifying research expenses could claim $120,000-$160,000 in federal credits plus an additional $30,000-$100,000+ in state credits, depending on where the research takes place.
The challenge? Every state has its own rules. Rates range from 1.3% to 25%. Some states conform to the federal four-part test. Others have their own definitions. Some credits carry forward indefinitely. Others expire in 3 years. A handful are refundable — meaning you get cash back even with zero state tax liability. And several states made major changes in 2025-2026 that most businesses haven’t caught up with yet.
Here’s the practical guide to the state R&D credits that matter most — starting with the states where our clients operate and the programs that have changed recently.
Key Takeaways
- 37 states offer R&D tax credit programs that stack on top of the federal credit under IRC §41
- California (SB 711, 2025) repealed the AIC and introduced the ASC — if you were on the AIC, you must elect a new method or lose your credit entirely
- Texas (SB 2206, 2025) overhauled its program with permanent authorization, an increased rate of 8.722%, and new refundability for certain businesses
- States with refundable credits (Arizona, Connecticut, Michigan, Minnesota, Texas for certain filers) provide cash-back benefits — especially valuable for startups and companies with state NOLs
The Top 10 State R&D Credit Programs
Not all 37 state programs are equally valuable. Here are the 10 states with the most impactful R&D credit programs — the ones our clients ask about most and the ones with the biggest recent changes.
1. California — 15% Regular Credit / 3% ASC
We covered California’s credit in depth in our dedicated California R&D tax credit post. The key updates for 2025-2026: SB 711 repealed the Alternative Incremental Credit and introduced the federal-style ASC at a 3% rate. If you were on the AIC, you must elect a new method on your 2025 return or receive zero credit. California’s credit carries forward indefinitely. The state also imposes a temporary $5 million cap on combined business credits for 2024-2026.
California-specific note: The state uses a different definition of gross receipts than the federal government. California only includes sales of tangible or intangible property delivered to purchasers within California — not service revenue. This means service-based companies may have zero California gross receipts, which affects the Regular credit calculation. The ASC may be more favorable for these companies.
2. Texas — 8.722% Franchise Tax Credit (Overhauled 2025)
Texas completely revamped its R&D program with SB 2206, signed June 2025. The changes took effect January 1, 2026. The credit rate increased from 5% to 8.722% of QREs above the base amount. If you work with a Texas university, the rate jumps to 10.903%. Startups with no base period get a flat 4.361% (5.451% with a university). The credit is now permanently authorized — no more expiration risk. Texas also made the credit refundable for certain businesses that don’t owe franchise tax.
Key change: Texas eliminated the option to use the R&D credit against sales and use tax. Starting in 2026, the credit can only apply against the franchise tax. Companies that previously used the sales tax exemption need to re-evaluate their approach.
3. New York — 50% Refundable Excelsior Credit + 9% QETC Credit
New York offers two separate R&D credit programs. The Excelsior R&D Credit provides a 50% refundable credit on the federal R&D credit amount — but requires certification by Empire State Development as part of the Excelsior Jobs Program. The QETC (Qualified Emerging Technology Company) Credit provides a 9% credit on QREs for small technology firms. The QETC credit carries forward up to 10 years. Both programs require separate applications beyond just filing the tax return.
4. Massachusetts — 10% Incremental Credit
Massachusetts offers a 10% incremental credit on QREs above the base amount. The credit is non-refundable but carries forward up to 15 years. Companies can also sell unused credits to other Massachusetts taxpayers — creating immediate liquidity for startups or companies in loss positions. The credit applies to the same qualifying activities as the federal credit under IRC §41.
5. Connecticut — 20% Credit, Partially Refundable
Connecticut’s 20% credit rate is one of the highest in the country. The state uses a broader definition of qualifying expenses than most states — with a lower threshold under Section 174, allowing more spending to qualify. The credit is partially refundable (up to 65% of the credit can be refunded). Unused credits carry forward up to 15 years.
6. Arizona — Refundable for Small Businesses
Arizona offers a 24% credit on the first $2.5 million of QREs and 15% on QREs above that threshold. For qualifying small businesses (gross receipts under $5 million), the credit is 100% refundable — making Arizona one of the most startup-friendly state R&D credit programs. Non-refundable credits carry forward up to 15 years.
7. Michigan — 100% Refundable (New for 2025)
Michigan overhauled its R&D credit in 2025, making it 100% refundable with $100 million allocated annually. Small to medium businesses (under 250 employees) get a 15% credit on QREs above the base amount, capped at $250,000 per year. Larger businesses get 10% above the base or 3% of total Michigan QREs, capped at $2 million. Michigan follows federal §41 guidelines for qualifying activities.
8. Pennsylvania — Transferable Credits
Pennsylvania offers a credit equal to 10% of the increase in QREs over the prior year. The credit is non-refundable but transferable — you can sell unused credits to other Pennsylvania taxpayers. This turns the credit into immediate cash for companies that can’t use it against their own tax liability. Credits carry forward up to 15 years. The state program has a $55 million annual cap.
9. Georgia — Up to 50% Tax Liability Offset
Georgia follows the federal R&D credit framework and offers a credit of 10% of QREs above the base amount. The credit can offset up to 50% of your Georgia income tax liability — one of the most generous offset limits. Non-refundable. Carries forward up to 10 years. Georgia is particularly attractive for mid-market companies expanding operations.
10. Minnesota — Partially Refundable (New for 2025)
Minnesota modified its R&D credit in 2025, making it partially refundable. The base credit provides 10% on the first $2 million of excess QREs and 4% above that threshold. The refund rate is 19.2% for tax years beginning in 2025 and 25% for 2026-2027. Non-refundable credits carry forward up to 15 years.
The Full State Comparison Table
Key features at a glance
How State Credits Stack With the Federal Credit
State R&D credits and the federal R&D credit are completely separate programs. You claim both — and the combined benefit can be substantial. Here’s a practical example:
Combined Example: California Software Company
$2M in California QREs
A SaaS company with $2 million in qualifying research expenses, all performed by California-based employees.
Federal credit: ~$120,000-$160,000
Under the federal ASC at approximately 6-8% effective rate (after §280C coordination).
California credit: ~$30,000-$60,000
Under California’s 15% Regular credit or 3% ASC, depending on the method elected and base period data.
Combined: $150,000-$220,000 annually
Year after year. The same qualifying activities support both credits. One R&D study calculates both.
Multi-State Businesses: Key Considerations
If your company performs R&D in multiple states, each state’s credit applies only to research performed within that state. Here’s what you need to know:
Geographic allocation
You must allocate QREs to each state based on where the research was physically performed — not where the company is headquartered. An engineer working in your Texas office generates Texas QREs. The same engineer on a project at your California facility generates California QREs.
Remote workers
Remote employees generate QREs in the state where they physically perform the work — typically their home state. A developer working from home in Arizona for a California-headquartered company generates Arizona QREs, not California. This has become a significant planning consideration since 2020.
State conformity varies
Most states follow the federal §41 framework for qualifying activities. But some states have their own definitions — California’s gross receipts definition, Connecticut’s broader §174 threshold, and Texas’s franchise tax application are all exceptions. Don’t assume your federal study automatically applies in every state.
One study, multiple credits
A comprehensive R&D study can calculate both federal and applicable state credits simultaneously. The qualifying activities analysis happens once; the credit calculation happens separately for each jurisdiction. This is more efficient than running separate state-level studies.
From our practice: The most common mistake we see in multi-state R&D studies is failing to claim the state credit at all. Companies focus on the federal credit and forget (or don’t realize) that their states offer additional credits. Every R&D study we perform at Tax Formulations includes the calculation of applicable state credits as a standard part of the engagement. The incremental effort is small. The incremental benefit is significant.
States Without R&D Credits — What to Know
Thirteen states don’t offer a specific R&D tax credit: Alabama, Alaska, Florida, Hawaii, Iowa, Kentucky, Mississippi, Nevada, New Mexico, South Dakota, Tennessee, Washington, and Wyoming. If your company performs all research in one of these states, you can still claim the federal credit — you just won’t get the state-level bonus.
However, some of these states offer alternative incentives — Florida has a $9 million annual R&D credit program with limited allocation, and Washington offers a B&O tax credit for certain high-tech activities. Check with a specialist before assuming there’s no state-level benefit.
Ready to Claim Your Federal and State Credits?
Every R&D study we perform includes state credit calculations alongside the federal credit. We’ll identify which states you have qualifying activities in, calculate each credit separately, and maximize your combined benefit.
Frequently Asked Questions
Do I need to file separate R&D studies for each state?
No. A single comprehensive R&D study calculates both the federal and applicable state credits. The qualifying activities analysis happens once. The credit calculations happen separately for each jurisdiction, using state-specific rates, base amounts, and definitions. This is standard practice — and it’s how we structure every engagement.
Can I claim state credits in multiple states?
Yes. If you perform qualifying research in multiple states that offer credits, you can claim a credit in each state based on the QREs attributable to that state. A company with engineers in California, Texas, and New York could claim credits in all three states plus the federal credit — all from the same qualifying activities.
What if I have remote employees in multiple states?
Remote employees generate QREs in the state where they physically work — typically their home state. If you have 10 developers working from home across 5 different states, each state gets the QREs from its resident employees. This creates both opportunities (credits in states you didn’t expect) and complexity (more state returns to consider). Proper geographic allocation is essential.
Do state credits reduce my federal credit?
Not directly. The federal and state credits are separate calculations. However, state credits can reduce your state tax liability, which in turn could affect your federal deduction for state taxes paid (though the $10,000 SALT cap limits this impact for most individual taxpayers). The interaction is generally favorable — you want to claim both.
Which states are best for startups?
States with refundable credits provide the most value to startups with no state tax liability. Arizona (100% refundable for small businesses), Michigan (100% refundable), Connecticut (65% refundable), and Minnesota (25% refundable) are the standouts. At the federal level, don’t forget the $500,000 annual payroll tax offset — which works regardless of which state you’re in.
What Should You Do Next?
If you’re claiming the federal R&D credit but haven’t evaluated your state credit opportunities — or if you’ve never claimed any R&D credits at all — there’s almost certainly money on the table. The state credit adds 15-50% on top of the federal benefit depending on where you perform research, and it comes from the same qualifying activities you’re already doing.
Schedule a free consultation and we’ll evaluate both your federal and state R&D credit positions. We work with businesses performing research across California and nationwide — from software companies to manufacturers to life sciences firms.
Take our 60-second R&D credit qualification quiz →
Learn more about the federal R&D credit →
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Martin Gamez
Founder, Tax Formulations
Martin is a tax credit specialist with over 25 years of experience in federal and state R&D tax credits, cost segregation, and business tax incentives. His background includes tenure at Big Four and Top 10 accounting firms, with deep experience in multi-state R&D credit studies and state-specific compliance. Read full bio →