A Practical Guide to State R&D Tax Credits

A lot of companies know about the federal R&D tax credit, but many are surprised to learn there’s more on the table. There is a whole other layer that often gets overlooked: state R&D tax credits. These programs can unlock meaningful savings, yet they tend to fly under the radar because the rules vary from state to state and feel harder to pin down.

In this guide, we’ll break it all down into easily digestible explanations of what you need to know. You’ll learn all about:

• • How state R&D credits work
  • Details of eligibility in major states
  • The differences between refundability and transferability,
  • Best practices for documentation and compliance

By the end, you’ll see how state credits can become a powerful part of a smarter overall tax strategy.

What are State R&D Tax Credits?

State R&D tax credits are incentives that individual states offer companies to reward them for doing research and development within their borders. Think of them as a supplement to the federal R&D credit. You still calculate your federal credit first, then layer state credits on top based on where the work actually happened.

When done right, stacking state and federal credits can significantly increase your overall tax savings. By applying for both federal and state, you are essentially getting rewarded twice for the same work! For companies investing heavily in R&D, that combination can mean more cash freed up to hire, build, and keep pushing ideas forward.

State-Level Eligibility

Most states start from the same foundation as the federal credit by leaning on the Four-Part Test defined in the tax code. If you already qualify federally, you’re off to a very good start. You can read more details about this test and the entire qualification process in this comprehensive guide to R&D tax credits. To summarize it briefly, the Four-Part Test is a set of questions that determines if your work is:

• • Aimed at improvement
  • Involves uncertainty
  • Includes experimentation
  • Is technical in nature

The obvious difference between the state and federal credits is, naturally, location. In most cases, the research activities and related expenses must physically take place within that state to qualify. Where your engineers sit, where testing happens, and where wages are paid all matter. This is why tracking R&D by location is extremely important.

There’s a catch to all this, however. Eligibility details vary widely by state. For some examples of these differences, let’s look at some of the tax credit characteristics of major states:

You can see that all these programs reward innovation, but each does it in its own way. In some cases state programs are attuned to the local qualifying industries. Because no two states have the same industrial output, it’s good to know what the common QREs are for the work your company is performing.

Key Advantages: Refundability and Transferability

One of the biggest advantages of state R&D credits is that some don’t just reduce taxes. They can actually put cash back in your pocket.

Refundable credits

Refundability allows certain businesses, especially startups, to receive a refund even if they don’t owe state income tax. States like Arizona and Connecticut, and more recently Texas, offer programs that can be game-changing for early-stage companies watching every dollar.

Transferable credits

Transferability takes things a step further. In states like Pennsylvania, businesses can sell their unused R&D credits to other taxpayers. That means immediate liquidity instead of waiting years to use the credit. For companies reinvesting aggressively or operating at a loss, this flexibility can turn tax credits into real working capital when it matters most.

Together, refundability and transferability are what make state R&D credits such a powerful and often underutilized tool. They’re not just about lowering future taxes. They’re about funding growth right now.

Regional Deep Dives: Top State Opportunities

In this section, you’ll find a tailored list of tax credit details as they pertain to the credit amounts, refundability, transferability, and other important features of your state’s R&D tax credits. These are the states with some of the highest R&D activity right now.

You will also see whether your credits carry forward and for how long. What does it mean when credits carry forward? A carryforward is basically the government’s way of saying, “No problem, you can use this later.” If your business earns an R&D tax credit but doesn’t have enough tax liability to use it right away, the credit doesn’t disappear. Instead, it gets saved and carried forward to future tax years, where it can be applied when your company starts owing more in taxes.

For federal R&D credits, that window is generous: up to 20 years. This makes carryforwards especially valuable for startups and growing companies that are investing heavily in innovation long before they’re consistently profitable. For each individual state, you have to pay closer attention, as these can vary quite drastically.

Texas R&D Tax Credits

The revised R&D franchise tax credit effective January 1, 2026 allows businesses to claim a credit based on qualified research expenses reported on IRS Form 6765 that are attributable to research conducted in Texas. The breakdown in credit amounts looks like this:

• • Standard credit amount: 8.722% of the increase in qualified research expenses over 50% of the average from the prior three tax years
  • Higher education boost: 10.903% if the research is conducted under contract with a public or private university
  • Startups or first-time claimants: 4.361% of current-year qualified research expenses if there were no qualifying expenses in one or more of the prior three years
  • Startups working with universities: 5.451% of current-year qualified research expenses if no prior-year QRE history exists

These credits are refundable for certain businesses that do not owe franchise tax including a new veteran-owned business or business with computed tax of less than $1,000. Any unused credits can be carried forward up to 20 years.

California R&D Tax Credits

The California R&D tax credit qualifications generally follow a modified federal approach (including an ASC option). Key information you should know:

• • The credit is equal to the sum of the following:
    • 15% of qualified expenses that exceed a base amount
    • 24% of basic research payments
  • Alternative Simplified Credit (ASC) – A simpler R&D credit method based on recent three-year average research spending, typically 3% of the excess over that baseline
  • Non-refundable, but can be carried forward indefinitely
    • Note: there is a $5 million cap on total business credits that can be used per year, including carryovers

The carryover must be applied to the earliest taxable year possible and the unused credit may be carried over until it is exhausted.

New York R&D Tax Credits

There are multiple R&D tax credits available to New York-based companies. Each credit has different qualifications and credit amounts. Key information you should know:

Life Sciences R&D Tax Credit

• • The credit equals to:
    • 15% of qualified New York R&D spending for companies with 10 or more employees
    • 20% for companies with fewer than 10 employees
  • It can be claimed for up to three consecutive years and is capped at $500,000 per year
  • Approved businesses receive a tax credit certificate from Empire State Development specifying the credit amount and the year it can be used
  • Refundable

NYC Biotechnology Tax Credit

• • 18% of R&D property costs, 9% of qualified research expenses, and up to $4,000 per employee per year in training costs.
  • Total credit cap is $250,000 per year.
  • Eligibility: Biotech companies in NYC with <$100M in revenue
  • Refundable
  • Can be carried forward

Excelsior Jobs Program R&D Credit

• • 50% of the portion of the federal R&D tax credit related to NYS expenditures
  • Up to 6%–8% of qualified research expenditures
  • Businesses meeting requirements and accepted for the Excelsior Jobs Program can apply for the research credit.
  • Refundable
  • Can be carried forward, but program guidelines vary

Florida R&D Tax Credits

Florida provides a corporate R&D tax credit for companies that have already claimed the federal R&D credit and operate in target industries. These are:

The credit equals:

• • ~10% of Florida-qualified research expenses above a base amount
  • Credit taken limited to 50% of Florida tax due after other credits
  • Non-refundable, but can be carried forward for five years

Credits are capped statewide (around $9 million per year) and distributed on a prorated basis if demand is high.

Pennsylvania R&D Tax Credits

The Pennsylvania R&D tax credit program is, thanks to its transferability, great for companies in need of immediate cash. Key information you should know:

• • Standard credit rate: 10% of qualified research expenses that exceed your Pennsylvania base amount
  • Small business rate: 20% for qualified small businesses (defined as companies with net book value of assets under $5 million)
  • Non-refundable, but transferable and carried forward for up to 15 years

The base amount is generally the average of the qualified research expenses in Pennsylvania over the four preceding taxable years. The program has a statewide cap on total credits awarded (historically about $55 million annually, with a set-aside portion for small businesses).

Massachusetts R&D Tax Credits

Massachusetts has a fast-growing startup scene and many VC-backed companies, and therefore, very generous R&D credits with a strong liquidity-focused program. While there are strict documentation expectations, the good news is that the state qualifications heavily overlap with the federal rules.

The credit equals to:

• • 10% of incremental qualified R&D expenses
  • 15% of basic research payments
  • Refundable only for certain life sciences taxpayers, but can be carried forward for 15 years

Note that the credit cannot reduce a taxpayer’s liability below $456.

New Jersey R&D Tax Credits

New Jersey has one of the most valuable transferable R&D credit programs. Qualifying mid-market companies looking for liquidity will especially want to be aware of the credits available to them.

The credit equals to:

• • 10% of the excess of the qualified research expenses over a base amount
  • 10% of the basic research payments
  • Generally non-refundable, but this may change
  • Can be carried over for 7 tax years in non-specified industries, but 15 years for specific tech fields

Pending legislation in 2026 would allow these credits to be refundable for certain taxpayers.

Illinois R&D Tax Credits

Many traditional businesses in Illinois don’t even realize that they qualify for the R&D tax credit. Thankfully, if you qualify for the credit at the federal level, chances are that you also qualify in Illinois thanks to similar qualification standards.

The credit equals to:

• • 6.5% of qualified R&D expenses exceeding a base amount
  • Non-refundable, but can be carried forward if unused

Colorado R&D Tax Credits

Colorado has startup-friendly policies that are applicable to companies operating and conducting research and experimental activities within one of the state’s designated Enterprise Zones.

The credit is equal to:

• • 3% of increased R&D expenses over a base amount
  • Non-refundable, but can be carried forward indefinitely

Georgia R&D Tax Credits

The Georgia R&D tax credit is great for qualifying business, especially mid-market companies that are expanding operations. This can offset up to 50% of your net Georgia income tax liability after all other credits have been applied

The credit generally equals to:

• • 10% of qualified research expenses
  • Excess credits can offset Georgia withholding tax payments for some taxpayers
  • For taxable years beginning on or after January 1, 2025 can be carried forward for up to 5 years

Oregon R&D Tax Credits

Oregon’s R&D tax credits are intended specifically for activities involving semiconductors. So while there are more technical compliance requirements, the good news is that the credit value is quite high!

The credit equals to:

• • 15% of qualified research expenses or basic research payments
  • Up to $4 million per taxpayer, per year
  • Partially refundable for companies with 3,000 employees or fewer
  • Can be carried forward for 5 consecutive tax years
    

Ohio R&D Tax Credits

Ohio’s R&D tax credits are a bit tricky. They can be quite appealing to businesses, including qualifying legacy manufacturers that are modernizing processes. However, because of the state’s unique business tax structure, these credits are often missed by non-specialists.

The credit equals to:

• • 7% qualified research expenses exceeding the average of the previous three years’ Ohio QREs
  • Non-refundable, but credit offsets commercial activity tax (CAT)
  • May be carried forward up to 7 years against future CAT liabilities

Arizona R&D Tax Credits

Arizona has a broad business R&D tax credit program, often with technology, aerospace, manufacturing, and semiconductors in mind.

The credit equals to:

• • 24% of the first $2.5 million in qualifying expenses
  • An extra 15% of the qualifying expense exceeding $2.5 million
  • Generally non-refundable, but may be carried forward 15 years for pre-2022 years and 10 for 2022 and later
  • Small businesses with less than 150 employees may be eligible to claim a partial refund from a limited pool of state funding

Connecticut R&D Tax Credits

Connecticut offers one of the more flexible state research and development tax credit programs, with multiple ways for businesses to benefit depending on how they invest in R&D. Key information you should know:

• • Incremental R&D Credit: Equal to 20% of the increase in qualified R&D expenses compared to the prior year
  • Non-Incremental R&D Credit: Credit amounts vary based on total expenses
    • Small businesses (gross income under $100 million) may qualify for up to 6% of the total
    • Larger companies use a statutory formula ranging from 1% up to 6% depending on the total
  • Offset up to 70% of corporation business tax liability
  • Refundable for small businesses (those with gross income of $70 million or less); has potential to be exchanged for a cash refund of 65% of the credit amount
  • Can be carried forward for up to 15 years for income years beginning on or after January 1, 2021
    • Prior credits earned before that date may carry forward indefinitely

Documentation & Compliance

No pressure, but when it comes to state R&D tax credits, documentation is where claims are won or lost. The truth is states may dig deeper than the IRS, and their audits tend to be very hands-on and detailed. That means clean, consistent records are everything!

When gathering information to make your case, prioritize documenting:

• • Clear ties between your research activities and expenses
  • Evidence that the work actually happened in that state
  • Time tracking
  • Project notes
  • Technical descriptions
  • Payroll detail
  • Expense backup
  • Anything specific that your state asks for

To ensure best practices take place, you should check your state’s requirements to establish an effective record-keeping system, particularly one that can withstand rigorous state-level audits. Remember: all of your documentation should tell the same story. A defensible claim is not just about what you did, but how well you can explain it.

As you can imagine, the strongest claims connect the dots between people, projects, and dollars in a way that an auditor can follow without guessing. If credits are treated as an afterthought or rushed together at filing time, this can unfortunately be a bit difficult to achieve.

With all of that said, this is where working with specialists really pays off. An experienced professional can build claims with audits in mind from day one, not as a cleanup exercise later. They know what state reviewers look for, where companies usually stumble, and how to document innovation in a way that actually holds up. Businesses tend to get weary when they have to correspond with government auditors, but you can trust experienced professionals to confidently guide you.

Federal Credits Aren’t the Finish Line

State R&D credits can significantly increase your total benefit, especially when they’re claimed alongside the federal credit. With features like refundability, transferability, and long carryforward periods, state credits can provide your company with immediate cash relief or meaningful savings in future years.

Because there’s no one-size-fits-all approach, many businesses never realize how much they qualify for at the state level. Companies that take a coordinated approach to both federal and state credits position themselves to maximize their returns from innovation. If you’re already investing in R&D, the next step is making sure every available incentive is fully captured and working in your favor.