A side-by-side comparison of R&D tax credit programs across 9 major states — covering credit rates, refundability, carryforward periods, and key program notes.
Last reviewed: June 2026·Reviewed by: MainStreet's R&D Tax Credit team (licensed CPAs & Enrolled Agents)
Quick answer
How do state R&D tax credits work, and do they follow OBBBA?
Most states offer their own R&D tax credit on top of the federal §41 credit, often using the same four-part test and QRE definitions but with their own rates, caps, refundability, and carryforward rules. Some states are far more generous than others, and a few offer refundable credits that are valuable to pre-profit companies.
State conformity to the new federal §174A expensing rules varies: rolling-conformity states automatically adopt it, static-conformity states (such as California, fixed to a prior IRC date) may not, and decoupled states follow their own treatment. Because the state credit is calculated separately, you can frequently claim federal and state credits on the same qualifying research — but you must apply each state's specific apportionment and filing rules.
More than 35 states offer their own R&D tax credit programs, many of which can be claimed in addition to the federal credit under IRC §41. State credits typically piggyback on the federal QRE definition but use state-specific rates, caps, and refundability rules.
MainStreet calculates both federal and applicable state R&D credits as part of every study. The combined federal + state credit can meaningfully increase the total tax savings for companies operating in high-value states.
Example: A California-based company with $1M in qualifying wages might receive ~$70,000 in federal credit (ASC method) plus up to $150,000 in California state credit — a combined savings of over $200,000.
State-by-State Comparison
State
Credit Rate
Type
Carryforward
Annual Cap
California
15% / 24%
Nonrefundable
Unlimited
None
New York
9%
Refundable (certain taxpayers)
15 years
None
Texas
5%
Nonrefundable / Sellable
20 years
$250M per biennium
Massachusetts
10%
Refundable (50% of unused credit)
15 years
None
Pennsylvania
10% / 20%
Nonrefundable / Sellable
15 years
$60M per year
Georgia
10%
Nonrefundable / Transferable
10 years
None
Connecticut
6%
Nonrefundable
15 years
None
Illinois
6.5%
Nonrefundable
5 years
None
Arizona
24% / 15%
Nonrefundable
15 years
None
State Profiles
California
15% / 24%
Type: Nonrefundable
Carryforward: Unlimited
15% for wages/supplies; 24% for contract research. Excess credit carries forward indefinitely. One of the largest state R&D programs.
New York
9%
Type: Refundable (certain taxpayers)
Carryforward: 15 years
9% of qualified expenditures. Fully refundable for qualified emerging technology companies (QETCs). Other taxpayers take a nonrefundable credit.
Texas
5%
Type: Nonrefundable / Sellable
Carryforward: 20 years
Cap: $250M per biennium
Credit on qualified research expenses incurred in Texas. Unused credits may be sold to other taxpayers under the Texas Research and Development Credit program.
Massachusetts
10%
Type: Refundable (50% of unused credit)
Carryforward: 15 years
10% of qualified Massachusetts research expenses. Taxpayers with unused credit may elect to receive 90% of 50% of the excess as a refund.
Pennsylvania
10% / 20%
Type: Nonrefundable / Sellable
Carryforward: 15 years
Cap: $60M per year
10% standard credit; 20% for small businesses (≤$5M gross receipts). Credits awarded by DCED on an application basis. Sellable to other PA taxpayers.
Georgia
10%
Type: Nonrefundable / Transferable
Carryforward: 10 years
10% of QREs exceeding the Georgia base amount. Credits are transferable and may be offset against payroll withholding for qualifying small businesses.
Connecticut
6%
Type: Nonrefundable
Carryforward: 15 years
6% of qualified research expenses. Connecticut also offers an incremental credit of up to 20% for expenditures exceeding the base amount.
Illinois
6.5%
Type: Nonrefundable
Carryforward: 5 years
6.5% of qualifying expenditures over a base amount. Illinois uses an ASC-like incremental method. Credit is nonrefundable against Illinois income tax.
Arizona
24% / 15%
Type: Nonrefundable
Carryforward: 15 years
24% for first $2.5M of QREs; 15% on amounts above $2.5M. Among the highest statutory rates of any state credit program.
How State R&D Credits Work
Base Definitions
Most states define qualifying research expenses using the same framework as IRC §41, with modifications. Common state-specific adjustments include:
Geographic limitation: Most states only allow credit for R&D conducted within the state.
Credit rate: Applied to either total QREs (flat method) or QREs above a base amount (incremental method).
Entity eligibility: Most states follow federal entity eligibility rules, though some have specific programs for small businesses.
Refundability
Non-refundable credits reduce your state tax liability to zero and carry forward unused amounts. Refundable credits generate a cash refund when they exceed your tax liability — making them especially valuable for early-stage companies with limited current-year income.
Carryforward Periods
If you can't use your state credit in the current year (because your liability is too low), most states allow you to carry it forward to future years. California offers unlimited carryforward; other states range from 5 to 20 years.
Application-Based Programs
Some states (like Pennsylvania) award R&D credits through a competitive application process, with a fixed annual cap on total credits issued. In these states, applying early and documenting your QREs thoroughly is critical to receiving an award.
Frequently Asked Questions
Generally yes, but states use their own definitions of qualified research, their own credit rates, and their own carryforward rules. Most states start from the federal QRE definition and apply a state-specific rate. Some states use a flat credit on total QREs; others use an incremental method similar to the federal ASC.
Yes. The federal credit and state credits are calculated separately and are generally both available to qualifying taxpayers. MainStreet calculates both federal and applicable state credits as part of the same study.
Several states either have no income tax (Nevada, Wyoming, South Dakota) or have no R&D-specific credit program. Businesses in those states rely entirely on the federal credit.
A refundable credit reduces your state tax liability to zero and then generates a cash refund for any remaining credit balance. Non-refundable credits can only offset tax owed and are carried forward if unused. Some states (like New York for QETCs) offer full or partial refundability.
No. The OBBBA is a federal law that affects federal §174 treatment and the federal R&D credit. State conformity to federal changes varies — consult your CPA regarding your specific state's response to OBBBA.
