The Question

“If we qualify for the federal R&D credit, should we automatically pursue state credits too?”

It’s an understandable assumption.
If the federal credit rewards innovation, then state credits should simply add more value on top — right?

Sometimes that’s true.
Often, it’s not.

The biggest mistake companies make with R&D credits isn’t missing a credit.
It’s assuming that more credits is always better, without understanding how layering actually works.

This article is about building a clear mental model: when state credits meaningfully stack on top of the federal credit — and when they quietly introduce more cost, complexity, and risk than they’re worth.

The Short Answer

The federal R&D credit is the foundation.
State credits are optional layers.

Layering makes sense when:

• the state credit materially increases total benefit,

• the rules align closely with the federal framework,

• documentation can be reused without significant rework,

• and the administrative cost is proportional to the upside.

Layering does not make sense when:

• the state credit is small or capped,

• the program is application-based or heavily restricted,

• the rules diverge from federal standards,

• or the compliance burden exceeds the incremental value.

The goal isn’t to collect every possible credit.
It’s to pursue the credits that actually move the needle.

The Deep Dive

1. The Federal Credit Is the Anchor

Every sound R&D credit strategy starts with the federal credit.

It sets the technical standard, defines what qualifies as research, and establishes the baseline documentation expectations. For most tech companies, the federal credit represents the largest and most predictable portion of total benefit.

More importantly, the federal credit forces discipline.
If a company cannot clearly support qualification at the federal level, state credits will not fix that problem — they will magnify it.

That’s why the right question is never, “Which states offer credits?”
It’s, “Do we have a defensible federal story?”

Without that foundation, layering becomes fragile.

2. Why Some State Credits Stack Cleanly

Some states intentionally design their programs to sit neatly on top of the federal framework. They borrow the federal definition of qualified research, accept similar documentation, and apply a simple rate to in-state expenses.

In these cases, layering works because:

• the same technical narrative can support both credits,

• incremental documentation is limited,

• and the additional benefit is meaningful relative to the effort.

States like Texas, Michigan, Minnesota, and — in more complex ways — California, often fall into this category for the right companies.

The key point is not that these states are “good.”
It’s that their programs reward companies that already have strong federal compliance.

When the state credit feels like an extension of the federal process rather than a separate project, layering usually makes sense.

3. Why Other State Credits Don’t Stack Well

Other states take a very different approach.

Some require pre-approval or annual applications.
Some cap the total pool of credits.
Some restrict eligibility to certain industries.
Some impose verification or certification requirements beyond the federal standard.

In these cases, layering breaks down.

Even if the credit is refundable, the incremental value may be offset by:

• additional professional fees,

• internal time spent preparing applications,

• uncertainty around award amounts,

• and ongoing compliance obligations year after year.

Iowa’s new program is a good example of this dynamic.
The credit still exists, but the structure makes it more selective and more administratively heavy. For some companies, it will still be worth pursuing. For others, it won’t clear the bar.

The mistake is assuming the answer is the same for everyone.

4. Administrative Drag Is the Hidden Variable

When companies evaluate state credits, they often focus on the headline rate and ignore the friction.

But administrative drag is real.

Every additional state credit introduces:

• new calculations,

• new forms,

• new deadlines,

• new documentation expectations,

• and new audit exposure.

That drag compounds quickly in multi-state environments.

A state credit that adds a modest percentage to the total benefit can quietly consume that value in time, distraction, and cost — especially if it requires separate systems or narratives.

The best credit strategies minimize marginal effort per marginal dollar.

5. How Multi-State Teams Should Prioritize

For companies with engineers spread across multiple states, prioritization matters more than completeness.

A rational approach usually looks like this:

Start with the federal credit and make it defensible.

Then identify the one or two states where:

• payroll concentration is highest,

• credit value is meaningful,

• and the rules align reasonably well with federal standards.

Pursue those states intentionally.
Evaluate the rest opportunistically, not reflexively.

This approach avoids the trap of turning R&D credits into a compliance sprawl.

6. When Skipping a State Credit Is the Right Decision

Skipping a state credit is not a failure.
Often, it’s good judgment.

It’s rational to skip when:

• the state credit adds minimal incremental value,

• the compliance burden is disproportionate,

• the company lacks documentation maturity,

• or the credit introduces more uncertainty than benefit.

Sophisticated teams don’t ask, “Can we claim this?”
They ask, “Does claiming this improve our overall position?”

Sometimes the answer is no — and that’s fine.

The Takeaway

Federal and state R&D credits are not additive by default.
They are layered — and layering only works when the structure supports it.

The federal credit should always come first.
State credits should be evaluated through the lens of incremental value, not theoretical availability.

The companies that get the most out of R&D credits aren’t the ones chasing every program.
They’re the ones that understand which credits stack cleanly, which ones don’t, and where the return justifies the effort.