The Question

“Are state R&D credits actually worth pursuing, or do they end up costing more than they return?”

It’s a question many founders and CFOs ask once they see how inconsistent, bureaucratic, and complex state programs can be.

A handful of states provide meaningful, high-ROI incentives.
Others offer credits so small — or so administratively painful — that they barely move the needle.

The real challenge is knowing which category your state falls into.

The Short Answer

State R&D credits are worth it when:

• the state’s credit rate is meaningful

• refundability or long carryforwards increase real value

• your engineering payroll is substantial in that state

• the program is straightforward enough to pursue without excessive burden

They’re not worth it when:

• your presence in the state is small

• the credit rate is low

• the program is application-heavy

• compliance costs exceed expected benefit

The value depends entirely on where your engineers sit and how each state structures its program.

The Deep Dive

1. Where State Credits Create Strong ROI

Some states make the decision easy — the incentives are structured to deliver measurable value to technology companies.

Texas (One of the Strongest Credits in the Country Starting 2026)

Texas has modernized its credit to align more closely with federal rules.
Key changes include:

• higher credit rates (8.722% standard, 10.903% with university collaboration)

• 20-year carryforward treatment

• refundability for small and veteran-owned businesses

For companies with a real engineering footprint in Texas, the opportunity is significant and increasingly accessible.

Minnesota (Refundable Credit Up to $1M)

Minnesota expanded refundability, allowing certain taxpayers to claim up to $1 million.
For early-stage companies, refundability is what turns a credit into cash-like benefit.

Michigan (New Refundable Program Beginning 2025)

Michigan reintroduced its credit with:

• refundability

• a 5% bonus for university collaboration

• application-based requirements with hard deadlines

The structure rewards innovation, but requires operational discipline to claim.

These states provide true ROI for companies with meaningful payroll inside their borders.

2. California: A Special Case — Restrictive, Yet Still Lucrative

California is complicated — but still valuable.

Even with limitations, California remains one of the most lucrative state R&D jurisdictions simply because:

• engineering payroll is often large

• credits can be generated at meaningful rates

• the state conforms to federal definitions of qualified research

• the credit applies to California-based R&D, which many tech companies have in abundance

But recent changes introduce both opportunity and friction.

The $5M Credit Limitation (2024–2026)

California now limits the use of business credits — including R&D — so they cannot reduce tax by more than $5 million per year.

This doesn’t eliminate the credit.
It only restricts how quickly you can use it.

For companies with large credits, this creates a longer runway to absorb them.

The Refundability Election — But Only Indirectly

California allows taxpayers to elect to convert disallowed credit amounts (due to the $5M cap) into a refundable credit, paid out over five years starting three years after the election.

This is not an immediate refund.
It’s a strategic choice:
You can trade time for certainty and liquidity.

Important note:

• S-corporations cannot make this election for entity-level credits.

• C-corporations and combined groups must elect at the group level.

This is sophisticated planning — but for profitable California companies, it can turn unused credit into real value over time.

Why California Credits Still Matter

Despite the non-conformity and complexity, California’s credit remains worthwhile because:

• credit rates can still be large in absolute dollars

• many companies have substantial CA-based QREs

• strong documentation can unlock significant carryforward value

• the credit compounds meaningfully year over year

California is rarely “easy,” but for most companies with engineers in the state, the benefit is too large to ignore.

3. States Where R&D Credits Might Be Worth It — If Conditions Are Right

Some states offer value only when payroll or credit amounts reach certain levels.

Iowa

Iowa offers refundable credits, but the process is application-driven and administratively heavy.
For companies with small headcount in Iowa, the burden can outweigh the benefit.
For larger teams, the refundability makes it compelling.

Oklahoma

Useful for mixed hardware/software or manufacturing-heavy companies.
Less impactful for pure SaaS.

These states require a case-by-case ROI calculation, not a blanket yes or no.

4. When State Credits Are Clearly NOT Worth It

You can safely deprioritize a state credit when:

• engineering presence is minimal

• credit rates are low (1–3%)

• documentation systems are weak

• compliance requires extensive application, certification, or agency approval

• the company has no state tax liability and no refundability is available

The biggest mistake companies make is assuming the “patchwork” of state R&D programs is symmetrical.
It isn’t. Some states barely reward participation.

5. The Real Hidden Cost: Complexity

Even lucrative state credits carry operational load:

• additional tax returns

• payroll apportionment

• state-by-state documentation

• different definitions of what qualifies

• additional audit exposure

• additional provider fees

State credits are not just financial — they require administrative maturity.

Companies with strong documentation systems absorb this easily.
Companies without them struggle, regardless of credit size.

6. A Practical Framework to Decide If State Credits Are Worth It

Here’s a simple decision model used by CFOs who approach this rationally:

Pursue the credit if:

• your engineering payroll in the state is meaningful

• the credit is refundable or has strong carryforward treatment

• the state program is formulaic and not competitive

• you can support the documentation requirements

• expected benefit exceeds compliance cost

Pass on the credit if:

• payroll is minimal

• the administrative burden is high

• credit rates are too low to justify effort

• documentation is weak

• there is no refundability and little tax liability

State credits are not about chasing every dollar.
They’re about capturing the dollars that make sense.

The Takeaway

State R&D credits are not equal — and they’re not universally valuable.

The best opportunities in 2025 come from:

• Texas (enhanced rates and refundability)

• Minnesota (refundable up to $1M)

• Michigan (new refundable program)

• California (still lucrative, with strategic planning required due to caps and elections)

For tech companies with real engineering headcount in these states, state credits can meaningfully increase ROI, liquidity, and long-term tax planning value.

For others, the cost of compliance will exceed the credit itself.

The smartest companies treat state credits the way they treat everything else:
by running the math, assessing the complexity, and choosing only the opportunities worth pursuing.