The 24% Basic Research Credit: An Expert Analysis of California R&D Tax Policy (R&TC 23609)

The 24% Basic Research Credit (BRC) in California targets cash payments made by C-corporations to qualified academic or scientific institutions for fundamental research performed within the state. This premium rate applies only to basic research payments that exceed a statutory historical baseline, serving as a powerful incentive for foundational scientific investment.

The California Research and Development (R&D) Tax Credit, codified under Revenue and Taxation Code (R&TC) Section 23609, provides a structured incentive framework derived from the federal model (Internal Revenue Code (IRC) Section 41) but includes significant modifications tailored to state policy objectives.1 This incentive structure is composed of two primary components: a credit equal to 15% of qualified research expenses (QREs) exceeding a base amount, and a substantially higher credit of 24% applied to qualifying basic research payments.1 The provision of a 24% premium rate specifically for basic research underscores the state’s commitment to fostering scientific exploration that typically lacks an immediate commercial objective.3

1.0. Statutory Foundation and Eligibility for Basic Research

California allows a credit against tax for amounts paid or incurred for research conducted within the state, generally adhering to the framework set forth in IRC Section 41, as modified by R&TC Section 23609.2 This credit has been available at the current rates—15% for QREs and 24% for basic research payments—for taxable years beginning on or after January 1, 2000.2

1.1. Defining Qualified Basic Research

The definition of “Basic Research” used for the California credit aligns with the federal standard found in IRC §41(e).4 Basic research is defined as any original investigation for the advancement of scientific knowledge that does not have a specific commercial objective.3 This definition is highly restrictive, immediately excluding research conducted outside of the United States.3

Basic Research Payments (BRPs) must be cash payments made to a qualified university or scientific research organization.4 These recipients typically include institutions of higher education and certain scientific research organizations exempt from tax under IRC §501(c)(3) and §501(c)(6).

The decision by the state to offer a 24% premium rate—which is substantially higher than the standard 15% QRE credit and even the maximum federal rate—is reflective of a deliberate policy choice. Basic research, by its nature, entails a higher financial risk and a longer time horizon for generating economic returns, as it explicitly excludes having a “specific commercial objective”.3 The increased credit rate functions as a necessity to compensate corporations for investing in these higher-risk, foundational activities, thereby ensuring that private capital flows into California’s long-term scientific and academic infrastructure.

1.2. Strict Eligibility and Situs Requirements

Eligibility for the 24% Basic Research Credit is narrowly confined and requires strict compliance checks:

• Entity Limitation: The credit is available only to specific Corporations, explicitly excluding S corporations, personal holding companies, and service organizations.4
• Contractual Obligation: The basic research must be performed pursuant to a written contract with the qualified organization.4
• Situs Requirement: A critical, California-specific modification is the requirement that the basic research activities must be performed entirely within California.4

The in-state performance mandate is a crucial component of compliance for any multi-state enterprise claiming the credit. This mandate ensures that the tax expenditure directly benefits the state’s economy and intellectual capital. Taxpayers must possess detailed documentation—beyond the contract itself—that rigorously proves the geographic location of the research, such as laboratory usage records, researcher time allocation, and specific campus location details. For multinational or multi-campus organizations, failure to provide granular evidence tracing the research to a California facility will result in the disallowance of the credit upon audit by the Franchise Tax Board (FTB).

2.0. Mechanics of the 24% Credit and the Base Amount

The 24% credit is incremental, meaning it only applies to Basic Research Payments (BRPs) that exceed a statutorily defined historical baseline known as the Qualified Organization Base Period Amount (QOBPA).

2.1. The Incremental Calculation

The amount of basic research payments eligible for the 24% credit is calculated as the excess of the current-year BRPs over the QOBPA.6 This approach requires the taxpayer to first establish a historical spending baseline.

The QOBPA calculation is complex and is defined by IRC Section 41(e) and referenced in R&TC Section 23609.4 The base period generally consists of the three preceding tax years.8 The QOBPA is calculated based on the greater of two measures: 1% of the average of the total R&D expenses (in-house and contract research) paid during the base period, or the amounts previously treated as contract research expenses during that period.7

2.2. Reclassification of Baseline Payments

A key technical provision addresses the BRPs that do not exceed the QOBPA—that is, the baseline amount of current spending. This portion is not discarded; instead, the amount of the current-year BRP equal to the QOBPA is treated as contract research expenses for purposes of the 15% regular R&D credit calculation.5

This reclassification mechanism ensures that every dollar of BRP contributes to a tax benefit: either the premium 24% rate for incremental investment, or the standard 15% QRE rate for maintaining historical spending levels. This specialized structure prevents taxpayers from simultaneously claiming the same dollar of research spending under both the 24% credit (as a BRP) and the 15% credit (as a QRE), thereby upholding statutory integrity while maximizing the incentive. The reclassified amount (QOBPA) is then subject to the general limitations placed on contract research expenses, typically restricted to 65% of the total payment amount for QRE calculations.9

2.3. Interaction with Income Deductions

A crucial compliance detail concerns the coordination between the R&D credit and the deduction of research expenditures. Under IRC §280C(c) and R&TC §24440, a deduction claimed for research expenditures must be reduced by the amount of the current year’s research credit.2

Since the 24% basic research rate is so high, it often necessitates a significant mandatory reduction in the corresponding expense deduction. Corporations have the option to elect to reduce the regular 15% QRE credit to avoid the state adjustment to income.2 However, this decision must be strategically balanced against the benefit derived from the high-rate 24% basic research credit, requiring complex modeling to determine whether the immediate credit value justifies the reduction in the deductible expenses.

3.0. FTB Guidance and Reporting Requirements

The Franchise Tax Board (FTB) is the local state revenue office responsible for administering R&TC 23609. Guidance is primarily disseminated through the instructions for Form FTB 3523, Research Credit.

3.1. Filing and Administrative Procedures

To claim the R&D credit, including the 24% BRC, a taxpayer must file their income tax return and attach Form FTB 3523.1 The instructions for Form FTB 3523 provide specific line instructions for calculating the BRC.4

Specific reporting for the Basic Research Credit occurs in Section C of Form FTB 3523:

• Line 18: Taxpayers enter the total cash basic research payments made during the taxable year to qualified organizations.4
• Line 19: Taxpayers enter the QOBPA, defined by IRC Section 41(e) and R&TC Section 23609. The amount on Line 19 cannot exceed the payments on Line 18.4
• Line 20: The basic research credit amount is calculated by applying the 24% rate to the incremental amount (Line 18 minus Line 19).1
• Line 25: The QOBPA amount (Line 19) is then categorized as contract research expenses for the 15% regular credit calculation.5

3.2. Alternative Methods and Carryover

While the regular credit component offers the option of the fixed-base percentage method, changes related to the calculation methodology require formal notification and adherence to strict rules. Historically, taxpayers could elect the Alternative Incremental Credit (AIC). To revoke an AIC election in a subsequent year, a taxpayer must receive FTB approval before filing an original return; the method cannot be changed on an amended return.1 This procedural requirement establishes that California views the R&D election as a long-term strategic commitment, introducing administrative friction for entities seeking to switch methodologies based on annual fluctuations in qualified expenditures.

Unused R&D credits, including the 24% BRC, benefit from an indefinite carryover period. The carryover must be applied to the earliest tax year possible until the credit is exhausted.1 This indefinite carryforward capability provides significant future tax planning value, particularly for high-growth companies.

4.0. Comprehensive Calculation Example

To illustrate the application of the 24% rate and the base amount requirement, the following hypothetical scenario details the calculation for a qualifying C-Corporation, TechCorp, in the 2024 tax year.

4.1. Calculation Inputs

4.2. Step-by-Step Credit Determination

Part 1: Regular QRE Credit (15%)

1. Calculate Incremental QREs: Subtract the QRE Base Amount (B) from Total QREs (A).

• $\$1,000,000 – \$600,000 = \$400,000$

1. Calculate Regular Credit: Apply the 15% rate to the incremental amount.

• 15% $\times$ $\$400,000 = \$60,000$

Part 2: Basic Research Credit (24%)

1. Determine Incremental BRPs: Subtract the QOBPA (D) from current BRPs (C). This is the amount eligible for the 24% rate.

• $\$100,000 – \$90,000 = \$10,000$

1. Calculate Basic Research Credit: Apply the premium 24% rate to the incremental BRPs.

• 24% $\times$ $\$10,000 = \$2,400$

1. Identify Reclassified QREs: The QOBPA amount of $\$90,000$ is treated as contract research QREs for the 15% credit calculation (subject to the 65% limit on contract research).5

4.3. Total Credit

Total Combined California R&D Credit = Regular Credit + Basic Research Credit

Total Credit = $\$60,000 + \$2,400 = \$62,400$ 10

5.0. Strategic Limitations and Legislative Outlook

The effectiveness and utilization of the R&D credit, including the 24% BRC, are subject to current legislative constraints and upcoming changes in calculation methodology.

5.1. Impact of the $5 Million Annual Credit Usage Cap

In a significant policy adjustment, California has temporarily capped the annual utilization of combined business incentive tax credits at $5 million, applicable to tax years 2024 through 2026.10 This cap applies at the combined group level and affects the R&D credit, which is the state’s largest business tax credit, costing California over $2.5 billion in 2023.11

The immediate consequence of this cap is a forced delay in the realization of credit benefits, particularly for large corporations that have accumulated massive stockpiles of R&D credits, such as Alphabet ($6.4 billion) and Apple ($3.5 billion).11 Although the 24% rate strongly encourages increased basic research spending, the inability to utilize more than $5 million annually dramatically reduces the marginal cash value of generating new credits beyond that threshold.

This regulatory conflict means that the state’s incentive mechanism, intended to spur current investment, achieves only a deferral of tax liability. For major corporations already producing credits well above the cap, the policy creates a short-term disincentive for aggressive R&D expansion, as the financial reward for that new spending is pushed further into the indefinite carryforward period. Prudent financial management during this period requires prioritizing the application of existing carryovers and optimizing the annual credit generation to precisely match the $5 million allowance.

5.2. Future Calculation Methodology (2025 and Beyond)

Effective for taxable years beginning on or after January 1, 2025, California legislation (SB 711) will discontinue the Alternative Incremental Research Credit (AIRC) method and adopt the federal Alternative Simplified Credit (ASC) methodology.12

The new California ASC rate is set at 3% for QREs exceeding 50% of the average QREs over the prior three taxable years.12 This change primarily affects the 15% regular QRE calculation, potentially offering a more accessible method for businesses that struggled to meet the base period hurdles under the fixed-base percentage method.12

Crucially, R&TC 23609 maintains the existing credit structure for foundational research. The legislation confirms that California retains the 24% credit for basic research payments.13 This continued adherence to the high rate for basic research reinforces the long-term policy goal of supporting foundational scientific advancement within the state, irrespective of the adopted methodology for calculating the incremental QREs.

6.0. Conclusion

The California 24% Basic Research Credit is a targeted and robust incentive for corporate investment in foundational science, designed to position California as a global leader in innovation and development.14 Its application, however, requires rigorous compliance with specific state regulations that extend beyond the federal framework.

For corporations seeking to maximize this credit, success depends upon a multifaceted strategy:

1. Documentary Integrity: Companies must ensure absolute eligibility by documenting the C-corporation status and providing unambiguous proof that the basic research was conducted pursuant to a written contract and performed strictly within California.4
2. Financial Precision: Accurate calculation of the Qualified Organization Base Period Amount (QOBPA) is paramount. This base calculation ensures that new, incremental BRPs receive the 24% premium rate, while the historical baseline spending is strategically reclassified as contract QREs, capturing a 15% benefit through the regular credit calculation.7

Utilization Planning: The temporary $5 million annual credit utilization cap (2024–2026) mandates treating R&D credits as a deferred financial asset. Businesses, particularly those with substantial existing carryforwards, must shift focus from simply generating credits to optimizing their annual usage allowance and managing the indefinite carryover schedule to ensure long-term tax benefit realization.10

R&D Tax Credit Preparation Services

Swanson Reed is one of the only companies in the United States to exclusively focus on R&D tax credit preparation. Swanson Reed provides state and federal R&D tax credit preparation and audit services to all 50 states.

If you have any questions or need further assistance, please call or email our CEO, Damian Smyth on (800) 986-4725.
Feel free to book a quick teleconference with one of our national R&D tax credit specialists at a time that is convenient for you.

R&D Tax Credit Audit Advisory Services

creditARMOR is a sophisticated R&D tax credit insurance and AI-driven risk management platform. It mitigates audit exposure by covering defense expenses, including CPA, tax attorney, and specialist consultant fees—delivering robust, compliant support for R&D credit claims. Click here for more information about R&D tax credit management and implementation.

Our Fees

Swanson Reed offers R&D tax credit preparation and audit services at our hourly rates of between $195 – $395 per hour. We are also able offer fixed fees and success fees in special circumstances. Learn more at https://www.swansonreed.com/about-us/research-tax-credit-consulting/our-fees/