Fighting California's High Taxes with State-Specific Credits
The challenge: California has the highest state income tax in the nation (up to 13.3%).
The opportunity: California also offers unique tax credits and strategies that don't exist in other states.
These 6 strategies can help offset California's high tax rates—sometimes saving $50K-$100K+ annually.
Author’s note (Sam Young, EA): I’ve advised California owners on PTET elections and claims for CA Competes, R&D, and Film credits—watch filing windows and substantiation requirements.
The 6 California-Only Strategies (Quick Summary)
| Strategy | Potential Savings | What It Is |
|---|---|---|
| 69. California Competes Credit | $20K-$10M+ | Negotiated credit for creating jobs in CA |
| 70. New Employment Credit | $2K-$100K+/year | 35% credit on wages in designated areas |
| 71. Homeless Hiring Credit | $2.5K-$30K/year | Credit for hiring certified homeless individuals |
| 72. California R&D Credit | $5K-$250K+/year | 15% credit (stacks with federal!) |
| 73. Film/TV Production Credit | $50K-$10M+ | 20-25% of production costs (transferable) |
| 74. PTE Tax Election | $5K-$100K+/year | Bypass $10K federal SALT cap |
California Business Tax Credits (Details)
Strategy 69: California Competes Credit - Negotiate Your Own Credit
What it is: A custom tax credit you can negotiate with the state if you're creating jobs in California.
Who gets it: Businesses creating 100+ jobs or making major investments
How much: $20K to $10M+ (negotiated case-by-case)
Example: Tech company shows they're creating 200 jobs with $75K average wages. State negotiates $2M credit over 5 years.
How to apply: Through GO-Biz (California's business development office) with a detailed business plan showing job creation and investment.
Strategy 70: New Employment Credit - 35% of Wages in Certain Areas
What it is: If your business is in a "designated geographic area" (economically distressed zone), you get a 35% credit on certain wages for new hires.
The calculation: 35% of wages between 150%-350% of minimum wage, for first 5 years
Example: Company in DGA hires 50 employees
- Qualified wages average $5/hour per employee
- 50 employees × 2,000 hours × $5 × 35% = $175K/year credit
- 5-year total: $875K in credits
Who qualifies: Business in DGA + hiring qualified workers (unemployed, veterans, ex-offenders, etc.)
Strategy 71: Homeless Hiring Credit - Up to $30K/Year
What it is: Credit for hiring people certified as homeless.
How much: $2,500-$10,000 per employee (based on hours worked), capped at $30K total per year
Example: Restaurant hires 5 certified homeless individuals working full-time. Gets $7,500 credit per person, but capped at $30K total.
How to qualify: Get certification from CDSS (California Department of Social Services) using Form 3831.
Strategy 72: California R&D Credit - Stacks With Federal!
What it is: California gives you a 15% credit on research expenses (on top of the ~11% federal credit).
The double-dip: Same R&D expenses qualify for BOTH federal and California credits.
Example: Biotech company spends $1M on research (with $700K base)
- Qualifying amount: $300K
- California credit: $300K × 15% = $45K
- Federal credit: ~$110K
- Total credits: $155K on the same research
Who qualifies: Software development, product development, engineering improvements, manufacturing process improvements.
Strategy 73: Film/TV Production Credit - 20-25% of Costs
What it is: Credit for filming in California (20-25% of production costs).
Special feature: You can SELL the credit for cash if you don't have enough California tax to use it.
Example: Indie film with $8M budget
- Qualifying CA costs: $6M
- Credit: $6M × 25% = $1.5M
- Sell credit for 90% of value = $1.35M cash
Who qualifies: Film/TV productions shot in California
Strategy 74: PTE Election - Bypass the $10K SALT Cap
What it is: California pass-through businesses can pay state tax at the entity level, making it federally deductible.
The problem it solves: Federal law caps state tax deductions at $10K. This workaround lets you deduct unlimited state taxes.
How it works: Law firm with $1M income
- Firm pays 9.3% CA tax at entity level = $93K
- Firm deducts $93K on federal return (bypasses $10K SALT cap!)
- Partners claim credit on CA returns
- Federal savings: $93K × 37% = $34,410
Requirements:
- Make election by March 15
- All owners must agree
- Can't revoke once made
Who benefits: High-income California business owners hitting the $10K SALT cap
Common Questions
Q: Are California credits worth the effort given the high state tax rates?
A: Yes. California credits can be huge—up to $10M for California Competes, 25%+ combined for R&D (federal + state). They make California competitive despite high base rates.
Q: Should I make the PTE election?
A: If you're a high-income business owner hitting the $10K SALT cap, absolutely. You save 37 cents per dollar of state tax paid (in the top federal bracket).
Q: Can I use California and federal credits together?
A: Yes! The California R&D credit (15%) stacks on top of the federal R&D credit (~11%) for total 25%+ benefits on the same expenses.
Q: How do I apply for California Competes?
A: Through GO-Biz with a business plan showing job creation (typically 100+ jobs), investment commitments, and why you're choosing California.
Q: Can I sell California credits?
A: Yes! Film/TV production credits can be sold to other California taxpayers for 85-95% of face value if you can't use them.
Q: What records do I need for hiring credits?
A: Employee certifications (Form 3831 for homeless hiring), proof your business is in a designated area (for NEC), wage records, and hours worked documentation.
Your California Tax Action Plan
This quarter:
- Determine if you're in a designated geographic area (for NEC)
- Assess R&D activities for California credit
- Consider PTE election if you're hitting SALT cap
- Review job creation plans for California Competes
Before March 15:
- Make PTE election if applicable (deadline!)
Year-round:
- Track all R&D expenses (claim credits next year)
- Document hiring (for employment credits)
- Keep production records (for film/TV credits)
Multi-State Considerations
If you operate in multiple states:
- Consider IP holding company in tax-friendly state (Delaware, Nevada)
- Strategic apportionment planning
- Coordinate credits across states
- Manage nexus carefully
Key point: California's high rates make interstate tax planning especially valuable.
Related Reading
Sources
- CA FTB — Pass-Through Entity Tax (PTET) overview: https://www.ftb.ca.gov
- GO-Biz — California Competes Tax Credit program: https://business.ca.gov
- CA FTB — Research Credit information: https://www.ftb.ca.gov
- California Film Commission — Film/TV Tax Credit Program: https://film.ca.gov
- CDSS — Homeless Hiring Credit certification (Form 3831): https://www.cdss.ca.gov
Disclaimer: California tax law is complex. Work with California-specialized tax advisors.