State R&D Tax Credits for Software Companies (2026)

State R&D tax credits are one of the most overlooked levers for software and AI companies — many businesses claim the federal credit but never realize their state offers one too, stacked on top. Here’s the cited 2026 guide to how state R&D credits work for software companies, with concrete examples. (dgm builds the AI that may generate qualifying R&D; your CPA captures the credit — see the end.)

How state R&D credits work

The pattern is consistent across most states. State R&D credits almost universally piggyback on the federal IRC §41 definition of qualified research and qualified research expenses (QREs) — wages for qualified services, supplies, and a portion of contract research — then add a geographic nexus: only QREs tied to in-state activity count. The credit is typically a percentage of qualifying expenses over a base amount, mirroring the federal incremental design.

Two things vary a lot, so always check your state:

• Conformity — some states automatically adopt federal changes (rolling conformity), others are frozen to the Code as of a fixed date. So a federal change (like §174 treatment) doesn’t flow through identically everywhere.
• Refundability and carryforward — many state credits are non-refundable with multi-year (often 15–20 year, sometimes indefinite) carryforwards; a minority are refundable, frequently only for specific company types.

Roughly 35–40 states offer an R&D credit (a commonly cited figure is ~38); the exact count drifts as states change their laws, and there’s no single authoritative tally.

State examples

California

California offers a credit of 15% of QREs over a base amount (plus 24% of basic research payments for corporations), claimed on Form FTB 3523. It’s non-refundable, and recent conforming legislation is associated with an indefinite carryforward (replacing the prior 15-year limit). Confirm the current carryforward term and method on the FTB Form 3523 instructions, as the underlying law has been updated.

New York

New York delivers its R&D benefit through the Excelsior Jobs Program, whose R&D component equals 50% of the federal R&D credit attributable to New York. Note a correction to a commonly repeated figure: the cap was originally 3% of NY QREs but was raised to 6% for tax years beginning on or after January 1, 2018 (with higher caps for green and semiconductor projects), per NY Economic Development Law §355. The “3% cap” figure is outdated. Because it runs through Excelsior, it requires program admission, not a standalone filing.

Texas (major 2026 overhaul)

Texas changed substantially. Effective January 1, 2026, SB 2206 permanently extended and enhanced the franchise-tax R&D credit and repealed the former R&D sales-and-use-tax exemption — so the old “credit or exemption” choice is gone (TX Comptroller). The enhanced credit rate is 8.722% of QREs over 50% of the prior-three-year average (4.361% with no history; 10.903%/5.451% if contracting with Texas higher-education institutions), with a 20-report carryforward. It’s generally non-refundable (limited to 50% of franchise tax due), though a refundable version exists for certain no-tax-due entities.

Massachusetts

Massachusetts offers 10% of QREs over a base, plus 15% of basic research payments, under M.G.L. c. 63 §38M (Mass.gov). It’s non-refundable for general companies (certified life-sciences companies can refund up to 90% of unused credits), with carryforwards generally up to about 15 years.

What qualifies — and what doesn’t

The boundary is the same as the federal credit: these reward doing R&D, not buying it. Software development can qualify if it meets the four-part test (a new or improved business component, technical uncertainty, a process of experimentation, and a technological nature). Internal-use software faces an additional higher “high threshold of innovation” test. A company that merely licenses and deploys AI isn’t doing qualified research — adoption doesn’t generate the credit, at the state level any more than the federal one.

A note on getting it right

State R&D positions are fact-specific, the rules vary widely, and they change often (several states have amended their credits recently). Document your qualifying activities and the in-state nexus, and work with a CPA or state-tax specialist to substantiate both the federal and state claims. The combined federal-plus-state benefit can be meaningful for a company genuinely building software — which is exactly why it’s worth getting right rather than guessing.

How dgm helps

dgm implements osFoundry and other AI for US businesses. If your engagement involves building or customizing AI — not just turning on a tool — that work may generate qualifying R&D at both the federal and state level. The tax treatment belongs with your CPA; the build belongs with us. We deliver the AI; your CPA captures the credits, federal and state. And if your project is pure adoption, we’ll tell you plainly that the R&D-credit story is limited and focus on a system that earns its keep.