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State program

California Research and Development Credit

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  • Offset only

Last reviewed November 2026

At a glance

  • Jurisdiction: California (CA)
  • Credit name: California Research Credit (R&TC §§ 17052.12 and 23609).
  • Administering agency: Franchise Tax Board (FTB).
  • Rate(s) and base: Regular credit: 15% of California qualified research expenses (QREs) above the base amount (fixed-base percentage capped at 16%), plus 24% of basic research payments. Alternative Simplified Credit (ASC), for taxable years beginning on or after January 1, 2025: 3% of QREs above 50% of the average QREs for the three preceding years (1.3% of current-year QREs if there were no QREs in any of those three years). The Alternative Incremental Credit (AIC) is repealed for taxable years beginning on or after January 1, 2025.
  • Refundable? Generally no. For taxable years beginning in 2024 through 2029, credits disallowed by the $5 million business credit limitation may be made refundable by an annual irrevocable election on FTB 3870, paid in 20% installments over five years beginning in the third taxable year after the election year. S corporations cannot make the election for entity-level credits.
  • Transferable? No.
  • Carryforward: Indefinite, until exhausted. Credits disallowed by the limitation (and not elected as refundable) get an extended carryover period equal to the number of years they were disallowed.
  • Annual cap / proration: Business credits, including the research credit and carryovers, cannot reduce tax by more than $5 million per year for taxable years beginning on or after January 1, 2024 and before January 1, 2030 (applied at the combined group level). From taxable years beginning on or after January 1, 2030, the limit is permanently the greater of $5 million or 70% of tax.
  • Pre-approval / application and deadline: No pre-approval. The ASC election and the FTB 3870 refundable election must be made on a timely filed original return.
  • Forms: FTB 3523 (Research Credit) attached to Form 100, 100S, 100W, 540, 541, 565 or 568; FTB 3870 (Election for Refundable Credit).
  • Sunset / recent changes: The credit is permanent. SB 711 (2025) repealed the AIC and adopted the ASC from 2025. SB 122 (2026) extended the $5 million limitation and refundable election through 2029 and made a 70%/$5 million limit permanent from 2030.

What it is

California's research credit is a long-standing, permanent credit modeled on IRC § 41, but using only research performed in California. Taxpayers may use the regular incremental computation or, from 2025, the new California ASC. The credit is nonrefundable and carries forward indefinitely, but during 2024 through 2029 its use is limited to $5 million a year, with an option to convert disallowed amounts into a deferred refund.

Who can claim it

Corporations, S corporations (which may claim one-third of the credit at the entity level, with the full credit passing through to shareholders), partnerships, LLCs, individuals, estates and trusts that conduct qualified research in California. Research performed outside California does not qualify, even for a California-headquartered taxpayer.

How it is calculated

  • Regular credit: 15% of California QREs above a base amount (fixed-base percentage × average California gross receipts for the four prior years, with the fixed-base percentage capped at 16% and the base at least 50% of current QREs), plus 24% of basic research payments to qualified organizations for research in California.
  • ASC (2025 and later): 3% of current QREs above 50% of the average QREs for the three preceding taxable years, or 1.3% of current QREs if any of those years had no QREs. IRC § 41(c)(4)(C) does not apply in California.
  • California's modified definitions apply. For example, gross receipts are California-sourced and certain supplies are treated differently from federal law.
  • The credit cannot reduce tax below the minimum franchise tax or tentative minimum tax, and from 2024 through 2029 it is subject to the $5 million combined credit limitation.

How to claim it

  1. Complete FTB 3523 and attach it to the original or amended return.
  2. To use the ASC, elect it on a timely filed original return. The election cannot be made or changed on an amended return. Revoking it requires FTB consent before the original return for that year is filed (FTB Notice 2024-01; submit federal Form 3115 or 1128 with a cover letter). Deemed consent does not apply.
  3. Taxpayers that previously elected the AIC must choose the regular credit or the ASC on FTB 3523 on their timely filed original 2025 return. A prior AIC election does not default to another method.
  4. To make credits disallowed by the $5 million limitation refundable, attach FTB 3870 to the original, timely filed return for that year. The election applies to all disallowed credits for the year.

Recent changes

  • SB 167 (2024): Imposed the $5 million business credit limitation for taxable years beginning on or after January 1, 2024 and before January 1, 2027, with the FTB 3870 refundable election and carryover extension.
  • SB 711 (chaptered October 1, 2025): Updated California's IRC conformity date to January 1, 2025. For taxable years beginning on or after January 1, 2025, repealed the AIC and adopted the ASC at 3% (1.3% with no prior QREs).
  • SB 122 (signed June 29, 2026): Extended the $5 million limitation and the refundable election to taxable years beginning before January 1, 2030. Refundable amounts do not count against the limitation for 2027 through 2029. For taxable years beginning on or after January 1, 2030, the limitation becomes permanently the greater of $5 million or 70% of total tax; the refundable election is not extended past 2029.

Likely examiner questions

These questions illustrate what an examiner may ask about this credit. They are drafts for illustration and should be reviewed by a specialist before use. Most state claims also face standard questions: where the research was physically performed, how wages, supplies and contract research were apportioned between California and other locations, how California amounts reconcile to federal Form 6765, the California credit and carryforward schedule for each year claimed, and whether the claiming entity is the one subject to California tax.

  1. Confirm each activity was physically performed in California and provide location support for wages, supplies and contract research.
  2. Provide the California base computation (regular method) or three-year QRE history (ASC), with California gross receipts.
  3. Reconcile California QREs to federal Form 6765 and explain each difference.
  4. Show that the ASC or regular method was elected on a timely filed original return, and for former AIC users, show the 2025 method choice.
  5. Provide the computation of the $5 million limitation at the combined group level and any FTB 3870 election.
  6. Provide the carryover schedule, including extended carryover periods for credits disallowed in 2024 through 2029.
  7. Confirm the claiming entity is the one subject to California tax, and for S corporations, show the one-third entity-level computation.
  8. Identify any funded research and support the exclusion.

Common weak spots

  • Out-of-state research included in California QREs.
  • The $5 million limitation (2024 through 2029) and the post-2029 70%/$5 million limit not modeled, so expected benefit is overstated.
  • A prior AIC election left in place for 2025, so no credit method is elected.
  • ASC chosen on an amended return, which California does not allow.
  • FTB 3870 not attached to a timely original return.
  • Base computed from incomplete historical records.

Next steps

Important

This page is general information, not tax advice. Rules change; confirm current requirements with the state revenue agency or a qualified tax professional. creditARMOR is a free service. Passing this mock audit does not guarantee that your claim will pass an IRS or state examination. If needed, Swanson Reed can assist you with representation before the IRS. creditARMOR and TaxTrex are products of Swanson Reed.

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