California Research Credit (Form 3523)

About this programme

The California Research Credit is a state income/franchise tax credit for businesses that carry out qualified research inside California. It is claimed on Form FTB 3523, filed with the California Franchise Tax Board (FTB), and is separate from the federal R&D tax credit — a business does not need to claim the federal credit to claim this one.

The credit rewards a business for increasing its research spend over a historical baseline. Under the regular credit, it is worth 15% of the qualified research expenses (QREs) for the year that exceed a calculated base-period amount, and corporations can also claim a separate 24% credit on qualifying basic research payments made to universities or scientific research organizations. Starting with taxable years beginning on or after January 1, 2025, California also allows an Alternative Simplified Credit (ASC) — a simpler calculation businesses can elect instead of the regular method.

Qualified research expenses follow the federal definition in IRC Section 41(b): wages paid to employees for qualified research, supplies used in that research, and a portion of payments made to outside parties for contract research — all for research conducted within California. The credit is not refundable and cannot be carried back, but unused credit carries forward to future tax years until it is used up.

The credit applies to corporations, S corporations, partnerships, LLCs, estates, trusts, and individuals conducting qualified research in a trade or business, and it can pass through from a pass-through entity to its owners.

How it works

Regular credit (Section A of Form FTB 3523): the credit equals 15% of the amount by which the current year's California QREs exceed a base-period amount calculated from the business's historical research spend and gross receipts (a 'fixed-base percentage' method for existing companies, or a phased-in method for start-up companies). The base amount can never be less than 50% of the current year's QREs.

Alternative Simplified Credit (Section B, available for taxable years beginning on or after January 1, 2025): the credit equals 3% of QREs that exceed 50% of the average QREs for the three preceding taxable years. If the business had no QREs in one or more of those three preceding years, the credit is instead 1.3% of the current year's QREs. The ASC election is made on a timely filed original return and, once made, applies to that year and all future years unless the FTB consents to revoke it.

Corporations (other than S corporations, personal holding companies, and service organizations) can additionally claim a credit equal to 24% of qualifying basic research payments made in cash to a qualified university or scientific research organization under a written contract, where the research is performed in California and the payments exceed a base-period amount.

Contract research costs count at 65% of the amount paid (75% for payments to a qualified nonprofit research consortium) rather than the full amount, when computing QREs.

There is a $5,000,000 cap (for taxable years beginning on or after January 1, 2024 and before January 1, 2027) on the total business credits — including carryovers — that can be applied against tax in a single year. A business can instead make an irrevocable election on Form FTB 3870 to receive the disallowed amount as a refundable credit, paid out at 20% per year over a five-year period starting the third taxable year after the election.

The credit cannot reduce minimum franchise tax, alternative minimum tax, built-in gains tax, or excess net passive income tax, but it can reduce regular tax below tentative minimum tax.

S corporations can pass through 100% of the credit to shareholders pro rata, but can only claim 1/3 of the credit themselves against the 1.5% (3.5% for financial S corporations) entity-level tax. Partnerships and LLCs allocate the credit to partners/members per their distributive share. Amounts passed through to individual owners are subject to an IRC Section 41(g) limitation tied to the tax attributable to that ownership interest.

Corporations that are members of a combined reporting group can assign earned credit to an affiliated corporation in the same group using Form FTB 3544; assigned credit can only be claimed by the assignee against its own tax liability, and once assigned to a specific entity it cannot be reassigned.

Unused credit carries forward to later years, applied to the earliest year first, until it is fully used. It cannot be carried back to a prior year.

Who can apply

The business must conduct basic or qualified research within California — the state credit only applies to research performed in-state, regardless of where the business is otherwise based or does business.

Qualified research expenses must fall within the federal definition under IRC Section 41(b): in-house wages for qualified research (or its direct supervision/support), qualified supplies (tangible property other than land, subject to depreciation), and qualified contract research expenses.

A taxpayer and spouse/registered domestic partner filing separately may claim only one credit between them, or split it equally.

S corporations, partnerships, LLCs, estates, and trusts compute the credit at the entity level and pass their share through to shareholders, partners, members, or beneficiaries via Schedule K-1.

A business with no California gross receipts is directed by the FTB to use the Alternative Simplified Credit method instead of the regular credit, since the regular method's gross-receipts-based calculation does not work without them.

How to apply

1. Determine and document the qualified research expenses (QREs) attributable to research conducted within California for the tax year.
2. Choose the calculation method — the regular credit (Section A of Form FTB 3523) or, for taxable years beginning on or after January 1, 2025, the Alternative Simplified Credit (Section B). The ASC election must be made on a timely filed original return for the year it first applies.
3. Complete Form FTB 3523, Research Credit, computing the credit under the chosen method.
4. Attach Form FTB 3523 to the applicable California tax return: Form 100 (corporations), Form 100S (S corporations), Form 540/540NR (individuals), Form 541 (fiduciaries), Form 565 (partnerships), or Form 568 (LLCs).
5. Enter credit code 183 where the return calls for it, and apply any $5,000,000 business-credit limitation and carryover rules from the form instructions.
6. Pass-through entities report each shareholder, partner, beneficiary, or member's distributive share of the credit on Schedule K-1 (100S, 541, 565, or 568).
7. If assigning credit within a combined reporting group, file Form FTB 3544; if electing to convert a disallowed amount to a refundable credit, file Form FTB 3870 with the original timely filed return.

Documents you’ll typically need

• Form FTB 3523, Research Credit (the credit computation form itself)
• Records substantiating California qualified research expenses — qualifying wages, supplies, and contract research costs, and any basic research payments to qualified universities or research organizations
• Federal Form 6765, Credit for Increasing Research Activities (referenced by the FTB for the federal QRE definition California conforms to)
• Schedule K-1 (100S, 541, 565, or 568) for pass-through entities reporting each owner's share of the credit
• Form FTB 3544, Assignment of Credit (only if assigning credit to an affiliated corporation within a combined reporting group)
• Form FTB 3870, Election for Refundable Credit (only if electing to convert a disallowed amount, due to the $5,000,000 limitation, into a refundable credit)
• Form FTB 3801-CR or FTB 3802 (only if any portion of the credit is subject to passive activity limitations)

Frequently asked

Reviewed 2026-08-16. Programmes change — confirm current eligibility, amounts and deadlines on the official page before you apply. CapEasy is a private consultancy and is not affiliated with any government authority.