State research · West
California gives a nonrefundable credit for research performed inside the state: 15% of qualified research expenses over a base amount, plus 24% of qualifying basic research payments for corporations. From tax year 2025 a California alternative simplified credit (3%, or 1.3% with no prior-year QREs) replaces the old alternative incremental credit. Unused credit carries forward until it is used up.
At a glance
Active — verified. Rules last verified November 8, 2026 (tax years 2024–2026, FTB 3523 and Franchise Tax Board (FTB) guidance).
15% + 24%
Regular QRE component plus the basic research component for eligible corporations
3% / 1.3%
California ASC from tax year 2025; not the federal 14% ASC
$5M limitation
Caps business credits applied in 2024–2026, not the credit generated
Until exhausted
Carryover of unused credit; never carried back
The California research credit is active with no scheduled sunset in the FTB form or instructions. California has offered a research credit since 1987, when it was enacted by AB 53 (Chapter 1138, Statutes of 1987) and SB 572 (Chapter 1139, Statutes of 1987) and modeled on the federal credit.
Two recent law changes drive most of the current complexity. For tax years beginning on or after January 1, 2024 and before January 1, 2027, a $5,000,000 limit applies to the total business credits a taxpayer, or a combined reporting group, can use in a year. For tax years beginning on or after January 1, 2025, California adopted a modified alternative simplified credit and repealed the alternative incremental credit.
California adopts the federal definition of qualified research expenses in IRC §41(b), so wages for qualified services, supplies, computer rental and 65% of contract research (75% for payments to a qualified research consortium) count in California the same way they count federally. The 2025 form and instructions reference the IRC as of January 1, 2025; the 2024 form referenced the IRC as of January 1, 2015.
The conformity is selective. California did not adopt the federal energy research consortium credit, did not adopt the 2006 federal modifications to the research credit, and has its own rates, base-period rules and research-location requirement.
California has not conformed to the Tax Cuts and Jobs Act. In particular, the federal requirement to capitalize and amortize research and experimental expenditures under IRC §174 for tax years beginning after 2021 does not apply for California purposes. California also excludes from QREs amounts paid on or after January 1, 1999 for tangible personal property eligible for the sales and use tax exemption in R&TC §6378.
| Tax year | Methods available | How it works |
|---|---|---|
| 2024 |
| Regular credit: 15% of QREs over the base amount, where the base amount is the fixed-base percentage (capped at 16%) times average annual gross receipts for the four prior years, and never less than 50% of current QREs. Alternatively, the AIC applied three rates to QREs above 1%, 1.5% and 2% of average gross receipts. Corporations add 24% of basic research payments over the base period amount under either method. |
| 2025 |
| The regular credit is unchanged. The AIC is repealed and replaced by a California ASC: 3% of QREs over 50% of the average QREs for the three preceding tax years, or 1.3% of current QREs if the taxpayer had no QREs in any one of those three years. Taxpayers who had an AIC election in force must make a fresh election for the regular credit or the ASC on a timely filed original 2025 return; the old election does not roll over. |
| 2026 |
| No change announced. The 2026 Form FTB 3523 had not been published when this page was verified, so 2025 rules are assumed to carry forward VERIFY: 2026 form and instructions when released. The $5,000,000 business credit limitation still applies to tax years beginning in 2026. |
California QREs
Add wages for qualified services, supplies, computer rental and contract research at 65% (75% for a qualified research consortium), all for research conducted in California (lines 5–9).
Base amount
Multiply average California-destination gross receipts for the four preceding tax years by the fixed-base percentage, which is capped at 16%. Start-ups use 3% for their first five years with QREs (lines 10–12).
Minimum base check
Subtract the base amount from QREs, then compare with 50% of QREs. The smaller figure is what earns the credit, so the base can never be less than half of current QREs (lines 13–15).
Apply 15%
Multiply the creditable amount by 15% (line 16). C corporations add 24% of basic research payments over the base period amount from line 4.
Reduced credit election
If you keep the full research deduction, multiply the credit by 91.16% (corporations), 87.7% (individuals, estates, trusts) or 98.5% (S corporations) on line 17b.
California QREs
Same four categories as the regular credit, California research only (lines 22–26).
Prior three-year base
Add California QREs for the three preceding tax years and divide by six, which is half the three-year average (lines 27–28). If any of those years had no QREs, skip to the 1.3% rule.
Apply 3% or 1.3%
Subtract the base from current QREs and multiply by 3%; with a missing prior year, multiply total QREs by 1.3% instead (lines 29–30). Add the 24% basic research component for corporations (line 21).
Election and reduction
The ASC election is made on a timely original return and binds later years until the FTB consents to revoke it. The reduced-credit factors on line 31b are the same as for the regular credit.
Three bands of gross receipts
Compute QREs above 1%, 1.5% and 2% of average gross receipts (lines 27–35).
Apply the tier rates
1.49% on the band between 1% and 1.5%, 1.98% between 1.5% and 2%, 2.48% above 2% (lines 36–38), plus the basic research component.
No carry-over of the election
The AIC is repealed for 2025. A prior AIC election does not convert to the ASC; a new election is required on the 2025 return.
Existing companies compute the fixed-base percentage as aggregate QREs divided by aggregate gross receipts for at least three tax years from 1984 through 1988, rounded to the nearest hundredth of a percent. Start-up companies use 3% for each of the first five tax years beginning on or after January 1, 1994 in which they have QREs, then phase in under IRC §41(c)(3)(B)(ii). The percentage entered on line 10 can never exceed 16%.
Average annual gross receipts are for the four tax years preceding the credit year, reduced by returns and allowances. For a business operating inside and outside California, gross receipts include only sales of property held for sale to customers that is delivered or shipped to customers in California. Throwback sales and receipts from services, rents, operating leases, interest, royalties and licenses are excluded.
A taxpayer with no California gross receipts (R&TC §17052.12(h) and §23609(i)) is steered by the 2025 instructions toward the ASC. Under the 2024 instructions, such a taxpayer computed the regular credit as a start-up and used 16% once the ratio could not be calculated.
Both qualified research and basic research must be conducted within California. Contract research counts only when the research is performed on the taxpayer's behalf in California. The prior-three-year QRE figure used for the ASC on line 27 likewise includes only QREs for research conducted in California.
Qualified services means engaging in qualified research or directly supervising or supporting it. Qualified supplies are tangible property other than land, improvements to land and depreciable property. Computer rental is included under the federal rule in IRC §41(b)(2)(A)(iii).
The credit is nonrefundable and is claimed with credit code 183. It cannot reduce the minimum franchise tax, the annual tax on partnerships and qualified subchapter S subsidiaries, alternative minimum tax, the built-in gains tax or the excess net passive income tax. It can reduce regular tax below tentative minimum tax.
For tax years beginning on or after January 1, 2024 and before January 1, 2027, the total of all business credits, including carryovers, may not reduce net tax (personal income tax filers) or tax (corporate filers) by more than $5,000,000. For a combined report the limit is applied at the group level.
For each year the cap applies, a taxpayer may make an irrevocable election on Form FTB 3870 to turn credit disallowed solely by the cap into a refundable credit, paid out at 20% a year over a five-year period that starts in the third tax year after the election year. Credit that is unusable because of tax liability, rather than the cap, cannot be made refundable. S corporations cannot make the election for credit taken at the entity level. Without the election, credit blocked by the cap carries over and the carryover period is extended by the number of years it was blocked.
There is no pre-approval, application or allocation process. The credit is claimed on the return. The ASC election, and formerly the AIC election, must be made on a timely filed original return and stays in place until the FTB consents to a revocation, requested on federal Form 3115 or Form 1128.
S corporations, estates, trusts, partnerships and LLCs compute the credit on Form FTB 3523 at 100% and report each owner's share on Schedule K-1 (100S, 541, 565 or 568). An S corporation may use only one-third of the credit against its 1.5% entity-level tax (3.5% for financial S corporations) but passes 100% of the credit through to shareholders. Partnerships allocate the credit according to each partner's distributive share under the written partnership agreement.
Owners who receive a pass-through credit are limited under IRC §41(g) to the tax attributable to their interest in the entity. The instructions give the formula: taxable income from the interest divided by total taxable income, times net income tax. Excess credit carries forward and remains subject to the limit each year.
If the entity elects the reduced credit, each owner's share is multiplied by the owner's own reduction factor: 87.7% for individuals, estates and trusts, 91.16% for corporations and 98.5% for S corporations. When the entity does not know the owner's type, it reports the unreduced credit and notes on the K-1 that the owner must apply the reduction.
When a C corporation with unused research credit carryovers elects S status, the carryovers are cut to one-third and may be used only against the S corporation's own entity-level tax; they cannot be passed through.
1987
California research credit enacted by AB 53 (Chapter 1138, Statutes of 1987) and SB 572 (Chapter 1139, Statutes of 1987), modeled on the federal research credit.
Tax years from 1994
Start-up companies use a 3% fixed-base percentage for their first five tax years with QREs beginning on or after January 1, 1994.
Tax years from 1996
Basic research credit extended to biopharmaceutical and biotech payments to hospitals run by public universities and to qualified cancer centers.
January 1, 1999
Amounts paid for property eligible for the R&TC §6378 sales tax exemption are excluded from QREs.
Tax years from 2015
California conformity date set to the IRC as of January 1, 2015 (used by the 2024 Form 3523).
Tax years 2024–2026
$5,000,000 limit on business credits used per year, with the FTB 3870 refundable election for credit blocked by the cap. Enacted by SB 167 (budget trailer bill, 2024), with the refundable election added by SB 175 (2024).
Tax years from 2025
Alternative incremental credit repealed; California alternative simplified credit (3% / 1.3%) adopted; conformity date moved to the IRC as of January 1, 2025. Enacted by SB 711, the Conformity Act of 2025.
Tax years from 2027
$5,000,000 business credit limitation scheduled to end for tax years beginning on or after January 1, 2027.
Basic research credit (24%)
A component of the research credit for C corporations that make cash payments under written contract to qualified universities, scientific research organizations, and (for biopharma and biotech firms) qualifying public university hospitals and cancer centers, for basic research performed in California.
Credit assignment within a combined reporting group
A corporation may assign research credit to an affiliated corporation in the same combined reporting group on Form FTB 3544 (R&TC §23663). Assigned credit cannot be reassigned.
No. The FTB instructions state that you do not have to claim the federal research credit to claim the California credit. The California computation stands on its own on Form FTB 3523, although it borrows the federal QRE definitions.
The regular credit is 15% of qualified research expenses over the base amount. Corporations add 24% of basic research payments over the base period amount. For tax years beginning on or after January 1, 2025, the alternative simplified credit is 3% of QREs over half the prior three-year average, or 1.3% of current QREs if any prior year had no QREs.
It was repealed for tax years beginning on or after January 1, 2025. A prior AIC election does not carry over to anything; a taxpayer that used the AIC must elect either the regular credit or the new ASC on a timely filed original 2025 return.
No. Both qualified research and basic research must be conducted within California, and contract research counts only when performed on your behalf in California. Prior-year QREs used for the ASC base are also California-only.
Until it is exhausted. Carryover is applied to the earliest tax year possible, and the credit can never be carried back. Credit blocked by the $5,000,000 cap in 2024 through 2026 gets its carryover period extended by the number of years it was blocked.
The credit itself is nonrefundable. For tax years 2024 through 2026, credit that would have been used but for the $5,000,000 business credit limitation can be made refundable by an irrevocable election on Form FTB 3870. The refund is paid at 20% a year over five years, starting in the third tax year after the election year. Credit limited by tax liability does not qualify.
Instead of cutting your research deductions by the amount of the credit, you can elect a smaller credit. On Form FTB 3523 the full credit is multiplied by 87.7% for individuals, estates and trusts, 91.16% for corporations, or 98.5% for S corporations. The election is made on a timely filed original return.
No. California has not conformed to the Tax Cuts and Jobs Act, and the FTB instructions say the §174 amortization changes for tax years beginning on or after January 1, 2022 do not apply for California purposes.
Primary sources only: statute, forms, instructions and agency guidance.
Form
Form FTB 3523, Research Credit (2025)California Franchise Tax Board
Accessed November 8, 2026
Supports: Line structure, rates printed on the form (24%, 15%, 50%, 16%, 3%, 1.3%), reduced-credit factors, refundable election line 41
Instructions
2025 Instructions for Form FTB 3523, Research CreditCalifornia Franchise Tax Board
Accessed November 8, 2026
Supports: ASC adoption and AIC repeal, $5,000,000 limitation and refundable election, conformity, research location, gross receipts, fixed-base percentage, carryover, pass-through rules, §41(g) limit
Form
Form FTB 3523, Research Credit (2024)California Franchise Tax Board
Accessed November 8, 2026
Supports: 2024 alternative incremental credit lines 27–39 and tier rates
Instructions
2024 Instructions for Form FTB 3523, Research CreditCalifornia Franchise Tax Board
Accessed November 8, 2026
Supports: 2024 conformity date (IRC as of January 1, 2015), AIC election rules, LDG 2012-03-01 treatment of taxpayers with no California gross receipts
Form
Form FTB 3870, Election for Refundable Credit (2025)California Franchise Tax Board
Accessed November 8, 2026
Supports: Refundable election mechanics: total elected, 20% annual refundable amount
Statute
Revenue and Taxation Code §23609 (research credit, Corporation Tax Law)California Legislative Information
Accessed November 8, 2026
Supports: Statutory authority cited throughout the FTB instructions [VERIFY: statute text could not be retrieved by our tooling; rules above are taken from the FTB instructions that cite it]
Statute
Revenue and Taxation Code §17052.12 (research credit, Personal Income Tax Law)California Legislative Information
Accessed November 8, 2026
Supports: Statutory authority for individuals and pass-through owners [VERIFY: statute text could not be retrieved by our tooling]
Form
Form 6765, Credit for Increasing Research Activities (Rev. January 2025)Internal Revenue Service
Accessed November 8, 2026
Supports: Federal line numbers used in the state-to-federal line map
Legislation
SB 167 (Budget trailer bill: taxation provisions), FTB bill analysis, amended June 10, 2024California Franchise Tax Board, Legislative Services
Accessed November 8, 2026
Supports: $5,000,000 business credit limitation for tax years beginning 2024 through 2026 and the extended carryover for disallowed credit
Legislation
SB 711 (McNerney), Conformity Act of 2025, FTB final bill analysisCalifornia Franchise Tax Board, Legislative Services
Accessed November 8, 2026
Supports: 2025 IRC conformity date and repeal of the alternative incremental credit; the California ASC rates are in the 2025 Form 3523 instructions. Chaptered text: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=202520260SB711
Agency guidance
An Overview of California's Research and Development Tax Credit (November 2003)Legislative Analyst's Office
Accessed November 8, 2026
Supports: 1987 enactment (Chapter 1138 and Chapter 1139, Statutes of 1987) and the credit's federal model
Every rule on this page was read in the 2025 and 2024 Form FTB 3523, their FTB instructions, and Form FTB 3870. Statute citations are those printed in the FTB instructions. Items we could not confirm against those documents are tagged for verification.
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