FTB 3523, Research Credit: line-by-line walkthrough

Part I, Section A: Regular credit (lines 1–17)

Skip Section A if you are electing the alternative simplified credit. Lines 1 through 4 are completed only by C corporations other than personal holding companies and service organizations; everyone else begins on line 5.

1. Line 1

   Basic research payments paid or incurred during the taxable year

   Cash paid under a written contract to a qualified university or scientific research organization for basic research performed in California. Corporations only.

   Worked example: $0 (no basic research payments)

2. Line 2

   Base period amount

   The IRC §41(e) base period amount, generally built from the three tax years before your first tax year after 1983. If you did not exist then, the floor is 50% of this year's basic research payments. Cannot exceed line 1.

   Worked example: $0

3. Line 3

   Subtract line 2 from line 1

   Basic research payments above the base. Not less than zero. Payments that do not exceed the base are instead treated as contract research on line 8 at 65%.

   Worked example: $0

4. Line 4

   Multiply line 3 by 24%

   The basic research component of the credit.

   Worked example: $0

5. Line 5

   Wages for qualified services

   Taxable wages of employees who perform, directly supervise or directly support qualified research in California. Use the federal IRC §41(b) definition, limited to California research.

   Worked example: $800,000

6. Line 6

   Cost of supplies

   Tangible property used in the research, other than land, improvements to land and depreciable property.

   Worked example: $120,000

7. Line 7

   Rental or lease costs of computers

   Amounts paid to rent or lease computers used in qualified research, under the IRC §41(b)(2)(A)(iii) rules.

   Worked example: $30,000

8. Line 8

   Applicable percentage of contract research expenses

   65% of amounts paid for qualified research performed on your behalf in California, or 75% for payments to a qualified research consortium. Corporations also include 65% of line 1 payments that did not exceed the line 2 base.

   Worked example: $100,000 × 65% = $65,000

9. Line 9

   Total qualified research expenses

   Add lines 5 through 8.

   Worked example: $1,015,000

10. Line 10

    Fixed-base percentage, not more than 16%

    Existing companies: aggregate 1984–1988 QREs divided by aggregate gross receipts for those years, rounded to four decimal places. Start-ups: 3% for the first five tax years with QREs beginning on or after January 1, 1994, then the IRC §41(c)(3)(B)(ii) phase-in.

    Worked example: 3.00% (start-up company in year 3)

11. Line 11

    Average annual gross receipts

    Average for the four tax years before the credit year, net of returns and allowances. Multistate businesses count only sales of property delivered or shipped to customers in California; services, rents, interest, royalties and throwback sales are excluded.

    Worked example: $12,000,000

12. Line 12

    Base amount

    Line 11 multiplied by the line 10 percentage.

    Worked example: $12,000,000 × 3% = $360,000

13. Line 13

    Subtract line 12 from line 9

    QREs over the base amount. Not less than zero.

    Worked example: $1,015,000 − $360,000 = $655,000

14. Line 14

    Multiply line 9 by 50%

    The minimum base rule: the base amount can never be less than half of current-year QREs, so the creditable excess can never be more than half of QREs.

    Worked example: $507,500

15. Line 15

    Smaller of line 13 or line 14

    The amount of QREs that actually earns the 15% credit.

    Worked example: $507,500

16. Line 16

    Multiply line 15 by 15%

    The incremental research credit.

    Worked example: $76,125

17. Line 17a

    Regular credit: add line 4 and line 16

    Your full regular credit. If you do not elect the reduced credit, enter it here and attach the schedule showing which deductions you reduced by the credit amount.

    Worked example: $76,125

18. Line 17b

    Reduced regular credit under IRC §280C(c)

    If you elect not to reduce your research deductions, multiply line 17a by 87.7% (individuals, estates, trusts), 91.16% (corporations) or 98.5% (S corporations). Pass-through entities apply each owner's factor to that owner's share.

    Worked example: $76,125 × 91.16% = $69,396 (C corporation electing)

Part I, Section B: Alternative simplified credit (lines 18–31)

New for 2025. Complete Section B only if you elect the ASC. The election is made on a timely filed original return and binds future years until the FTB consents to revoke it. Lines 18 through 21 mirror lines 1 through 4 for the corporate basic research credit.

1. Line 18–21

   Basic research payments, base period amount, excess and 24% credit

   Identical to lines 1 through 4, repeated so a corporation electing the ASC can still claim the basic research component.

   Worked example: $0

2. Line 22–25

   Wages, supplies, computer rental and applicable contract research

   Identical to lines 5 through 8. California research only.

   Worked example: $800,000 / $120,000 / $30,000 / $65,000

3. Line 26

   Total qualified research expenses

   Add lines 22 through 25.

   Worked example: $1,015,000

4. Line 27

   Total QREs for the prior three taxable years

   California QREs for each of the three preceding tax years, added together. Controlled group members enter the group total. If any one of the three years had no QREs, skip lines 28 and 29. Annualize short years under Treas. Reg. §1.41-9(c)(3).

   Worked example: $600,000 + $800,000 + $1,000,000 = $2,400,000

5. Line 28

   Divide line 27 by 6

   This is 50% of the three-year average in one step.

   Worked example: $400,000

6. Line 29

   Subtract line 28 from line 26

   Current QREs over half the prior average. Not less than zero.

   Worked example: $615,000

7. Line 30

   Multiply line 29 by 3%; if you skipped lines 28 and 29, multiply line 26 by 1.3%

   The California ASC. The 1.3% rate applies whenever any of the three prior years had no QREs.

   Worked example: $615,000 × 3% = $18,450

8. Line 31a

   Alternative simplified credit: add lines 21 and 30

   Your full ASC before any reduced-credit election.

   Worked example: $18,450

9. Line 31b

   Reduced alternative simplified credit under IRC §280C(c)

   Same factors as line 17b: 87.7%, 91.16% or 98.5%.

   Worked example: $18,450 × 91.16% = $16,819

Part I, Section C: Available research credit (lines 32–38)

1. Line 32

   Pass-through research credits

   Credit received on Schedule K-1 from S corporations, estates, trusts, partnerships and LLCs, after the IRC §41(g) limit (tax attributable to your interest in the entity) and after the owner-level reduced-credit factor where the entity elected it.

   Worked example: $0

2. Line 33

   Current year research credit

   Line 17a or 31a (or 17b or 31b if you elected the reduced credit) plus line 32.

   Worked example: $76,125

3. Line 34

   Amount from passive activities

   The part of line 33 generated by passive activities. Enter zero if none.

   Worked example: $0

4. Line 35

   Subtract line 34 from line 33

   Non-passive current-year credit.

   Worked example: $76,125

5. Line 36

   Allowable credit from passive activities

   From form FTB 3801-CR (individuals) or FTB 3802 (corporations), computed with California amounts.

   Worked example: $0

6. Line 37

   Non-passive credit carryover from prior year

   Last year's line 42, excluding credit received by assignment. Pass-through recipients apply the §41(g) limit to the carryover first.

   Worked example: $0

7. Line 38

   Total: add lines 35 through 37

   The credit available this year before tax liability and the $5,000,000 limitation.

   Worked example: $76,125

Part II: Carryover computation (lines 39–42)

Combined report filers complete Part III before Part II.

1. Line 39

   Credit claimed on the current year return

   What you actually use this year, limited by tax and by the $5,000,000 business credit cap. Use credit code 183. Exclude assigned credit claimed on FTB 3544 Part B.

   Worked example: $50,000 (limited by tax)

2. Line 40

   Total credit assigned

   Corporations only: credit assigned to affiliates within the combined reporting group, from FTB 3544 Part A column (g).

   Worked example: $0

3. Line 41

   Credit amount to be elected as refundable in future years

   Only credit blocked by the $5,000,000 limitation, and only if you file FTB 3870 with an original timely return. Credit blocked by tax liability does not qualify. Partial elections are not allowed.

   Worked example: $0

4. Line 42

   Credit carryover available for future years

   Line 38 minus lines 39, 40 and 41. Carry it to next year's line 37.

   Worked example: $76,125 − $50,000 = $26,125

Part III: Credit allocation and carryover per entity (combined report filers)

1. Line (a)–(e)

   Corporation, identifying number, credit generated, carryover from prior years, total

   One row per member of the combined group that generates, claims or assigns research credit.

   Worked example: Single-entity filer: not completed

2. Line (f)–(h)

   Credit claimed, credit assigned (FTB 3544 Part A), carryover for future years

   Column (h) excludes any amount elected as refundable on FTB 3870. Assigned credit cannot be reassigned (R&TC §23663).

   Worked example: Not completed