The Bottom Line
California made significant changes to its research and development (R&D) tax credit for tax years beginning on or after January 1, 2025, under California Senate Bill 711. The state adopted the Alternative Simplified Credit (ASC) method and repealed the Alternative Incremental Credit (AIC) method for calculating the R&D credit. This new ASC option conforms to the federal R&D credit methods under Internal Revenue Code (IRC) section 41(c)(4) as modified by California law.
Beginning for tax years 2025 and beyond, taxpayers that historically relied on the AIC method must now affirmatively elect the ASC or regular credit method on a timely filed original return using the updated Franchise Tax Board (FTB) Form 3523 as there is no automatic default to either credit method for previous AIC filers. There is no change to taxpayers claiming the regular credit. Once made, the ASC election will apply to the current and future years and may only be revoked with FTB consent. The credit method cannot be changed on an amended return.
How We Can Help
Taxpayers intending to claim the California R&D credit for tax year 2025 should evaluate the available methods, model the potential impact, and ensure compliance with the new election rules.
At Forvis Mazars, our nationwide team of engineers, accountants, and attorneys are ready to help you calculate, document, and substantiate your R&D credits. Reach out to a member of our team to learn more about how we can help.