Short answer. California's research credit is 15 percent of qualifying expenses over a base under the regular method, or 3 percent under the Alternative Simplified Credit. You elect one on a timely-filed return, and the regular method usually wins unless your California spend is growing fast.
Key facts
| Regular method | 15% of California QRE over a base |
|---|---|
| Alternative Simplified Credit | 3% over 50% of the prior 3-year California QRE average |
| Refundable | No |
| Carryforward | Indefinite |
| Credit cap | $5 million a year, tax years beginning before 2030 |
| Form | FTB 3523 |
The two rates
California lets you compute the credit two ways and elect the one you can support.
Regular method, 15 percent. Fifteen percent of California qualified research expenses above a base amount tied to your history. This method generally produces the larger credit for a company whose California research spend is flat or growing modestly.
Alternative Simplified Credit, 3 percent. Three percent of California QRE that exceeds 50 percent of the average California QRE for the prior three years, or 1.3 percent of current-year QRE if any of those three years had no QRE. The base math is simpler and the rate is lower, so it tends to favor companies whose California spend is climbing fast or that cannot reconstruct the regular method's base period.
Which rate wins
The better rate depends on your spending curve, not on a single headline number.
For most companies with steady California research, the 15 percent regular credit beats the 3 percent ASC even though the ASC looks simpler. The ASC pulls ahead when California QRE is rising quickly year over year, or when the regular method's base period cannot be reconstructed.
You elect one method on a timely-filed original return. After SB 711, a company that previously used the Alternative Incremental Method must affirmatively choose the regular credit or the ASC for 2025, or it forfeits the credit for that year.
How the rate applies
Two rules shape what the rate is applied to.
The expenses must be for research conducted in California: wages for time worked in California, contractor work performed there, and supplies consumed there. The California rate is applied only to that in-state QRE.
The credit is nonrefundable, but any unused amount carries forward indefinitely, so a rate you cannot use this year is not lost. For tax years beginning before January 1, 2030, SB 122 also caps business credits, including this one, at $5 million a year; credit blocked by the cap can be converted to a refund by election on FTB 3870, paid over five years.
More on California's R&D credit
The full state overview, the federal Section 41 work it builds on, and related state guides:
Sources
Every claim on this page traces to a primary authority. Each source below is independent and verifiable.
- California FTB Form 3523 (Research Credit), 2025 instructions - California Franchise Tax Board
- California SB 711 (Chapter 231, Statutes of 2025), bill text - California Legislature
- KPMG TaxNewsFlash: California newly enacted law updates IRC conformity (October 2025) - KPMG
- California SB 122 (Chapter 23, Statutes of 2026), bill text - California Legislature
- EY Tax News 2026-1414: California budget trailer bill extends the limitation on business tax credits - EY
- 26 U.S.C. ยง 41 (credit for increasing research activities) - Cornell Law School, Legal Information Institute
- IRS, About Form 6765 - Internal Revenue Service
Get documentation built to survive an exam
R&D Binder produces the federal Section 41 binder and the California state workpaper from one engagement, both built to survive an FTB or IRS exam.