Key Takeaways:
- California R&D credits now allow the ASC method, offering manufacturers a simpler way to calculate and claim credits starting in 2025 and beyond.
- The ASC method may increase your R&D tax credit and reduce documentation efforts — ideal for manufacturers investing in process or product improvements.
- Now is the time for California manufacturers to evaluate which R&D credit method will deliver the best outcome for ongoing tax planning.
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If your California-based manufacturing company is investing in innovation — whether improving processes, introducing automation, or prototyping new products — there is a new incentive that may support those efforts.
As of January 1, 2025, the California Franchise Tax Board (FTB) now allows businesses to calculate the state research and development (R&D) tax credit using the alternative simplified credit (ASC) method. This provides manufacturers with a more flexible, and often more efficient, way to claim tax credits for qualifying R&D activities.
Background: ASC Method Now Accepted in California
Previously, California allowed use of the regular credit method or alternative incremental credit (AIC) method. The regular credit compares R&D investment to a historical base period that often ties to the mid-1980s for companies in existence during those years. This made it difficult for many manufacturers, especially those with changing operations or limited historical records, to access the full value of the credit. The AIC uses a complex, three-tiered percentage structure based on the gross receipts of the prior four years.
Beginning in 2025, California allows the ASC method and eliminates the AIC method, giving manufacturers the ability to follow an approach already familiar at the federal level. The ASC method uses a rolling three-year average of prior R&D expenses, making it easier to document and better align with modern innovation cycles.
Why This Matters to Manufacturing Companies
California’s manufacturing sector is rapidly evolving, driven by digital transformation, supply chain resilience, and clean-technology innovation. These efforts often involve qualifying R&D activities, including:
- Process automation or optimization
- Custom tooling development
- Prototyping and product testing
- Production line enhancements
For many companies, the ASC method offers a practical path to claim meaningful credits tied to these investments.
When ASC May Be a Better Fit
The ASC method may offer greater value if your business:
- Has fluctuating R&D budgets
- Includes acquisitions with limited historical records
- Recently scaled operations or modernized production
- Doesn’t have reliable base-year records from decades past
- Wants a more consistent calculation method across state and federal filings
Because the ASC is an annual election, manufacturers can compare methods each year and select the most beneficial approach. The election is made on a timely filed original return, including extensions, and is generally not allowed on an amended return. To make the election, you must complete Section B of Form 3523 to elect the ASC method for that tax year. However, the election is irrevocable for the chosen tax year, so modeling outcomes in advance is key.
What Manufacturers Should Do Now
Now that this change is in effect, California manufacturing CFOs and tax leads should take these actions to integrate ASC into their planning:
1. Compare Credit Methods
Run side-by-side calculations for ASC and the regular method. Even if your company qualified under the old method, ASC may yield stronger results and reduce audit exposure.
At a high level, the methods differ in how the credit is calculated:
- The regular credit is generally 15% of qualified research expenses (QREs) above a historical base amount.
- The ASC method is typically 3% of QREs above 50% of your average QREs from the prior three years. If there are no QREs for any one of the three prior years, the credit is 1.3% of the current year QREs.
Because each method relies on different baselines, the outcome can vary significantly depending on your R&D spending patterns.
2. Align With R&D Tracking
Work across finance, engineering, and production teams to document eligible activities and expenses tied to qualified R&D. This includes wages, materials, and third-party research.
3. Incorporate Into 2025 Filing Strategy
Coordinate with your tax advisors to decide which credit methodology aligns with your 2025 return and beyond. Early planning can reduce the risk of surprises and missed opportunities.
4. Consider Multi-State Impact
If you operate in other states, check how those jurisdictions handle ASC versus other methods. A consistent approach may simplify compliance.
How MGO Supports California Manufacturers With R&D Credit Strategy
MGO works with manufacturing companies across California to assess R&D credit opportunities and evaluate the calculation method that aligns best with current innovation efforts. From evaluating automation projects to documenting production design updates, we help tax leaders in building defensible credit positions while integrating state and federal strategies.
Connect with MGO’s R&D practitioners to evaluate your 2025 R&D credit position. With ASC now available, the opportunity to capture more value is well within reach — if your business is prepared.