The Mandatory Revocation of the Alternative Incremental Credit (AIC) Election: Navigating FTB Consent for the California R&D Tax Credit

The Revocation of AIC Election (FTB Consent) refers to the mandatory procedural step required for a taxpayer to legally discontinue use of the Alternative Incremental Credit calculation method for the California Research and Development (R&D) tax credit.

This consent must be formally requested and granted by the Franchise Tax Board (FTB) because the initial AIC election is statutorily binding for all succeeding tax years under California Revenue and Taxation Code (R&TC) provisions.

II. Foundational Context: The California R&D Tax Credit Landscape

The California Research and Development (R&D) tax credit serves as a crucial mechanism to offset state income or franchise tax liabilities, rewarding companies for qualified research activities conducted within the state.1 This credit, codified primarily under R&TC sections 17052.12 (Personal Income Tax) and 23609 (Corporation Tax), generally mirrors the federal R&D tax credit structure found in Internal Revenue Code (IRC) Section 41, albeit with mandatory state-specific modifications.1 Key benefits include the ability to carry forward any unused credit indefinitely, which significantly enhances the long-term value proposition of the credit for taxpayers.1

A. The Three Calculation Methods (Pre-2025)

Historically, California taxpayers could choose among three distinct methodologies to calculate their R&D tax credit. The choice of method had profound compliance and financial implications, particularly regarding the need for historic documentation.

1. The Regular Research Credit (RRC)

The RRC is the primary method for calculating the credit. The credit amount is calculated as 15% of the qualified research expenses (QREs) that exceed a complex base amount, plus an additional 24% of basic research payments.2

The inherent difficulty of the RRC lies in establishing the base amount, which must be determined by calculating a fixed-base percentage. This calculation relies on historic QREs and gross receipts, often necessitating documentation and data that date back to the base period of 1984–1988.1 For newer companies, those with poor record retention, or those that experienced early operational changes, substantiating this base period information is often challenging or impossible. Furthermore, the base amount can never be less than 50% of the current year’s California QREs.5

2. The Alternative Incremental Credit (AIC): The Irrevocable Election

The Alternative Incremental Credit (AIC) was introduced to address the documentation challenges inherent in the RRC, offering a simpler calculation for taxpayers who could not easily substantiate their historical base period information.1 The AIC, unlike the RRC, did not require historical QRE data; instead, it required only prior year gross receipts and current year QREs.6

The calculation utilized a reduced, three-tiered rate structure applied to QREs exceeding tiers of prior-year gross receipts. These state-specific credit rates, modified from the federal version by R&TC Section 17052.12, were set at 1.49%, 1.98%, and 2.48%.1

The significant drawback of the AIC, and the genesis of the current procedural requirements, is its binding nature. R&TC mandates that the election to use the AIC method applies to the taxable year for which it is made and all succeeding taxable years unless revoked with the consent of the Franchise Tax Board (FTB).8 This irrevocability transforms the decision to switch methods from a simple election on a return to a complex administrative procedure.2

The AIC historically represented a fundamental trade-off for taxpayers: procedural simplification was achieved by accepting a significantly lower potential credit amount, which was often considered inconsequential for small- or medium-sized businesses.1 Notably, California maintained the AIC method for state purposes even after the federal government terminated it for taxable years beginning after December 31, 2008, demonstrating the state’s independent approach to R&D credit methodology prior to recent legislative changes.5

III. The Legislative Catalyst: SB 711 and the Mandatory Method Shift

The modern imperative for AIC revocation is driven entirely by Senate Bill 711 (SB 711), enacted in 2025, which introduced substantial updates to the state’s R&D tax credit program.

A. The Repeal of AIC and Adoption of ASC (Effective 1/1/2025)

SB 711’s primary action was aligning California’s tax code more closely with federal standards regarding calculation methods.1

1. AIC Sunset

The legislation officially sunsets the Alternative Incremental Credit (AIC) method, rendering it unavailable for new elections starting in tax years that begin on or after January 1, 2025.1

2. ASC Adoption and Calculation

Concurrently, SB 711 adopted the federal Alternative Simplified Credit (ASC) calculation method.1 The ASC represents a significant improvement for many taxpayers because it fundamentally changes the method for determining the base amount, requiring a lookback only at recent qualified research expenditures, rather than relying on decades-old historical data or gross receipts.5

Under the ASC, the credit rate is applied to the amount of current year QREs that exceed 50% of the average QREs from the three preceding taxable years.5 California modifies the federal ASC rates for state application, specifying a standard rate of 3% of the creditable QREs. A reduced rate of 1.3% applies if the taxpayer had no QREs in any of the three preceding years.5

B. The Strategic Necessity of Revocation

The passage of SB 711 immediately compelled taxpayers previously locked into the AIC to seek revocation, transforming a historical disadvantage (the AIC’s sub-optimal credit yield) into a critical compliance risk.

The financial motivation to switch is clear: the ASC’s 3.0% rate is markedly higher than the AIC’s maximum rate of 2.48%.7 Furthermore, the ASC base calculation, which relies only on the three most recent years of QREs, is often far more advantageous than the complex, gross-receipts-based calculations under the AIC, resulting in a larger creditable amount.5

The key procedural complication is the doctrine of irrevocability. The FTB has explicitly stated that a previous AIC election will not automatically default to another credit method, such as the RRC or the newly adopted ASC.9 This means that the legislative repeal of the AIC method does not negate the binding legal effect of the prior election itself. Without FTB consent to revoke the AIC election, a taxpayer remains legally bound to a calculation methodology that is now obsolete and legally unavailable for computation in 2025. This forces every existing AIC user into a complex administrative process to secure a release from the old methodology.

The long-term state policy regarding election changes remains consistent: the new ASC election, once made, is also subject to the irrevocability rule and may only be revoked in a subsequent year with consent from the FTB.1 This underscores the critical importance of careful documentation and planning when making the initial ASC election. While practitioners have expressed hope that the FTB will later issue guidance allowing an automatic method change recognizing the compulsory nature of the transition 1, current guidance mandates proactive, non-automatic consent.

IV. FTB Administrative Procedures for Revocation of AIC Election

Because the AIC election is irrevocable without explicit consent, the process to switch to a superior method like the ASC is classified as a non-automatic change in accounting method by the Franchise Tax Board.

A. Guidance and Authority

The overarching procedural requirements for requesting a change in an accounting period or method, including the revocation of a prior tax credit election, are outlined in FTB Notice 2024-01, Requests Involving Changes in Accounting Periods or Methods.9

FTB Notice 2024-01 categorizes requests for change. The revocation of the AIC election falls under the category requiring a “Different California Election” which necessitates specific FTB review and approval, rather than relying on “Deemed California Consent”.11 The FTB maintains discretion in this process, reserving the right to modify or deny a requested change if the proposed alteration is deemed to “distort income for California purposes”.12

B. Detailed Submission Requirements and Deadlines

The most critical factor in securing a compliant transition is timing. The FTB requires that taxpayers request and receive consent to revoke the AIC election prior to filing their timely-filed original return for the taxable year in which the change is desired.2

If a taxpayer files the tax return attempting to utilize the new ASC method without having secured the FTB’s written consent beforehand, the consent request will be automatically denied. The taxpayer will then be legally deemed to have retained the AIC method, which is now repealed for 2025, jeopardizing the entire R&D credit claim for that year.9 Since the statute requires obtaining FTB consent, there are no provisions for a “deemed” consent if the taxpayer fails to meet this requirement.9

1. Required Documentation

To initiate the revocation process, the taxpayer must submit the following documents to the designated FTB coordinator:

• Cover Letter: This letter must explicitly state that the taxpayer is submitting an application for a “Change in Accounting Method” (specifically, the revocation of the AIC election and adoption of the ASC method). The taxpayer’s California Corporation Number (CCN) and Federal Employer Identification Number (FEIN) must be clearly identified.11
• Federal Form 3115: A completed federal Form 3115, Application for Change in Accounting Method, must be submitted. This form serves as a pro forma application, but must be adapted for California tax law. It must use California-specific QREs, gross receipts, and base calculations, not federal figures.11 Any references to the IRC on the form must be understood as referring to the corresponding R&TC sections.11

2. Submission Protocol

The request for non-automatic consent must be directed to the FTB coordinator responsible for accounting method changes. To ensure the FTB has adequate time to review the request and issue a determination letter prior to the critical original filing deadline, submission should occur at least sixty (60) days prior to the return due date, including extensions.11

Requests are submitted via mail or facsimile:

V. Comparative Financial Modeling and Risk Analysis

The transition from the AIC to the ASC method, facilitated by the revocation process, offers a compelling financial benefit that justifies the administrative complexity.

A. Quantification of Financial Benefit: AIC vs. ASC

The primary advantage of the ASC calculation method is the significant optimization of the credit calculation base.

Under the AIC, which often relied on complex gross receipt figures, a growing company typically saw its base amount increase rapidly, minimizing the “excess” QREs subject to the credit. In many instances, the AIC generated a minimal or even zero credit, despite substantial research investment.1

The ASC method remedies this by calculating the base solely on 50% of the average QREs from the three preceding years.5 For a company with increasing QREs, this formula significantly lowers the base compared to the historical methods, thus maximizing the creditable expenditures. Furthermore, the ASC offers a 3.0% credit rate, which is an immediate improvement over the highest AIC tier rate of 2.48%.7 This combination of a higher rate and a lower, simpler base maximizes the state tax credit yield.

B. Strategic Risk Mitigation Post-Revocation

The greatest strategic risk inherent in this compliance transition is the timing of the FTB consent. The cost of failing to secure timely pre-filing consent is the complete loss of the R&D credit benefit for the transition year, as the taxpayer is then legally prevented from claiming the superior ASC method and cannot utilize the now-repealed AIC.9

In preparation for the post-2025 environment, tax departments must shift their audit focus. While the AIC and RRC methods required extensive, complex, and potentially decades-old documentation regarding gross receipts, the ASC method places a premium on meticulously documenting and substantiating QREs for the three preceding taxable years to justify the newly calculated base amount.10 The FTB has historically expressed concern over inadequate documentation in R&D credit claims, making rigorous QRE support essential for audit readiness.3

Finally, taxpayers must recognize that the FTB’s steadfast adherence to the irrevocability rule—applying it immediately to the new ASC election—underscores a consistent state policy view: once an election is made, it represents a binding, long-term commitment. Tax departments must exercise enhanced diligence when making the ASC election in the 2025 tax year, as any future desired change back to the RRC would require repeating the entire non-automatic consent procedure.1

VI. Illustrative Case Study: Revocation and Transition Strategy

This scenario demonstrates the tangible financial consequence of obtaining FTB consent to revoke the AIC election and subsequently adopting the Alternative Simplified Credit (ASC) method.

A. Scenario Setup: TechCo, A Growth-Phase California Software Developer

TechCo, a California-based technology corporation, has elected the AIC method since 2020 due to difficulties in obtaining complete historical gross receipts data required for the RRC method. By 2024, despite increasing investment in research, the rising gross receipts factored into the AIC base calculation resulted in a zero credit outcome for the company, demonstrating the method’s inherent limitations for high-growth firms.1

TechCo wishes to transition to the newly available ASC method for the 2025 tax year.

B. Calculation of Credit Under AIC (2024) vs. ASC (2025)

The table below contrasts TechCo’s credit calculation under the obsolete AIC method in 2024 versus the projected ASC credit in 2025, assuming a successful revocation.

The calculated $\$33,000$ R&D credit available under the ASC method in 2025, compared to the $\$0$ generated by the AIC method in the prior year, underscores the necessity of obtaining the FTB’s consent for revocation.

C. Procedural Necessity and Timeline

The financial benefit is conditional upon timely compliance. To legally claim the $\$33,000$ credit, TechCo’s tax team must prepare and submit the Form 3115 pro forma and the supporting cover letter to the FTB’s Change in Accounting Periods and Methods Coordinator.9 Given that the original due date for the 2025 corporate tax return may be as early as March 15, 2026 (or September 15, 2026, with extension), TechCo should aim to secure FTB consent no later than January 2026. Failure to obtain written approval prior to the filing of the 2025 original return would nullify the method change and forfeit the credit for that taxable year.9

VII. Conclusion and Recommendations for Tax Compliance

The repeal of the Alternative Incremental Credit (AIC) method via SB 711 has created a mandatory compliance transition for all previously bound California R&D tax credit users. The process of AIC revocation, while appearing administrative, is an essential strategic step to unlock the significantly greater financial potential offered by the new Alternative Simplified Credit (ASC) method.

The most critical regulatory hurdle is the FTB’s requirement for explicit, non-automatic consent to revoke the previously irrevocable AIC election.8 This mandate dictates that the taxpayer must proactively secure written approval from the Franchise Tax Board before submitting the timely-filed original return for the year in which the method change is applied. The reliance on this strict pre-filing consent, outlined in FTB Notice 2024-01, necessitates immediate action and planning to avoid the denial of the method change and the resulting loss of the optimized tax credit.9

Key Recommendations for Tax Directors

1. Immediate History Audit: Tax departments must promptly identify if the AIC election was utilized in any prior year. If so, preparation for revocation is mandatory for the 2025 tax year.
2. Proactive Submission: Given the critical pre-filing deadline, taxpayers should prepare the California pro forma Form 3115 and the required cover letter, referencing the guidance in FTB Notice 2024-01, and submit the request to the FTB Change in Accounting Periods and Methods Coordinator with a significant lead time (ideally 60+ days) before the anticipated original return filing date.9
3. Enhanced Documentation for ASC: Transitioning to the ASC shifts the audit focus. Tax teams must prioritize the robust collection and substantiation of Qualified Research Expenses (QREs) for the three preceding years to defend the newly calculated ASC base amount against potential FTB scrutiny.3

Acknowledge New Irrevocability: While pursuing revocation of the AIC, taxpayers must recognize that the new ASC election is also irrevocable without future FTB consent.1 The selection of the ASC method for 2025 should be viewed as a definitive, long-term strategic commitment.

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