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The research credit, or the alternative?
If they qualify, your clients can claim either the regular Research Credit or the Alternative Incremental Credit[i]. When claiming the regular research credit, if the base amount (computed by multiplying the base period percentage by the average of the prior four years of gross receipts) is higher than the current qualified research expenses, your clients may not qualify for the regular credit. If so, they may be eligible to receive the benefit of the Alternative Incremental Credit (AIC). It provides an alternative for those who do not have an incremental increase under the regular method. The AIC is simply elected and claimed on the California return.
For clients who file on a combined group basis, all members of the combined group must use the same method. To compute either the regular Research Credit, or the AIC, all members of a "controlled group" are to be treated as a single taxpayer[ii]. For both federal and California purposes, credit documentation is aggregated from all members of a controlled group to compute the credit as a single taxpayer. This credit amount is then divided and proportionately allocated back to each member of the controlled group.
To elect the AIC, compute the credit using the AIC section on California Form 3523, Research Credit. You may want to advise your clients to attach a statement to their California returns stating that they are making the AIC election, although this is not required. Make sure they understand that once they make the AIC election, they are required to continue using the AIC unless they obtain permission from the Franchise Tax Board (FTB) to revoke the election[iii]. It is critical to inform your clients that they must receive permission to revoke the California AIC, even if their federal AIC is revoked. It is also possible to make a California AIC election even if the AIC has not been elected for federal purposes.
To revoke the California AIC election, follow instructions provided in FTB Notice 2000-8, Requests for Changes in Accounting Periods or Methods, (as modified by FTB Notice 2001-2.) Revocation can only be granted on a current, or prospective basis. Federal Form 3115, Application for Change in Accounting Method, or federal Form 1128, Application to Adopt, Change, or Retain a Tax Year, can be used. Federal Form 3115 or Federal Form 1128 should be completed using the appropriate California tax information, including the California Corporate Number (CCN) at the top of page 1. Any reference on these forms, or their instructions, to the Internal Revenue Code should be read as referring to the Revenue and Taxation Code section, if it exists. A cover letter, with your client's name and CCN, should be attached to the front of the Form 3115 or Form 1128. Please indicate that a "Change in Accounting Period" or a "Change in Accounting Method" is being requested.
Send the request to:
Franchise Tax Board
Change in Accounting Periods and Methods Coordinator
PO Box 1998
Sacramento, CA 95812
 Internal Revenue Code (IRC) Section 41(c)(4);
Revenue and Taxation Code (R&TC) Section 23609, effective for tax years
beginning on or after January 1, 1998.
 IRC Section 41(f).
 R&TC Section 23609(h)(2).