How to compute the limitation

The limitation only applies to business credits and does not apply to the following credits:

Earned income tax credit

Young child tax credit

Foster youth tax credit

Credit for household and dependent care

Credit for elective tax under the Small Business Relief Act

Credit for adoption costs

Renter’s tax credit

Personal exemption credit

Credit for qualified joint custody head of household and a qualified taxpayer with a dependent parent

Credit for qualified senior head of household

Credit for low-income housing

Excess contributions of unemployment compensation

The credits listed above are required to be applied after any business credits are applied.

For each taxable year of the limitation, taxpayers may make an irrevocable election to receive an annual refundable credit amount, in future tax years, for business credits disallowed due to the $5,000,000 limitation. The election must be made annually by completing form FTB 3870 and attaching it to an original, timely filed tax return.

If a taxpayer does not choose to make the election outlined above, business credits disallowed due to the limitation may be carried over. The carryover period for disallowed credits is extended by the number of taxable years the credit was not allowed.

Taxpayers are required to keep track of the disallowed business credits on a worksheet and provide it to the Franchise Tax Board upon request.