California Form FTB 3540: Credit Carryover and Recapture Filing Guide

California Form FTB 3540, the Credit Carryover and Recapture Summary, is the Franchise Tax Board form you attach to your main California return when you still have an unused balance from a repealed state tax credit, or when you have to pay back part of a credit you claimed in an earlier year. You list each repealed credit by its three-digit code, show how much carryover you have, how much you’re using this year, and how much is left for next year. If you’re subject to recapture on the Farmworker Housing Credit or the Environmental Tax Credit, you compute that here too and move the number to your main return.¹

When FTB 3540 Is the Right Form

FTB 3540 covers a narrow slice of California credits: those from programs the state has repealed, where the credit itself had carryover provisions and no longer has its own dedicated form. Active credits each use their own form. The Research Credit uses FTB 3523, California Competes uses FTB 3531, Low-Income Housing uses FTB 3521. None of those belong on FTB 3540.²

Two situations put you on this form:

You have unused carryover from a repealed credit that doesn’t have its own carryover form.
You previously claimed the Farmworker Housing Credit (Code 207) or Environmental Tax Credit (Code 218), and a triggering event (such as selling the qualifying property) now requires you to pay part of it back.¹

Some repealed credits are deliberately excluded. Do not use FTB 3540 for carryovers from the Enterprise Zone Hiring and Sales or Use Tax Credit (Code 176), the Local Agency Military Base Recovery Area Hiring and Sales or Use Tax Credit (Code 198), the Manufacturing Enhancement Area Hiring Credit (Code 211), or the Targeted Tax Area Hiring and Sales or Use Tax Credit (Code 210). Each has its own carryover process; the FTB’s credit table points you to the correct form.¹

The repealed credits that do belong on FTB 3540 span decades of California tax policy. The instructions list roughly 30, including the Enhanced Oil Recovery Credit (Code 203), Environmental Tax Credit (Code 218), Donated Fresh Fruits or Vegetables Credit (Code 224), Employer Childcare Program and Contribution Credits (Codes 189 and 190), the Main Street Small Business Tax Credit for 2020 (Code 240) and its 2021 successor (Code 241), and the Farmworker Housing Credit – Construction (Code 207). Some are entity-specific: the Contribution of Computer Software Credit (Code 202) is for corporations only; the Employee Ridesharing Credit (Code 194) is for individuals only. Check the current instructions and credit table for your exact code before you fill anything in.¹

What to Gather First

Pull these items together before you open the form:

Last year’s California return, including the credit form, statement, or Schedule P (100, 100W, 540, 540NR, or 541) that shows your remaining carryover. The amount in column (d) of Schedule P’s “Credit carryover” section is what you’ll enter on this year’s FTB 3540.
The original credit certification or award documentation. You may need it to prove the credit’s origin years later.
The three-digit credit code for each credit you’re carrying. The FTB’s credit table lists every code.²
This year’s tax booklet for your primary return. Your tentative minimum tax or total tax may cap how much carryover you can actually use.³

Download the current-year FTB 3540 from ftb.ca.gov/forms. Using a prior-year version can delay processing.

Filling Out Part I: Credit Carryover

Part I is where most filers do all their work. It has seven columns and up to five rows (lines 1a through 1e), so you can list several repealed credits on one form.⁴

Column (a), Code: enter the three-digit code for the repealed credit.

Column (b), Name of repealed credit: write the full name, for example “Enhanced Oil Recovery Credit Carryover.”

Column (c), Credit carryover available from prior years: the unused balance from last year. Pull it from your prior year’s credit form, the statement attached to last year’s return, or Schedule P.¹

Column (d), Credit carryover used this year: how much you’re actually claiming against this year’s tax. It may be less than column (c) because your tax liability or tentative minimum tax caps what you can use.

Column (e), Total credit assigned this year: corporations within a combined reporting group can assign credits to other group members using FTB 3544. If that isn’t you, enter zero.

Column (f), Credit amount elected as refundable in future years: if you’ve hit the $5,000,000 credit limitation and want to make excess credits refundable later, enter that amount and complete FTB 3870. Otherwise, enter zero.

Column (g), Credit carryover to future years: column (c) minus columns (d), (e), and (f). This is what rolls into next year.

The arithmetic in column (g) is where most problems start. Next year’s column (c) must match this year’s column (g); if the numbers don’t line up, the FTB’s systems will flag it. Keep a copy.

Filling Out Part II: Credit Recapture

Skip Part II unless you’re subject to recapture on one of two specific credits.

Farmworker Housing Credit (Code 207)

If you claimed the Farmworker Housing Credit under the pre-2009 provision and the qualifying property is sold or stops operating within 360 months (30 years) of construction completion, you owe back a proportional share. The recapture equals the total credit claimed multiplied by the number of months left in the 360-month window divided by 360.¹

Environmental Tax Credit (Code 218)

If you claimed the Environmental Tax Credit for a facility producing ultra-low-sulfur diesel and the facility is sold or disposed of within five years of the year you first claimed it, you owe recapture. The formula: total credit claimed multiplied by the remaining term of the five-year period divided by five.¹

Moving the Recapture Amount to Your Return

Transfer the recapture figure from Part II, column (c), to the correct line on your primary return:

Form 540 (individual residents): line 63
Form 540NR (nonresidents and part-year residents): line 73
Form 541 (estates and trusts): line 38
Form 100 (corporations): Schedule J, line 5
Form 100S (S corporations): Schedule J, line 5

Write “FTB 3540” next to the line so the FTB can tie the number back to this form. Estates, trusts, partnerships, and LLCs taxed as partnerships pass recapture through to beneficiaries, partners, or members on the appropriate Schedule K-1.¹

Attaching and Filing the Form

FTB 3540 never goes in on its own. Attach it to your main California return: Form 540 for individuals, Form 100 for corporations, Form 541 for fiduciaries, and so on.

If a tax professional prepares your return with software, California generally requires e-filing. Preparers must e-file if they prepare more than 100 individual returns or use any tax preparation software.⁵ E-file software includes the FTB 3540 data in the electronic submission automatically.

Filing on paper? Place FTB 3540 behind the main return and the other schedules in the order the instructions specify. The mailing address depends on your return type and whether you owe:

Form 540 without payment: Franchise Tax Board, PO Box 942840, Sacramento, CA 94240-0001
Form 540 with payment: Franchise Tax Board, PO Box 942867, Sacramento, CA 94267-0001
Form 100 without payment: Franchise Tax Board, PO Box 942857, Sacramento, CA 94257-0500
Form 100 with payment: Franchise Tax Board, PO Box 942857, Sacramento, CA 94257-0501

A return sent to the wrong PO box is still valid but slower to process.⁶

Keeping Records for a Credit That Lives for Years

Repealed-credit balances can ride along on your returns for a long time, so recordkeeping matters more here than for most tax documents. Hold onto the original certification or award letter, the return you first claimed the credit on, each year’s Schedule P or FTB 3540 showing the rolling balance, and any FTB correspondence about the credit. A good rule: keep records supporting a carryover until it no longer affects any open tax year. For most carryovers that means at least three years after the year you use up or forfeit the last dollar, since the FTB’s standard examination window runs three years from the filing date.

If you have carryovers from more than one repealed credit, a simple spreadsheet tracking each credit’s code, original amount, annual usage, and remaining balance will save you time at filing. Column (c) on next year’s FTB 3540 should always match column (g) from this year. A mismatch is one of the fastest ways to draw a Notice of Tax Return Change from the FTB adjusting your carryover downward.⁷

1
Franchise Tax Board. 2025 Instructions for Form FTB 3540 Credit Carryover and Recapture Summary
2
Franchise Tax Board. Credit Table
3
Franchise Tax Board. 2025 Personal Income Tax Booklet
4
Franchise Tax Board. 2025 Form FTB 3540 Credit Carryover and Recapture Summary
5
Franchise Tax Board. e-File for Individuals
6
Franchise Tax Board. Mailing Addresses
7
Franchise Tax Board. Notice of Tax Return Change