3507: Prison Inmate Labor Credit (2025)
California · FTB · Used for tax years 2025
California Form 3507 calculates the Prison Inmate Labor Credit for qualifying wages paid under an approved joint venture with the California Department of Corrections. It reports qualifying wages, pass-through credits, carryovers, and the credit claimed or assigned. Attach it to
Who files this form
Use Form FTB 3507 to figure the credit for wages paid to prison inmates under an approved joint venture with the California Department of Corrections. The contract must have been signed on or before the day the individual begins work for the employer.
Also use this form to claim pass-through Prison Inmate Labor Credits received from S corporations, estates, trusts, partnerships, or LLCs classified as partnerships.
Those entities should complete Form FTB 3507 to figure the credit passed through to their shareholders, beneficiaries, partners, or members.
What you'll need
- Your name and identification information as shown on your California tax return.
- The total qualifying wages paid or incurred under the approved joint venture.
- The approved joint venture agreement. The employer must keep it for audit purposes.
- Schedule K-1 (100S, 541, 565, or 568), if you received pass-through credits. If you received more than one, attach a schedule listing the names and identification numbers of the entities that passed the credits through to you.
- Your credit carryover amount from 2024, if applicable.
- Form FTB 3544, Part A, if you are a corporation assigning credit within the same combined reporting group.
- Form FTB 3870, if you elect to make credits disallowed by the $5,000,000 business credit limitation refundable in future years.
How to file
Attach Form FTB 3507 to your California tax return. The supplied text does not give a mailing address or e-file directions.
- Enter total qualifying wages on line 1 and multiply by 10% on line 2.
- Enter pass-through credits on line 3 and credit carryover from 2024 on line 4. Add lines 2, 3, and 4 on line 5.
- Enter the credit claimed on line 6a, subject to the credit limitations. Use credit code 162 when claiming the credit.
- Enter assigned credits on line 6b. If you are not a corporation, enter 0.
- Enter any credit amount elected as refundable in future years on line 6c. Complete Form FTB 3870 and attach it to your original, timely filed return.
- Calculate line 7 by subtracting the total of lines 6a, 6b, and 6c from line 5, following the line 7 instructions.
Pass-through entities attach this form to Form 100S, 541, 565, or 568, as applicable, and report each recipient’s credit on Schedule K-1.
Common mistakes
- Not keeping the agreement: The employer must retain the approved joint venture agreement for audit purposes.
- Including assigned credits in the wrong place: Do not include assigned credit carryovers reported on Form FTB 3544, Part B, on line 4. Do not include assigned credits claimed on that form on line 6a.
- Electing a refund for credits limited by tax liability: Do not include those amounts on line 6c. The election applies to credits disallowed because of the $5,000,000 business credit limitation.
- Making only a partial refund election: You cannot elect to make only part of the disallowed credit refundable. The same election must apply to all other credits claimed that year and disallowed by the $5,000,000 limitation.
- Counting elected refundable amounts as carryovers: Do not include amounts elected as refundable on Form FTB 3870 on line 7.
- Carrying the credit back: The reminder states that this credit cannot be applied against a prior year’s tax.
Questions people ask
How much is the credit?
The credit equals 10% of wages paid to each qualifying prisoner during the taxable year for the duration of the approved contract agreement.
Can an S corporation claim the entire credit itself?
No. An S corporation may claim only one-third against its entity-level tax. The remaining two-thirds must be disregarded and cannot be carried over. It may pass through 100% of the credit to its shareholders.
Is the credit refundable?
The credit is generally not refundable. For taxable years 2024 through 2026, taxpayers may make an irrevocable election for credits disallowed by the $5,000,000 business credit limitation to become refundable in future years. The refundable amount is claimed at 20% per year over five years, beginning in the third taxable year after the election year. S corporations cannot make this election for credits taken at the entity level.
Can the credit reduce my tax without limit?
No. For taxable year 2025, total business credits, including carryovers, may not reduce personal income filers’ net tax or corporate filers’ tax by more than $5,000,000. For a combined reporting group, this limit applies at the group level. Other tax limitations also apply, so the amount claimed on line 6a may be less than the total available credit on line 5.