After a decade of differences from federal tax law, California has finally updated its alignment with the Internal Revenue Code (IRC). Governor Gavin Newsom signed Senate Bill 711 (SB 711) into law on October 1, 2025, moving California’s IRC conformity date from January 1, 2015, to January 1, 2025. The new law applies to tax years starting on or after January 1, 2025, bringing in hundreds of federal tax changes while keeping California’s independent stance on several important issues.

If your business claims R&D tax credits in California, this update brings major changes to how your research credits are calculated—and could affect how much funding you can access.

The Research Credit Gets a Major Overhaul

The biggest change for California companies doing R&D is the introduction of the Alternative Simplified Credit (ASC) method. Starting in 2025, California taxpayers can choose this streamlined calculation, which replaces the now-removed Alternative Incremental Research Credit (AIRC) method.

How the Alternative Simplified Credit Works

With California’s ASC method, companies can calculate their research credit using new percentages:

  • 3% of qualified research expenses (QREs) that are more than 50% of the average QREs for the previous three years (compared to 14% at the federal level)
  • 1.3% of current-year QREs if your company had no QREs in any of the last three years (compared to 6% federally)

Who Benefits Most from This Change?

The ASC method opens up new opportunities for companies that have struggled with the traditional research credit calculation. If your business has seen rapid R&D growth, set high base amounts in past years, or is new to claiming research credits, the ASC method could deliver much better results than the old AIRC approach.

This simplified calculation also reduces paperwork, making it easier for companies to plan and forecast their expected credits.

California Maintains Full R&E Expense Deductibility

Here’s a key point for tax planning: California specifically does not follow the federal Section 174 rules for capitalizing and amortizing R&E expenses. That means both U.S. and foreign research and experimental (R&E) costs remain fully deductible for California tax purposes.

While federal law requires businesses to spread out R&E costs over five or fifteen years (depending on location), California taxpayers can still deduct these costs right away. This gives R&D-heavy companies a major state tax advantage and means you’ll need to carefully track book-tax differences if you operate in multiple states.

What California Didn't Adopt: Key Areas of Nonconformity

Even with the updated conformity date, California keeps its independent tax policy on several provisions that affect innovative businesses:

Business Interest Limitation (IRC Section 163(j))

California still does not follow the federal limit on business interest expense deductions, which may benefit companies with more debt.

Bonus Depreciation (IRC Section 168(k))

California’s nonconformity to bonus depreciation rules hasn’t changed, so you’ll need separate state depreciation schedules.

Corporate Alternative Minimum Tax (CAMT)

The new federal corporate AMT from the Inflation Reduction Act does not apply in California.

Net Operating Loss (NOL) Rules

California keeps its own NOL rules, including different carryback and carryforward periods than federal law.

Clean Energy and IRA Credits

SB 711 does not include renewable energy provisions from the Inflation Reduction Act. California addressed these separately through SB 302.

One Big Beautiful Bill Act (OBBBA)

Because SB 711 aligns with the IRC as of January 1, 2025, it does not include changes from the OBBBA, which President Trump signed on July 4, 2025. California will need to address OBBBA conformity in future sessions.

Real Property Now Required for Like-Kind Exchanges

Another big change: California now follows federal Section 1031 rules, limiting like-kind exchanges to real property only. This ends deferral treatment for exchanges of certain non-real property, matching state rules to post-TCJA federal law.

Companies that have used personal property exchanges for California tax planning will need to rethink their strategies for deals starting in 2025.

Strategic Planning Considerations

The conformity update brings both new opportunities and new complexities for California taxpayers. Here’s what businesses should focus on:

For R&D-Intensive Companies

Evaluate ASC vs. Traditional Method: Run your research credit calculation using both the new ASC method and your current approach. Many companies with high historical base amounts will find the ASC method significantly increases their credits.

Optimize State vs. Federal Approaches: With California’s full R&E expense deductibility and different credit calculation methods, coordinate your federal and state R&D credit strategies to maximize your total benefit.

Timing Considerations: The ASC method uses a three-year lookback, so your current R&D decisions will affect credit calculations through 2028. Smart timing of R&D spending can boost your credits over several years.

For All California Taxpayers

Update Tax Provision Processes: With over 1,000 IRC changes now included, make sure your tax provision calculations reflect the new conformity date and California’s many exceptions.

Review Depreciation Schedules: California’s ongoing nonconformity to bonus depreciation and Section 168(k) means you must keep separate state fixed asset records. Double-check that your systems track these differences correctly.

Coordinate Multi-State Operations: For companies in multiple states, California’s selective conformity means you need to pay close attention to state-specific book-tax differences and credit opportunities.

Assess Estimated Payment Requirements: There’s not much time left to adjust 2025 estimated payments, but California does offer penalty relief if penalties result from law changes during the year in question.

The Boast Advantage in California's New Landscape

California’s selective conformity creates a complex compliance environment—but also opens up major funding opportunities for innovative businesses that know how to navigate the rules.

At Boast, we’ve tracked SB 711’s progress and have already updated our platform for California’s new research credit calculations. Our technology automatically handles the complex differences between federal and California R&D credits, so you capture every available dollar while keeping audit-proof documentation.

Here’s why Boast is uniquely positioned to help California companies maximize R&D credits under the new rules:

  • Automated ASC Calculations: Our platform handles both traditional and ASC calculations, comparing results so you always use the most beneficial method.
  • Section 174 Difference Tracking: We automatically account for California’s nonconformity with federal R&E capitalization rules, keeping state and federal treatment separate without extra manual work.
  • Multi-State Optimization: For companies operating in several states, our system coordinates California credits with federal and other state programs to maximize your total R&D funding.
  • Expert Review: Every California claim is reviewed by our specialized R&D tax credit team, who know the details of state conformity exceptions and can spot opportunities that general accounting firms miss.
  • Audit-Ready Documentation: Our SOC II-compliant platform creates thorough documentation that meets both IRS and California Franchise Tax Board requirements, protecting your credits in case of audit.

Looking AheadA0

While SB 711 brings California much closer to federal tax law, the state’s selective conformity means taxpayers must stay alert. The California Franchise Tax Board will likely release more guidance in the coming months, and future legislative sessions will need to address conformity to the OBBBA and other recent federal changes.

The Alternative Simplified Credit method is the biggest change to California’s research credit calculation in years. Companies that proactively assess this new approach—and adjust their R&D credit strategies—stand to gain the most.

Don’t leave money on the table under California’s new rules. Boast’s specialized expertise and purpose-built technology help you capture every dollar of R&D funding while reducing compliance headaches and audit risk.

 

Ready to maximize your California R&D credits under the new rules? Schedule a free consultation with our R&D tax credit experts to see how SB 711 affects your business and what the Alternative Simplified Credit could unlock for you.