After a decade of divergence from federal tax law, California has finally updated its conformity to the Internal Revenue Code (IRC). Governor Gavin Newsom signed Senate Bill 711 (SB 711) into law on October 1, 2025, advancing California's IRC conformity date from January 1, 2015, to January 1, 2025. The legislation takes effect for tax years beginning on or after January 1, 2025, incorporating hundreds of federal tax changes while maintaining California's independent approach on several key provisions.

For innovative businesses claiming R&D tax credits in California, this update brings significant changes to how research credits are calculated, and potentially how much funding you can access.

The Research Credit Gets a Major Overhaul

The most impactful change for California businesses engaged in research and development is the introduction of the Alternative Simplified Credit (ASC) method. Starting in 2025, California taxpayers can elect to use this streamlined calculation approach, which replaces the now-eliminated Alternative Incremental Research Credit (AIRC) method.

How the Alternative Simplified Credit Works

Under California's version of the ASC method, companies can calculate their research credit using modified percentages:

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

Who Benefits Most from This Change?

The ASC method creates significant opportunities for companies that have historically struggled with the traditional research credit calculation. If your business has experienced rapid R&D growth, established high base amounts in prior years, or is relatively new to claiming research credits, the ASC method may deliver substantially better results than the old AIRC approach.

The simplified calculation also reduces administrative burden, making it easier for companies to forecast and plan around their expected credit amounts.

California Maintains Full R&E Expense Deductibility

Here's critical news for tax planning: California explicitly does not conform to federal Section 174 capitalization and amortization requirements. This means that both U.S. and foreign research and experimental (R&E) expenditures remain fully deductible for California purposes.

While federal law has required businesses to capitalize and amortize R&E costs over five or fifteen years (depending on location), California taxpayers can continue to expense these costs immediately. This creates a significant state tax advantage for R&D-intensive companies and requires careful book-tax difference tracking for multi-state operations.

What California Didn't Adopt: Key Areas of Nonconformity

Despite updating its conformity date, California maintains its independent tax policy stance on several provisions that impact innovative businesses:

Business Interest Limitation (IRC Section 163(j))

California continues to reject the federal limitation on business interest expense deductions, potentially providing more favorable treatment for leveraged companies.

Bonus Depreciation (IRC Section 168(k))

California's nonconformity to bonus depreciation rules remains unchanged, requiring separate state depreciation schedules.

Corporate Alternative Minimum Tax (CAMT)

The new federal corporate AMT created by the Inflation Reduction Act does not apply for California purposes.

Net Operating Loss (NOL) Rules

California maintains its own NOL treatment, including different carryback and carryforward rules than federal law.

Clean Energy and IRA Credits

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

One Big Beautiful Bill Act (OBBBA)

Because SB 711 conforms to the IRC as of January 1, 2025, it does not include changes enacted under the OBBBA, which President Trump signed into law on July 4, 2025. California will need to address OBBBA conformity in future legislative sessions.

Real Property Now Required for Like-Kind Exchanges

Another significant change: California now conforms to federal Section 1031 rules, limiting like-kind exchanges to real property only. This eliminates deferral treatment for exchanges of certain non-real property, aligning state treatment with post-TCJA federal rules.

Companies that have relied on personal property exchanges for California tax planning purposes will need to reevaluate their strategies for transactions beginning in 2025.

Strategic Planning Considerations

The conformity update creates both opportunities and complexities for California taxpayers. Here's what businesses should focus on:

For R&D-Intensive Companies

Evaluate ASC vs. Traditional Method: Model your research credit calculation under both the new ASC method and your existing approach. Many companies with high historical base amounts will find the ASC method dramatically increases their credit claims.

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 total benefit.

Timing Considerations: The ASC method's reliance on three-year lookback periods means current-year R&D decisions will affect credit calculations through 2028. Strategic timing of R&D expenditures can optimize multi-year credit generation.

For All California Taxpayers

Update Tax Provision Processes: With more than 1,000 substantive IRC changes incorporated, ensure your tax provision calculations reflect the revised conformity date while accounting for California's numerous exceptions.

Review Depreciation Schedules: California's continued nonconformity to bonus depreciation and Section 168(k) requires maintaining separate state fixed asset records. Verify that your systems properly track these differences.

Coordinate Multi-State Operations: For companies operating in multiple states, California's selective conformity approach requires careful attention to state-specific book-tax differences and potential credit opportunities.

Assess Estimated Payment Requirements: While there's limited time left to adjust 2025 estimated payments, California does provide penalty relief when penalties result from changes in law that occurred during the year at issue.

The Boast Advantage in California's New Landscape

California's selective conformity approach creates a complex compliance environment—but also unlocks significant funding opportunities for innovative businesses that understand how to navigate the rules.

At Boast, we've been monitoring SB 711's progress and have already updated our platform to accommodate California's new research credit calculations. Our technology automatically tracks the complex differences between federal and California R&D credit treatment, ensuring you capture every dollar of available funding while maintaining bulletproof audit documentation.

Here's what makes Boast uniquely positioned to help California companies maximize their R&D credits under the new rules:

  • Automated ASC Calculations: Our platform seamlessly handles both traditional and ASC method calculations, comparing results to ensure you use the most advantageous approach.
  • Section 174 Difference Tracking: We automatically account for California's nonconformity to federal R&E capitalization rules, maintaining separate state and federal treatment without additional manual tracking.
  • Multi-State Optimization: For companies operating across state lines, our system coordinates California credits with federal and other state programs to maximize total R&D funding.
  • Expert Review: Every California claim receives review from our specialized R&D tax credit team, who understand the nuances of state conformity exceptions and can identify opportunities generic accounting firms miss.
  • Audit-Ready Documentation: Our SOC II-compliant platform creates comprehensive documentation that satisfies both federal IRS and California Franchise Tax Board requirements, protecting your credits during audits.

Regard vers l’avenir 

While SB 711 brings California substantially closer to federal tax law, the state's selective conformity approach means taxpayers must remain vigilant. The California Franchise Tax Board will likely issue additional guidance on implementation details 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, in particular, represents the most significant change to California's research credit calculation in years. Companies that proactively evaluate this new approach—and optimize their R&D credit strategies accordingly—stand to benefit substantially.

Don't leave money on the table under California's new rules. Boast's combination of specialized expertise and purpose-built technology ensures you capture every dollar of available R&D funding while minimizing compliance burden 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 specialists to evaluate how SB 711 impacts your business and what opportunities the Alternative Simplified Credit method might unlock.