California’s Senate Bill 711 (SB 711), signed by Governor Newsom on October 1, 2025, represents the most significant update to California’s tax conformity framework in a decade. By advancing the state’s reference date for Internal Revenue Code (IRC) conformity from January 1, 2015, to January 1, 2025, SB 711 incorporates numerous federal tax changes into California law — including substantial updates to how the state computes R&D credits.
Where previous California studies yielded less favorable results for taxpayers, the changes observed in SB 711 warrant further consideration, especially for businesses investing heavily into qualified R&D spending.
Modernized R&D Credit Calculation Method
Under SB 711, California replaces its legacy research credit rules with a conformity to the federal Alternative Simplified Credit (ASC) method for tax years beginning on or after January 1, 2025. This change affects the way qualified research expenses (QREs) are measured and can materially increase credit potential for many taxpayers.
- ASC Election: California taxpayers may now elect the ASC method to compute their R&D credit.
- 3% credit on QREs exceeding 50% of the average QREs for the prior three tax years.
- 1.3% credit if the taxpayer had no QREs in any of the prior three years.
These percentages mirror the structure of the federal ASC but at lower, California-specific rates, which can benefit companies with R&D expenditures that are not as significant relative to historical baselines.
Increased Credit Potential for Certain Taxpayers
Businesses that previously could not generate a substantial California R&D credit may now qualify under the ASC methodology. This is particularly relevant for:
- Companies with higher base amounts relative to current-year R&D efforts.
- Businesses that historically generated limited credits under older California rules.
Timing and Election Considerations
Adoption of the ASC method is elective—taxpayers should assess whether the California ASC produces a more favorable credit result compared to the repealed regime. Calculating both approaches early will guide the optimal election and maximize utilization within the state tax return.
Alignment with Federal R&D Rules — Understanding the Distinctions
SB 711’s conformity to the federal ASC method brings California closer to federal practice, reducing the nuances between state and federal R&D credit generation. However:
- California’s credit percentages remain lower than federal equivalents (e.g., 3% state vs. 14% federal).
- Primarily, the conformity update affects the calculation methodology, not the availability of federal R&D credit features, such as payroll tax offsets.
Next Steps for Innovation-Focused Businesses
While this is great news for businesses with R&D expenditures, RDIG’s knowledgeable team knows that many questions may remain, including how to approach prior years, current year calculation insights, and best practices for moving forward.
RDIG remains committed to helping our clients navigate all available options; please reach out to us, we are happy to help answer any questions.