01/30/2026
California formalizes federal conformity rules and updates R&D tax credit
California modernizes its tax code and updates R&D credit rules under SB 711. Learn what these changes mean for taxpayers.
Senate Bill 711 (SB 711), signed into law on Oct.1, 2025, marked a modernization of California’s tax code by updating the state’s federal conformity date from 2015 to Jan. 1, 2025. SB 711 also formalized California’s nonconformity to provisions such as the federal Tax Cuts and Jobs Act Section 174 rules, business interest limitations, and bonus depreciation, maintaining a tradition of “selective conformity.”
R&D tax credit calculation changes
SB 711 replaced the Alternative Incremental Credit (AIC) with the Alternative Simplified Credit (ASC) calculation method for calculating R&D tax credits for tax years beginning on or after Jan. 1, 2025. The new calculation mirrors the federal ASC methodology at lower rates: 3% for most taxpayers and 1.3% for those without qualified research expenses (QREs) in each of the prior three years, compared to federal rates of 14% and 6%, respectively. The new calculation compares a given year’s activity to three prior years’ activity rather than rely upon calculations tied to revenue and dated reporting for base period amounts. Like the expired AIC, the ASC election must be made on an originally-filed return, and switching methods later requires Franchise Tax Board consent.
California’s conformity to Internal Revenue Code Section 41(g), which limits a taxpayer’s ability to utilize credits without allocable profits to a given trade or business, remains unchanged. Regarding subsequent elections, a special filing is no longer required to leave the AIC; however, if a taxpayer wishes to leave the ASC method in a subsequent year, proactive filing is required, comparable to the prior AIC process.
What does CohnReznick think?
Taxpayers filing their California returns should evaluate and elect a calculation method on the originally filed return (even if not yet claiming a research credit) to preserve future claims under that method. Strategically, the calculation method for California may not always mirror the federal method, especially since California’s lower ASC rates may produce less credit or research activity may take place in other states. Regardless, taxpayers should expect federal-to-state tax differences given California’s various nonconformities.
Jalen Twine
Manager, National Tax
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.