California has long been a leader in supporting innovation through its Research and Development (R&D) tax credit. In October 2025, Senate Bill 711 (SB 711) aligned the California tax code with the federal tax code for tax years beginning on or after January 1, 2025.
This change finally adds the Alternative Simplified Credit calculation method, nearly 20 years after Congress enacted it for the federal R&D credit.
The California R&D Credit
The California R&D tax credit has traditionally mirrored many aspects of the federal R&D credit, offering companies a way to offset state income tax by rewarding qualifying research expenditures. Eligible expenses, which must occur in the state, include wages, supplies, cloud computing, and certain contract research costs related to developing new or improved products, processes, or software.
What SB 711 Changes
SB 711 represents a substantial update to the state’s R&D credit program. Here are the key changes introduced:
- New (to California) Credit Calculation Methodology: SB 711 aligns the state’s rules more closely with federal standards by adding the Alternative Simplified Credit (ASC) calculation method. This gives companies a third method for calculating the California credit, and, critically, one that does not rely on revenue.
- Sunsets the Alternative Incremental Method (AIM), making the method no longer available for election starting in tax years beginning after January 1, 2025.
- Changes to Credit Utilization: The legislation also removes restrictions on credit carryforwards, allowing credits to be carried forward indefinitely rather than for a limited number of years.
Implications for Businesses
For companies conducting R&D in California, SB 711 offers an opportunity to increase their R&D tax credit. Companies with high fixed-base percentages or a low ratio of R&D to revenue may generate larger credits, or in some cases begin to generate a credit for the first time.
Companies with old base period documentation (remember that the traditional credit could require data as far back as 1984-1988), or that had a much higher ratio of qualified expenses to receipts, often could not generate a credit under the traditional method.
For companies unable to support a historical base period, the Alternative Incremental Credit (AIC) has been the only alternative. A problem with the AIC is that it almost always generates a lower R&D credit than the traditional method would. And for small- or medium-sized companies, the resulting credit is typically inconsequential.
A key consideration for 2025 is that companies that have previously elected the AIC may only revoke the method with consent from the California Franchise Tax Board (FTB). As many companies will likely switch methods to the newly available ASC, we hope guidance later this year will enable an automatic method change. Note that the new ASC, once elected, may also only be revoked with consent from the FTB.
Additionally, the legislation is unclear if the AIC will continue to be available for companies that previously used the method or if they will need to shift to the ASC.
Credit Calculation
California’s ASC credit rate is 3% of qualified research expenditures (QREs) over a base amount, defined as half the average QREs from the prior three years. If the company has $0 in QREs in any of the prior three years, the credit is 1.3% of the current year’s total qualified expenses.
All three methods have different calculations for the base amount and credit percentage. The traditional credit is 15% of the QREs exceeding a base amount of a fixed ratio of prior year QREs to receipts, multiplied by the average of the four prior years’ receipts.
The percentage is calculated the same way as the federal base percentage, but using only California sales. AIC uses only California sales, with credits ranging from 1.49% to 2.48% of QREs over the base amount.
| Traditional | AIC | ASC | |
| Base Amount | PY CA sales and QREs, potentially as far back as the 1980s | PY sales only | PY QREs only |
| Credit rate | 15% of QREs over base amount | 1.49%-2.48% of QREs over base amounts | 3% of QREs over base amount or 1.3% of QREs if no |
| Election? | No | Yes – through years beginning before 12/31/2024. Revoked with FTB approval only | Yes – beginning years after 12/31/2025. Revoked with FTB approval only |
Next Steps
For companies engaging in R&D in California, work with an expert to evaluate the impact of the newly available ASC to determine if electing the method is a good fit for your company. The specific benefits and methods available will depend on available data, California QREs, and California sales. Since the method may only be revoked with FTB consent, making the right decision is important to maximize current and future benefits.
Our team will be monitoring guidance from the FTB and will provide updates as they become available.
As always, Sensiba LLP is here to help you navigate these changes and maximize the benefits for your business. Please reach out to our team to discuss how SB 711 may affect your organization’s R&D tax strategy.
