New Legislation, New Opportunity for CA Taxpayers to Claim State-Specific R&D Credit

On 10/1/2025, California Governor Gavin Newsom signed Senate Bill 711 (SB 711) into law. Effective 1/1/2025, the Bill impacts how California law conforms to the federal IRC, bringing new opportunity to smaller, newer California-based innovators.    

That Was Then  

 Until TY 2025, California taxpayers could select from one of two R&D Tax Credit calculation methodologies based on Qualified Research Expenses (QREs):  

•  Regular Credit 

• •  15% of incremental QREs over a base amount + 24% of basic research payments 

• • Generally yields a larger Credit than AIC   

• • Historical base period information required  

• Alternative Incremental Credit (AIC)  

• • Calculates credit in tiers based on QREs as a percentage of gross receipts 

• • Typically generates a lower Credit than Regular  

• • Ideal for firms without information needed to support a historical base period

This is Now  

The Regular Credit remains unchanged.    

SB 711 repealed the Alternative Incremental Credit (AIC) for tax years beginning on or after 1/1/2025, replacing it with the federal Alternative Simplified Credit (ASC) method under IRC §41(c)(4), with California-specific modifications.     

CA-Specific ASC Rates: 

• • 3% of the QREs exceeding 50% of the average QREs for the three preceding taxable years 

• • 1.3% of current-year QREs if the taxpayer had no QREs in the three preceding years 

Obviously, the California-specific rates are lower than the comparable federal ones –14% and 6% — but it’s much better to be able to claim a smaller Credit than no Credit at all.  The AIC method actually prevented many taxpayers from generating a meaningful Credit.  Businesses with limited historical data were forced to use the AIC, but the resulting Credit would often be so small as to be meaningless, especially for smaller firms.   

By implementing the ASC methodology, start-ups and small firms can now generate larger Credits, or even generate a meaningful Credit for the first time.  Firms with high fixed-base percentages may also benefit.   

By aligning more closely with federal law, the ASC method will also simplify compliance for CA taxpayers.  

Moving Forward: Decide Election Strategy Before Filing for TY 2025 

Methodology selection has always been a manual election in CA, and that’s not changing.  Elections must be made on a timely filed original return.   

Taxpayers who had elected AIC must now manually elect the Regular or ASC methodology on a timely filed CA return.   

• • This year, no Franchise Tax Board (FTB) consent is required to make a switch.   

• • In the future, method changes may require filing a 3115 and supplementary documentation with the FTB, so it’s best for a taxpayer to explore both options now, before making an election and filing the original TY 2025 return.    

More details on accounting method changes can be found in FTB Notice 2024-01.   

An updated version of Form FTB 3523 is coming soon.   

California taxpayers are encouraged to reevaluate their election strategy with their tax professionals well in advance of filing for TY 2025.  Smaller, newer firms may find that the new ASC methodology yields particularly meaningful benefit moving forward.