California has modernized its tax code with the enactment of Senate Bill 711 (SB 711), signed by Governor Gavin Newsom on October 1, 2025. Effective for tax years beginning on or after January 1, 2025, SB 711 updates the state’s conformity to the Internal Revenue Code, moving the conformity date from January 1, 2015, to January 1, 2025. While this alignment simplifies compliance, California continues to maintain several key differences from federal law.
In addition to updating conformity, SB 711 introduces significant changes to the research credit and other provisions, creating new planning opportunities for businesses engaged in R&D or structuring transactions such as like-kind exchanges.
Alternative Simplified Credit
Beginning in 2025, California taxpayers may elect the alternative simplified credit (ASC) method for computing the research credit. Under ASC:
- The credit equals 3% of qualified research expenses (QREs) exceeding 50% of the average QREs for the prior three years.
- If no QREs existed in any of the prior three years, the credit equals 1.3% of current-year QREs.
This new approach replaces the alternative incremental research credit (AIRC) method, which is no longer available. Taxpayers who previously struggled to generate credits due to high base amounts may find ASC more favorable.
Section 174 Treatment
California does not adopt federal capitalization and amortization rules for research and experimental (R&E) expenditures under Section 174 or Section 174A. Both U.S. and non-U.S. R&E costs remain fully deductible for California purposes.
Like-Kind Exchanges
California now conforms to federal Section 1031 rules, limiting like-kind exchanges to real property only and eliminating prior adjusted gross income-based exceptions. This change applies to exchanges beginning in 2025.
Areas of Nonconformity
Despite the updated conformity date, California does not conform to several federal provisions, including:
- The business interest limitation (Section 163(j))
- Bonus depreciation (Section 168(k))
- The corporate alternative minimum tax (CAMT)
- Clean energy credits under the Inflation Reduction Act
- Federal net operating loss (NOL) carryback rules and 80% limitation
What This Means for Taxpayers
For taxpayers, these changes present both opportunities and challenges. Companies engaged in research and development should evaluate whether the ASC method offers a more favorable way to claim California research credits starting in 2025. Businesses should also note that California continues to allow full expensing of R&E costs, even though federal rules require capitalization and amortization. Planning transactions such as like-kind exchanges must confirm that only real property qualifies under the new conformity rules, and they should account for depreciation differences when modeling state tax impacts. Finally, taxpayers need to remain vigilant about areas where California does not conform to federal law, such as the interest expense limitation, NOL usage, and bonus depreciation, to maintain accurate compliance and planning.
Next Steps for Businesses
Businesses should take proactive steps to prepare for these changes. Modeling the impact of the ASC method on California research credit claims will help determine whether the new method provides a better benefit. Tax provision processes should be updated to reflect the revised conformity date and the exceptions that remain. Companies should also coordinate with their tax advisors to verify proper treatment of Section 174 costs and other nonconforming items, as these differences can significantly affect both compliance and planning strategies. SB 711 brings California closer to federal tax law while preserving unique state provisions that can create planning opportunities -- particularly for companies investing in research and development.
Please visit BDO’s Business Incentives & Tax Credits page for more information on how BDO can help.