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California Adopts Alternative Simplified Credit for R&D
As tax professionals prepare 2025 California returns during the 2026 filing season, recent legislative changes are directly affecting how R&D credits are calculated and how state–federal conformity issues are managed.
On October 1, 2025, California Governor Gavin Newsom signed SB 711, updating and modifying California’s conformity with the federal tax code. Two notable changes impact California taxpayers: revisions to California’s R&D Tax Credit calculation and continued favorable treatment of research and experimental (R&E) costs.
Introduction of the Alternative Simplified Credit
Beginning with tax year 2025, California will allow taxpayers to claim the R&D Tax Credit using an Alternative Simplified Credit (ASC) methodology. This new option enables taxpayers to calculate the California R&D Credit without relying on gross receipts, bringing the state’s approach closer to the federal ASC framework.
The ASC will replace California’s Alternative Incremental Credit (AIC), which will no longer be available beginning in tax year 2026. The Regular Credit methodology will remain an option for eligible taxpayers.
For companies with fluctuating or declining gross receipts, the ASC may offer a more predictable and potentially more favorable credit outcome than the former AIC calculation. As a result, taxpayers and their advisors should evaluate available methodologies to determine which approach produces the most advantageous result for 2025 and future filings.
Continued Favorable Treatment of R&E Expenditures
In addition, California will maintain its conformity to the version of the federal tax code in effect on January 1, 2015, for purposes of determining deductible R&E expenditures. This means taxpayers can continue to expense both domestic and foreign research costs for California purposes.
This treatment differs from the One Big Beautiful Bill Act (OBBBA) at the federal level, under which only domestic research expenses are deductible, while foreign research costs must be amortized over 15 years.
Key Takeaways for Advisors and Taxpayers
These updates represent welcome relief for California taxpayers, offering more flexibility in calculating the R&D Credit while retaining favorable expensing treatment for foreign research. However, they also introduce new planning considerations, including selecting a credit methodology and managing differences in state–federal conformity.
If you have questions about how these changes may affect your clients’ R&D Credit filings, compliance obligations, or state–federal planning considerations for the 2025 tax year, please contact our R&D Tax Credit Services team.
David Seibel is a Shareholder in McGuire Sponsel’s R&D Tax Credit practice. He combines his knowledge of tax law with his engineering expertise to maximize companies’ research credits and reduce their overall tax burdens.
David ensures clients are receiving studies that meet the highest level of quality. He conducts fieldwork, produces detailed technical calculations, and builds narratives that accurately reflect each company’s research and experimentation activity.
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