If you’re a CFO, founder, or controller in California, SB 711 quietly changed the “R&D math” in a way that can move real money. Starting with tax years beginning on/after Jan 1, 2025 (i.e., 2025 returns filed in 2026 for calendar-year filers), California modernized how you can calculate the state R&D credit—and California continues to diverge from federal treatment of R&D expenses under IRC §174.

The result: your federal R&D treatment may create California-only adjustments, and your California credit model may need a rebuild.

1) SB 711 modernizes the California R&D credit: ASC-style option is in

The big structural change: ASC-style method becomes available (AIRC goes away)

California historically forced many taxpayers into the traditional base calculation or the state’s alternative method. SB 711 moves California toward the Alternative Simplified Credit (ASC) concept (modeled on federal mechanics, but with California-specific rates).

At the same time, the FTB’s SB 711 bill analysis explicitly references the repeal of the Alternative Incremental Credit for the research credit.

The headline rates (California is lower than federal—by design)

SB 711’s modified ASC-style approach uses lower California percentages:

3% (general ASC rate), and
1.3% in the “no QREs in the prior three years” scenario (reduced rate).

Why this matters: the traditional approach can be a paperwork grind and can penalize newer companies that don’t have long historical data. ASC-style mechanics typically make the credit more accessible for startups and fast-growing teams that ramp spend quickly.

2) How the ASC-style calculation works (plain English)

At a high level, ASC-style crediting is based on recent-year spending, not decades of history.

The general concept:

Start with your current-year Qualified Research Expenses (QREs).
Compare them to a baseline derived from the average QREs for the prior three years.
Credit applies to the amount that exceeds a threshold tied to that prior-year average.

If you had no QREs in any of the prior three years, a reduced rate applies.

A quick mental model (not a full computation)

If your R&D spend is flat, your credit may be modest.
If your R&D spend is growing, the ASC-style method generally performs better because it’s designed to reward incremental increases in QREs.

Translation: SB 711 pushes California toward a more “growth-friendly” way to compute the credit.

3) California’s §174 position stays split from federal (and it’s a big deal)

Here’s the part that creates the most confusion:

Federal (post-2021): capitalize and amortize §174

Federal law requires capitalization and amortization of research expenses (generally 5 years domestic / 15 years foreign) for tax years beginning after Dec 31, 2021.

California: does not conform to that federal change

The California Franchise Tax Board has been explicit: California has not conformed to the federal §174 change.

And they go further with the practical consequence:

Because California does not conform, taxpayers may need state adjustments for federal/state differences tied to expensing vs. amortization.
California taxpayers may continue to deduct §174 research expenses paid/incurred or elect to amortize over five years on the California return.

What this means operationally

If your tax team capitalized §174 federally, you can easily end up with:

higher federal taxable income (because deductions are spread out), and
lower California taxable income (because California may still allow a current deduction), plus
ongoing tracking of multi-year state/federal differences.

This is where “we’ll clean it up at filing” turns into a messy, time-consuming reconciliation—especially if the R&D ledger isn’t clean.

4) The accounting angle: current tax vs. deferreds (why CFOs care)

Even if you’re not deep into ASC 740/ASC 740-10, the directional impact is straightforward:

Current tax

California’s continued §174 nonconformity can reduce California current tax relative to federal (when federal forces capitalization).

Deferred taxes / provision

Federal §174 capitalization creates future deductions over time.
If California allows current deduction (or a different amortization approach), you can create state vs. federal timing differences that drive:
- different deferred schedules
- different effective tax rate movements
- more reconciliation work at close

The credit model and the expense model are linked

SB 711 changes how you can compute the credit, while §174 drives how you treat the underlying spend (timing of deductions). If the spend isn’t categorized correctly into QRE buckets, you can:

underclaim the credit,
misstate current tax,
or build an indefensible position in an exam.

5) Documentation: the fastest way to protect the credit and reduce audit friction

If you want this to be “finance-ready,” you need QRE support that can survive scrutiny. Minimum viable controls:

Time tracking or substantiation for technical staff (even lightweight sampling beats nothing)
A clear mapping of wages, supplies, and contractor costs into QRE categories
Project narratives that connect activities to qualifying research (what uncertainty, what experimentation)
A tie-out from the QRE study to the GL and tax return workpapers

This isn’t about overbuilding—this is about avoiding a last-minute scramble where everyone argues about what counts as “R&D” after the books are closed.

What to do now (2026 filing-season play)

Re-run your California R&D credit model under the new ASC-style option (don’t assume your old method is still optimal).
If you capitalized §174 federally, plan for California-only adjustments (and make sure the team can support them).
Build/refresh QRE documentation during the year, not after—because reconstruction is expensive and usually weaker.