California Provides Credit Guidance After IRC Update

The California Franchise Tax Board (FTB) has provided guidance¹ regarding SB 711,² which updated the state’s general Internal Revenue Code (IRC) conformity date from January 1, 2015, to January 1, 2025, generally operative for tax years beginning on or after January 1, 2025. The legislation decouples from many of the recent federal changes since 2015, including several provisions of the 2017 Tax Cuts and Jobs Act (TCJA) and last year’s One Big Beautiful Bill Act (OBBBA). One of the bill’s highlights is California’s modified conformity to the federal Alternative Simplified Credit (ASC) research and development (R&D) method and its repeal of the Alternative Incremental Credit (AIC) R&D method.

Affirmative Action Required for R&D Credit Eligibility for the 2025 Tax Year

SB 711 repeals the AIC, starting with the 2025 tax year. Taxpayers that previously elected the AIC must file California Form FTB 3523, Research Credit, with their original, timely filed 2025 California tax return, to elect either the regular credit or the new ASC. California’s version of the ASC offers a general rate of 3% (federal rate 14%) and 1.3% (federal rate 6%) where a taxpayer has no qualified research expenses in any of the three preceding years.

FTB Audit Trap

Another difference between the state and federal R&D laws relates to the ASC election revocation procedures. To revoke the ASC election for California, the FTB requires taxpayers to obtain FTB consent—prior to filing a timely, original return for the tax year at issue by filing federal Form 3115, Application for Change in Account Method (SB 711, §§ 3 and 83 and FTB Notice 2024-01). This requirement can be an AUDIT TRAP, as many taxpayers simply follow the federal automatic consent procedures by electing the ASC or regular credit on federal Form 6765, Research Credit, that they file with their federal tax returns.

Other Decoupling

SB 711 provides several notable corporate decoupling provisions, including (but not limited to):

• The business interest deduction limitation under IRC § 163(j). While this decoupling is only provided for corporate taxpayers, a clean-up bill to SB 711 will decouple the limitation for personal income taxpayers as well.

• The TCJA amendments relating to amortization of research and experimental expenditures, for taxable years beginning on or after January 1, 2022.

• Federal net operating loss (NOL) limitations. Note: California NOLs remain suspended for corporate taxpayers with taxable income of $1 million or more.

Ryan’s Take and Action Steps

The already complex nature of California tax law has taken a rather dramatic turn by this sudden advance of the IRC conformity date and the accompanying decoupling from federal law. Claimants of the AIC need to act expeditiously to maintain credit eligibility, especially for the 2025 tax year.

While the previous conformity date of January 1, 2015, meant that decoupling was the default rule in the state, the conformity provisions of SB 711, covering both the corporate and individual tax laws, need to be analyzed provision by provision to properly compute the state tax liability. As noted in the Legislature’s bill analysis, SB 711 conformed to more than 1,000 substantive federal provisions since 2015.

For assistance in claiming federal or state R&D credits or navigating California’s conformity rules, contact our Ryan tax professionals today.

¹ Tax News (December 2025).

² SB 711 (enacted October 1, 2025).

The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.