Corporate State Tax Conformity in the Wake of the OBBBA

State legislatures have been assessing the effects of the OBBBA on state budgets. When it comes to state corporate net income tax, there have been a wide array of state-level action in response to the OBBBA that will affect filings in many jurisdictions. 

Since the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, state legislatures have been assessing the impact of its major business tax provisions and the effects on current and future budgets. This column focuses on the corporate net income tax (CNIT) provisions of the OBBBA that could have the biggest impact on state revenues and state tax compliance.

Corporate Tax Provisions to Watch

The corporate provisions in the OBBBA that are most likely to have significant consequences on state income tax include the treatment of domestic research and experimental (R&E) expenditures, bonus depreciation, qualified production property (QPP), expanded expensing under Section 179, and the interest expense deduction limitation.

R&E Expenditures – The federal income tax treatment is changing again, with the OBBBA reinstating full expensing for domestic R&E expenses while maintaining the 2017 Tax Cuts and Jobs Act (TCJA) treatment for foreign R&E expenses.¹ The OBBBA also created a new Section 174A, which applies for the 2025 tax year and onward; Section 174 remains applicable only through the 2024 tax year. Transition rules under Rev. Proc. 2025-28 for unamortized R&E costs from 2022–2024 establish separate regimes for large taxpayers and small business taxpayers. Large taxpayers generally may not claim retroactive expensing, but, beginning in 2025, they may be able to accelerate their remaining unamortized TCJA domestic R&E amounts, either in a single year or spread over two years. Small-business taxpayers may elect retroactive application of Section 174A to 2022–2024, potentially enabling refunds and net operating loss creation. Taxpayers will need to carefully examine state decoupling rules related to R&E expenditures.

100% Bonus Depreciation – The OBBBA has permanently reinstated 100% depreciation for qualifying property placed in service on or after Jan. 19, 2025, under Section 168(k). (See the Federal Tax column in this issue.) This provision is one that many states have decoupled from in the past. Multistate corporations need to ensure that they are calculating the correct depreciation modification for jurisdictions that do not fully conform to the federal measure.

QPP Deduction – This deduction, newly created under Section 168(n), may cause confusion when it comes to state conformity. For federal income tax purposes, taxpayers are allowed a full deduction for QPP on which construction begins after Jan. 19, 2025, and before Jan. 1, 2029, if placed in service before Jan. 1, 2031. (See the Federal Tax column in this issue.) States that disallow bonus depreciation may not automatically disallow the QPP deduction. This is important to note for state tax compliance.

Expanded Expensing – Under Section 179, the OBBBA increases the amount taxpayers may immediately deduct for qualifying tangible personal property and eligible real property. Although many states generally conform to federal Section 179, some limit the deduction, some decouple entirely, while others require separate state-level depreciation adjustments. Taxpayers should track state-specific addbacks and basis differences to avoid mismatches in depreciation and gain or loss on disposition.

Business Interest Expense – Under the TCJA, business interest expense was limited to 30% of adjusted taxable income (ATI) with an unlimited carryforward of disallowed amounts. The determination of ATI for Section 163(j) had initially been based on earnings before interest, taxes, depreciation, and amortization (EBITDA). Under the OBBBA, the calculation for ATI has reverted to the more beneficial EBITDA-based calculation. Tax practitioners and taxpayers need to stay informed of legislative changes to state conformity, as they can have a significant impact on overall state tax liabilities.

Whether or not federal changes affect a taxpayer’s state income tax base ultimately depends on how each state incorporates the Internal Revenue Code (IRC). For CNIT, a slight majority of the states conform to the IRC on a rolling basis. Rolling-conformity states automatically adopt the IRC as it is amended for the current tax year. Fixed-date conformity states adopt the IRC as of a specified date. Since a majority of these static-date states currently have an IRC conformity date on or after July 4, 2025, provisions from the OBBBA do not automatically apply for state income tax purposes unless legislation updating the conformity date is adopted. The remaining states have partial or selective conformity. For example, New Jersey and Pennsylvania have rolling conformity for corporate taxpayers, while they use a static date to determine conformity for noncorporate taxpayers. Maryland is technically a rolling-conformity state, but automatically decouples on a temporary basis from any IRC amendment projected to reduce revenue by $5 million.

Early State Reactions

Several jurisdictions moved swiftly to protect their tax bases by explicitly decoupling from OBBBA provisions. Last July, Rhode Island decoupled from all business provisions of the OBBBA.² California enacted legislation that moved its IRC conformity date to Jan. 1, 2025,³ a date before enactment of the OBBBA to avoid conformity.

Even some rolling-conformity states selectively decoupled, underscoring that “automatic conformity” does not guarantee adoption of all federal changes. Delaware, for example, decoupled from bonus depreciation under IRC Section 168(k) as well as the transition rules related to unamortized amounts of R&E expenses.⁴

Projected revenue impacts have driven other legislative responses. Michigan projected revenue losses of about $2 billion over the next five fiscal years; Pennsylvania projected a $1.1 billion revenue loss for the 2026 fiscal year.⁵ Beginning with the 2025 tax year, Michigan will decouple from the immediate expensing of domestic R&E expenditures, the new depreciation allowance for QPP, and the updated calculation of the business interest expense limitation.⁶ Pennsylvania passed similar legislation, which gets a closer look in the next section.

Pennsylvania Guidance

For Pennsylvania corporate taxpayers, the impact of the OBBBA is shaped by the commonwealth’s rolling IRC conformity and specific statutory modifications that limit full federal alignment. As part of the fiscal year 2026 budget legislation, substantial changes were enacted in response to OBBBA provisions.

With respect to R&E expenditures, corporate taxpayers are now required to add back both foreign and domestic deductions taken under Sections 174, 174A, 59(e), or 481 on their federal tax return for Pennsylvania taxable income purposes. Taxpayers are then allowed a 20% deduction per taxable year until the full amount of the original expense added back has been fully deducted.⁷ For corporations that elect the two-year federal transition deduction, Pennsylvania still allows the full 20% deduction based on the total unamortized balance as of Jan. 1, 2025. Taxpayers need to complete Form PA REV-1826 (Schedule C-15) to compute the addback and deduction modifications.

An addback is also required for any QPP claimed under Section 168(n).⁸ Alternatively, taxpayers are allowed to take a depreciation deduction for QPP using depreciation rules under Sections 167 and 168, excluding Section 168(n), on their Pennsylvania returns. If the QPP is sold or disposed of during the tax year for which depreciation was added back to taxable income, an additional deduction is allowed if the depreciation had not yet been recovered.⁹ Effectively, since Pennsylvania does not recognize the immediate deduction of the full cost of QPP, normal depreciation rules must be followed.

Lastly, the calculation of the business interest expense limitation for Pennsylvania CNIT purposes is to be applied as if Section 163(j) were in effect on Dec. 31, 2024.¹⁰ This means that taxpayers should continue to calculate ATI using earnings before interest and taxes to determine their Section 163(j) limitation for Pennsylvania.

State Conformity Examples

Pennsylvania is an example of early and comprehensive decoupling. Other states have taken varied approaches as they continue to evaluate conformity with the OBBBA. Here are a few examples.

New Jersey has not enacted broad legislative decoupling, but the Division of Taxation issued targeted guidance addressing several provisions. Revised Technical Bulletin TB-87(R) confirms that New Jersey continues to apply IRC Section 163(j) for corporation business tax (CBT) purposes and indicates OBBBA’s changes do not alter New Jersey reporting, except to the extent federal amendments are inconsistent with the CBT Act. Revised Technical Bulletin TB-114 highlights that the timing differences created by the federal treatment of R&E expenditures (including the transition from Section 174 to Section 174A) can affect the New Jersey research credit computation. This must be tracked on the CBT return when federal and New Jersey deduction timing differs for New Jersey qualified research expenses.¹¹

The North Carolina Department of Revenue published guidance for corporate taxpayers for the 2025 tax year before the enactment of state legislation. Since North Carolina uses a fixed-conformity date of Jan. 1, 2023, the new OBBBA provisions do not currently apply. If state legislation is enacted after taxpayers file a North Carolina return, they may be required to file an amended return.¹²

Several states are actively debating conformity to the OBBBA in their current legislative sessions, while others are seemingly in no rush to act.

Compliance Considerations

The state responses to the OBBBA highlight a growing muddying between federal and state tax bases. State addbacks, decoupling adjustments, and modified limitation calculations are becoming common. It is increasingly critical to monitor legislative developments, evaluate how each state conformity rules interact with federal changes, and model the potential impact on cash taxes and effective tax rates. Proactive analysis and careful tracking will be essential as state conformity continues to evolve and compliance complexity increases.

¹ P.L. 115-97 (2017).

² R.I. Ch. 278 (H.B. 5076), Laws 2025.

³ Cal. S.B. 711, Laws 2025.

⁴ Del. H.B. 255, Laws 2025.

⁵ H.B. 4961 Bill Analysis, Michigan Senate Fiscal Agency, Oct. 1, 2025; H.B. 416 Fiscal Note, Pa. Senate Appropriations Committee, Nov. 12, 2025.

⁶ Mich. Pub. Act 24 (H.B. 4961), Laws 2025.

⁷ Pa. H.B. 416, Section 3, adding Section 216(a)-(f).

⁸ Pa. H.B. 416, Section 3, adding Section 216(g).

⁹ Pa. H.B. 416, Section 3, adding Section 216(h); Pa. H.B. 416, Section 3, adding Section 216(i).

¹⁰ Pa. H.B. 416, Section 3, adding Section 217.

¹¹ N.J. Division of Taxation, Technical Bulletin TB-87(R), “Guidance for Corporation Business Tax Filers on the IRC § 163(j) Limitation,” rev. Dec. 4, 2025; N.J. Division of Taxation, Technical Bulletin TB-114, “The New Jersey Research and Development Tax Credit,” rev. Nov. 25, 2025.

¹² NC Department of Revenue, “Important Notice: Impact of Federal Law on North Carolina Individual and Corporate Income Tax Returns for Tax Year 2025,” January 2025.

Samantha To, CPA, is state and local tax senior manager at Grant Thornton Advisors LLC in Philadelphia. She can be reached at samantha.to@us.gt.com.

Matthew D. Melinson, CPA, is a partner, state and local tax, Grant Thornton Advisors LLC in Philadelphia and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at matthew.melinson@us.gt.com.