The One Big Beautiful Bill Act May Create Confusion for State Income Taxes

President Donald Trump signed the One Big Beautiful Bill Act (OBBBA) into law on July 4, 2025. While the OBBBA does not directly amend state and local income tax laws, some of the new provisions impact state income taxes in states that use Federal Taxable Income or Adjusted Gross Income as the starting point for state corporate income and personal income taxes, respectively. The OBBBA amends several provisions that were enacted as part of the Tax Cuts and Jobs Act of 2017 (TCJA), P.L. 115-97, which may further complicate ongoing state attempts to conform to those provisions.

The extent of the new legislation’s impact at the state level will be based on the state’s conformity to the Internal Revenue Code. State net income taxes conform to the Internal Revenue Code in one of three ways: a rolling conformity to the IRC that automatically adopts federal changes as they are enacted, conformity to the IRC as of a specific date or conformity only to specific provisions in the IRC.

The rolling conformity states that initially conforming to the changes made by the OBBBA, the state may enact legislation to decouple from certain provisions that the state does not wish to follow. For example, several states using federal taxable income as the starting point have enacted legislation opting out of federal bonus depreciation provisions because the state would rather have the tax revenue now rather than later when depreciation is recaptured. In addition, even if a state does not enact legislation opting out of federal changes, state revenue departments may issue regulations interpreting the federal changes in ways that vary from state to state.

Recent amendments to the federal treatment of research and experimental (R&E) expenses made by the TCJA have had a significant impact on income tax calculations in certain states. Prior to the TCJA, IRC Section 174 generally allowed taxpayers the option to immediately deduct R&E expenses or to capitalize and amortize the expenses. The TCJA required taxpayers to capitalize and amortize R&E expenses.

The OBBBA reverses the TCJA’s provision, and starting in 2025, taxpayers will again have the option to deduct domestic R&E expenses immediately. Certain small business taxpayers with average annual gross receipts of $31 million or less can apply the change retroactively to the tax years 2022 through 2024. This retroactivity may create refund opportunities for taxpayers at the federal and state level in states that conformed to Section 174 for 2022 and later. Eligible taxpayers should examine their R&E expenses in these years to determine whether it would be beneficial to amend those returns and deduct the expenses in the year incurred.

The TCJA placed a $10,000 limit on an individual’s itemized state and local tax deduction (i.e., the SALT cap). In response, many states enacted pass-through entity taxes (PTETs) aimed at achieving the benefits of the state tax deduction prior to the enactment of the SALT cap. While there was talk that the SALT cap might be done away with this year, the OBBBA retained the cap. The new legislation increases the cap from $10,000 to $40,000, with further increases of 1% each year beginning in 2026, but then reverting to $10,000 in 2030. For taxpayers with MAGI over $500,000 MFJ or $250,000 single or MFS, there is a phaseout of the increased SALT cap. For taxpayers with incomes exceeding the MAGI limits, the SALT cap is reduced by 30% of the excess income; however, the allowable SALT deduction cannot go below $10,000. Couples filing MFJ returns with $600,000 or more MAGI and single or MFS filers with $350,000 of MAGI will be limited to a $10,000 SALT cap.

There were provisions in earlier versions of the bill that would have eliminated a taxpayer’s ability to get around the SALT cap via PTETs; however, the final law does not address the issue. Thus, taxpayers can still take advantage of PTET elections. With the increased SALT cap, taxpayers should review pass-through entity ownership structures to determine if making a PTET election in applicable jurisdictions remains beneficial. In addition, three states,Illinois, Oregon and Utah, have expiring PTET regimes. Unless these three states pass legislation to extend their PTETs, taxpayers will no longer be able to make a PTET election starting in 2026. 

As mentioned above, many states do not conform to federal bonus depreciation deductions and have opted out of the TCJA amendments, which allow for 100% bonus depreciation for certain taxpayers over a set period. The OBBBA makes permanent the 100% bonus depreciation that was temporarily allowed under the TCJA for “qualified property” acquired on or after Jan. 19, 2025. The term “qualified property” is defined as tangible personal property with a recovery period of 20 years or less.

Many states decoupled from the bonus depreciation provisions in the TCJA, and it is unlikely they will conform to the changes in the OBBBA. It is important for any taxpayer impacted by the changes in the legislation at the federal level to review the states where they have property to determine the extent of the state’s IRC Section 168 conformity. For example, the New Jersey statute specifically decouples from Section 168k but conforms to all other sections of 167 and 168.

The OBBBA amends the definition of “adjusted taxable income” (ATI) in determining a taxpayer’s allowable business interest expense deduction under Section 163(j). A taxpayer’s ATI will now be computed without regard to the deductions for depreciation, amortization and depletion, which will increase the taxpayer’s ATI and thereby increase the taxpayer’s allowable business interest expense deduction under Section 163(j). A number of states have decoupled from federal expense deduction provisions in order to set their own policies regarding what can be deducted. The interest expense deduction rules for each state should be examined to determine whether the state has decoupled from the federal provisions under Section 163(j) and, if not, what the impact of the changes will be at the state level.

The OBBBA makes several changes to the global intangible low taxed income (GILTI) regime enacted by the TCJA, including renaming it from GILTI to net CFC-tested income (NCTI). There have been many uncertainties as to how GILTI would apply at the state level since it was enacted, and many states do not conform to the federal requirements.

GILTI was enacted to ensure that a minimum tax was imposed on certain foreign earnings to lessen the potential tax benefit by shifting profits to countries with lower tax rates. However, the purpose behind the federal enactment did not really apply at the state level, which generally does not tax international income. Thus, when federal conformity states attempted to apply the GILTI provisions after the enactment of the TCJA, it created many issues absent at the federal level, including how to apply state apportionment rules that do not exist at the federal level to GILTI. Twenty-one states have adopted GILTI in some form in their income tax base. Now that these states have begun to implement GILTI at the state level, they will need to determine the impact of switching from GILTI to NCTI. Companies that are subject to GILTI (now NCTI) will need to monitor which states conform to the federal provisions.

Taxpayers should closely examine state conformity provisions where they are filing to determine the immediate impact of changes to the IRC in the OBBBA to state law. They should also keep an eye out for any guidance issued by state revenue departments on how the amendments will be applied. It is also important to monitor state tax legislation to see if any states have enacted legislation to decouple from various provisions in the OBBBA.

Authors: Mike Mcloughlin | [email protected] and Penny Sweeting, CPA | [email protected]