Navigating State Tax Changes After the OBBB

The OBBB raises many familiar and complex state tax issues. Most states anchor their income tax systems to the IRC, using federal definitions as the starting point for their own calculations.

States that adopt a “rolling” conformity to the IRC generally will adopt OBBB changes automatically. States that fix their conformity to the IRC as of a specific date likely will not adopt any of the changes in the OBBB until they enact legislation to advance their conformity date to include the law’s July 4, 2025, enactment date.

Crowe observation

Developments in states should be monitored to identify whether OBBB rules are adopted (either because of conformity or proactive legislation) or modified.

For both rolling and fixed conformity states, there are also many nuanced considerations. For example, if a rolling or a fixed conformity state previously has decoupled from a federal provision, care should be taken to review the method by which it decoupled. Close review is particularly important regarding Tax Cuts and Jobs Act of 2017 (TCJA) provisions.

Unless a state enacts specific legislation to the contrary, the following general rules should apply:

• If a state decouples from an IRC provision in its entirety, any subsequent federal law change to that provision would not affect that state’s tax law with respect to that provision, even if the state generally conforms to the IRC.
• If a state decouples from only TCJA changes to a code provision and conforms to the provision otherwise (as many states chose to do), then an OBBB change to that provision could nevertheless be applicable.
• If a state conforms to the IRC as of a specific date for only a specific IRC provision (for example, New Jersey conforms to IRC 168(k) as enacted on Jan. 1, 2002), that might impact conformity to the OBBB.

Crowe observation

A state’s tax treatment could align with federal treatment because the state conforms to an IRC provision or because it enacted a similar rule independently. The distinction can have meaningful implications for OBBB conformity.

Example of the OBBB’s impact on state tax

Using the OBBB’s changes to the treatment of research and experimental (R&E) expenses, the following is an example of how changes in the OBBB could affect state taxation.

The TCJA amended IRC Section 174 to require R&E expenses to be capitalized and amortized for five years (15 years for foreign research expenses). The OBBB enacted Section 174A to allow immediate expensing of domestic R&E expenses. Section 174 continues to require foreign R&E expenses to be capitalized and amortized over 15 years. The OBBB also made related changes to Section 41 and Section 280C and allows certain small businesses to elect to retroactively claim immediate deductions for R&E expenses.

State tax implications include:

• New Section 174A raises complications for state conformity in states that decoupled in whole or in part from Section 174.
• Section 174A accelerated deductions create incremental federal and state tax differences that will have to be tracked – for example, additional modifications triggered by federal deductions on amounts that already were deducted for state tax purposes.
• Revised Section 174 maintains the 15-year foreign amortization schedule. States with foreign treatment that differs from domestic treatment could trigger U.S. constitutional issues.
• Changes to Section 41 and Section 280C and the small-business election add further complexity.

Other OBBB changes to watch from a state tax perspective

Following are examples of other OBBB changes that could have meaningful state tax implications and could require complicated state-level attribute tracking:

• Section 163(j). The OBBB permanently reinstates the add-back for amortization and depreciation when computing the business interest expense limitation.
• Bonus depreciation. For property placed in service after Jan. 19, 2025, the OBBB permanently reinstates 100% bonus depreciation for qualified property.
• New 100% depreciation under Section 168(n). For manufacturing, production, or refining property placed in service in the U.S. before 2031 for construction beginning after Jan. 19, 2025, and before Jan. 1, 2029, Section 168(n), as a new provision, raises unique conformity issues for both rolling and fixed states.
• Section 199A. The OBBB makes permanent the Section 199A pass-through tax deduction and favorably revises rules for eligibility and computation of the benefit.
• Section 179. The OBBB increases the maximum amount that can be expensed under Section 179 to $2.5 million.
• Section 951A and Section 250. Before the OBBB, the global intangible low tax income (GILTI) deduction was scheduled to decrease from 50% to 37.5%, and the foreign-derived intangible income (FDII) deduction was scheduled to decrease from 37.5% to 21.875%, both applicable after 2025. For tax years beginning after Dec. 31, 2025, the OBBB renames GILTI to net controlled foreign corporation taxable income (NCTI) and changes the deduction to 40% and renames FDII to foreign-derived deduction eligible income and changes the deduction to 33.34%. NCTI’s exclusion of qualified business asset investment deductions might cause state conformity issues.
• Section 461(l). The OBBB permanently extends Section 461(l) limits on business losses of noncorporate entities through the 2028 tax year. The OBBB makes the excess business loss limitation permanent.
• Section 45D. The New Markets Tax Credit (NMTC) provides competitively awarded tax credits to encourage private investment in certain low-income communities. The NMTC program was set to expire at the end of 2025. The OBBB permanently extends the NMTC program.

Looking ahead

A significant amount of state legislative activity is expected over the next several months and beyond as states determine whether to adopt, change, or reject (decouple from) OBBB provisions. Taxpayers should consult their state tax advisers to evaluate the immediate impact of the OBBB on state tax obligations and to determine future changes as states modify their treatment of OBBB changes.