Federal tax provisions to consider for state purposes
The OBBBA, which became law on July 4, 2025, is the most significant federal tax legislation since the Tax Cuts and Jobs Act of 2017 (TCJA, P.L. 115-97). The following federal tax provisions amended by the OBBBA stand out for their potentially significant state and local tax impact for taxpayers:
Section 164 SALT deduction
Background: The TCJA limited the individual taxpayer deduction for SALT payments to $10,000 a year ($5,000 for a married person filing a separate return). The limitation is scheduled to sunset on Dec. 31, 2025.
In response to the TCJA’s SALT deduction limitation, 36 states and New York City enacted pass-through entity tax (PTET) workarounds to ultimately recharacterize a nondeductible individual state income tax expense as a deductible state income tax expense for federal income tax purposes.
What’s new: The OBBBA raises the SALT limitation to $40,000 ($20,000, for married separate filers) beginning in 2025 through tax year 2029, after which the limitation reverts to $10,000 ($5,000 for married separate filers).
The cap increases by 1% each year after 2025 and before 2030. Additionally, for tax years 2025 through 2029, the limitation is phased down for taxpayers with modified adjusted gross income (AGI) over $500,000. Under this phasedown, the $40,000 limitation is reduced by 30% of the excess of modified AGI over the threshold amount, not to be reduced below $10,000.
The changes to the federal limitation notably exclude limits to state PTET deductions, which were proposed in a version of the bill that the House passed on May 22 and one of the Senate’s preliminary drafts of legislation.
SALT considerations: The increased federal limitation and income limits may require some owners to reconsider state PTET elections.
Also note that several of the state PTET provisions sunset as of Dec. 31, 2025, and therefore must be extended through legislation in those jurisdictions. As of the date of this article, those states include Illinois, Oregon and Utah. California recently enacted a five-year extension of its PTET and Virginia extended its PTET one year to Dec. 31, 2026.
Section 174 research & experimental expenses
Background: The TCJA amended section 174 to require taxpayers to capitalize their research and experimental (R&E) costs and amortizing the costs over a five-year or 15-year period for domestic and foreign costs, respectively, paid or incurred in tax years beginning after Dec. 31, 2021.
States mostly have conformed to this provision, although a small number have decoupled or have provided an election for current expensing of section 174 costs. For example, Alabama recently disconnected from the federal provision effective Jan. 1, 2024. Beginning in 2023, Mississippi offers an election for current expensing.
What’s new: The OBBBA returns the federal provision to immediate expensing of domestic research costs, while providing an ability to accelerate the remaining unamortized amounts of previously capitalized R&E costs incurred in 2022 through 2024. The provision is now permanent.
SALT consideration: Taxpayers will need to identify state differences in IRC conformity between states that will automatically conform to the new provisions and those that conform on a fixed-date basis and may not conform beginning in 2025.
Section 163(j) business interest expense
Background: For tax years beginning after 2021, the TCJA amended section 163(j) to impose a limit on the deductibility of business interest expense equal to the sum of business interest income or 30% of EBIT (earnings before interest and taxes).
It is also important to remember that the adjusted tax income (ATI) limitation was temporarily increased to 50% from 30% of ATI for the 2019 and 2020 tax years under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P.L. 116-136). Not all states adopted the provisions of the CARES Act as it relates to section 163(j).
What’s new: Under the OBBBA, the limitation or cap on business interest expense deductions allowed in the current year reverts to an amount based on the more favorable EBITDA approach (i.e., earnings before interest, taxes, depreciation, and amortization) for tax years beginning in 2025 and after, instead of the EBIT. The provision is permanent.
SALT consideration: There are many nuances to state conformity to section 163(j), including separate entity pro forma calculations and tracking state differences from federal carryforwards amounts due to different conformity periods of states for both TCJA and CARES Act limitations. Any changes to federal section 163(j) limitations that are not immediately (or ever) adopted by states will add more complexity and could affect the calculation of current state tax expense and deferred tax assets or liabilities.
Section 168(k) bonus depreciation
Background: The TCJA scheduled a phaseout of 100% bonus depreciation under section 168(k). For example, qualifying property receives 40% bonus depreciation for 2025, with the full phase out beginning in 2027.
Many, but not all, states have decoupled from federal bonus depreciation or provide a state specific rule for calculating bonus depreciation.
What’s new: The OBBBA reinstates 100% bonus depreciation for qualified property acquired and placed in service after Jan. 19, 2025. This provision is permanent. The bill also expands the scope of qualified assets to cover manufacturing buildings but only for buildings placed in service before Jan. 1, 2031.
SALT consideration: It is important for taxpayers to track federal and state basis differences in depreciable assets to determine current year state modifications as well as the impact of the future disposal of any depreciable assets.
Global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII)
Background: For tax years beginning on or after Dec. 31, 2017, the TCJA created two new categories of foreign income: GILTI and FDII.
GILTI is added to federal taxable income and is taxed at a rate of 10.5% for tax years ending on or before Dec. 31, 2025, as opposed to the federal corporate income tax rate of 21% that otherwise applies to federal taxable income. This is accomplished by allowing a 50% deduction of GILTI income from federal taxable income.
Additionally, under TCJA, FDII is effectively taxed a rate of 13.125% for tax years ending on or before Dec. 31, 2025, which is accomplished by allowing a 37.5% deduction from federal taxable income.
What’s new: The OBBBA makes both GILTI and FDII permanent, renaming GILTI to “net CFC tested income” (NCTI) and FDII to “foreign-derived deduction eligible income” (FDDEI). The OBBBA decreases the deduction rate for NCTI to 40% from 50%, and reduces the FDDEI deduction to 33.34% from 37.5%. The bill reduces the NCTI foreign tax credit (FTC) haircut to 10%, resulting in a 14% tax rate on both NCTI and FDDEI income for federal taxable income purposes.
SALT consideration: The changes to the calculation of NCTI and FDDEI (formerly GILTI and FDII) will impact the starting point of state corporate taxable income. Taxpayers must consider how states conform to or decouple from these international provisions of the IRC to determine the state tax impact of the federal changes enacted under the bill.
State conformity: Recalling the basics
States generally conform to the IRC based on rolling conformity or fixed-date conformity. About half the states use rolling conformity and half the states are based on a fixed-date—excluding minor nuances such as selective conformity to specific federal provisions.
Many states already concluded their legislative sessions prior to enactment of the OBBBA on July 4, 2025. As a result, several fixed-date conformity states already updated their conformity to the IRC for the 2025 tax year and are tied to a version of the IRC prior to the enactment of federal tax reform. Some states may be able to enact a subsequent update in the same legislative session, while others may not—especially those states with short legislative sessions.
Timing of the state responses
State legislatures have largely adjourned for the year, as about 80% are out of session. While several states remain in session all year, taxpayers should expect that most states will address conformity or decoupling to a new federal tax provision in 2026 legislative sessions. Some states may not pass relevant legislation by March 15, 2026, or April 15, 2026, requiring taxpayers to consider the state impact of federal tax reform on extensions and estimates.
States may also not be able to respond to new federal tax law for two or more years, similar to state responses to prior federal tax bills. The TCJA is a noteworthy recent example where a handful of states took several years to conform or address changes from the TCJA.
It is not anticipated that many, if any, adjourned legislatures will call special sessions specifically to address the new tax bill during the second half of the calendar year. However, note that during the 2025 legislative sessions, certain states proactively addressed in their conformity laws whether the state would conform to certain tax provisions enacted federally later during 2025. Understanding how and whether states conform to the provisions of the federal bill will require a careful analysis of state conformity laws.
Takeaways and planning ahead
The tax community at large expected the extension and modification of certain TCJA provisions, especially with focus on the so-called Big Three business provisions of bonus depreciation, R&E costs, and business interest expense.
Taxpayers should begin to prepare for potential disconnects between federal and state tax codes and to closely follow developments of material provisions. The 2026 state legislative sessions must be closely watched as states consider conforming, decoupling, or selective agreement with the federal changes.
Identifying where conformity could cause additional complexity, and therefore analysis, will help ensure a successful compliance season in 2026. Taxpayers should also anticipate that necessary state responses may not occur by original deadlines, requiring taxpayers to consider filing extensions.
State conformity must be analyzed on a state-by-state basis and may be different for individual and business taxpayers. While some states and localities automatically conform to changes to the IRC for income tax purposes, many others have fixed-date conformity or only conform to enumerated provisions. This analysis should be conducted even before the states address conformity.
