Alabama issues guidance on treatment of Internal Revenue Code (IRC) section 174 expenses
On Sept. 11, 2025, the Alabama Department of Revenue issued guidance clarifying the treatment of research and experimental (R&E) expenses under section 174 for Alabama corporate income tax purposes. Previously this year, Alabama decoupled from the federal treatment of section 174 as enacted by the Tax Cuts and Jobs Act (TCJA) for tax years beginning on or after Jan. 1, 2024. Specifically, under Alabama law, section 174 expenses may be deducted in the year they are paid or incurred, or treat the expenses according to the federal rules for section 174 prior to the enactment of the TCJA.
According to the state’s guidance, a taxpayer may claim a full deduction for current-year R&E expenses on the Alabama corporate tax return. However, taxpayers must add back to Alabama taxable income the amount of the previously capitalized and amortized deduction on the federal return each year until the amount is fully amortized for federal purposes.
The guidance also clarifies the state’s treatment of the federal election under section 174A(f)(2), which allows taxpayers to deduct previously capitalized and unamortized amounts from the 2022-2024 tax years, either in full in 2025 or ratably between 2025 and 2026. To the extent a taxpayer elects to catch-up the remaining unamortized deductions, the taxpayer must add the deductions back to Alabama taxable income to the extent they were previously deducted on the 2024 Alabama corporate income tax return. Lastly, the notice provides guidance on where to report the relevant additions and subtractions on the Alabama corporate income tax return.
For more detail on the Alabama tax law changes, see our tax alert, Alabama enacts suite of taxpayer-friendly changes.
California provides guidance on certain deferred intercompany stock account (DISA) transactions
On July 30, 2025, the California Franchise Tax Board (FTB) issued Legal Ruling 2025-01 that addresses the treatment of DISA in IRC section 355 (nonrecognition) transactions when a corporation distributes stock to a corporation in its combined group. The ruling states that taxpayers in the fact pattern described in the legal ruling may use basis to reduce or eliminate the DISA when stock is distributed to a combined group member in section 355 nonrecognition transactions.
California issues guidance on market-based sourcing for sales other than tangible personal property
On Aug. 27, 2025, California adopted finalized regulations making changes to market-based sourcing rules for sales other than tangible personal property for tax years beginning on or after Jan. 1, 2026. Modifications to the California Code of Regulations section 25136-2 include new default rules and presumptions for identifying where the benefit of a service is received, definitions and sourcing rules for asset management services and a definition of professional services with a special rule for large-volume providers. Additionally, the amendment includes new sourcing rules for certain government service contracts and clarified definitions for sourcing receipts from sales of marketable securities.
For more detail on the amendments to the California sourcing regulations, please see our tax alert, California amends sourcing guidance for service providers.
Colorado enacts corporate income tax changes in response to the OBBBA
On Aug. 28, 2025, Colorado Gov. Jared Polis signed several tax bills aimed at reducing the fiscal impact of the One Big Beautiful Bill Act (OBBBA, P.L. 119-21). Under House Bill 25B-1002, Colorado makes several changes to the taxation of income from foreign subsidiaries. Specifically, the bill expands the list of foreign (non-U.S.) jurisdictions that are presumed to be tax havens to include Hong Kong, Ireland, Liechtenstein, the Netherlands and Singapore. House Bill 25B-1002 also decouples from the federal deduction for foreign-derived deduction eligible income (FDDEI). With regard to the treatment of the federal foreign tax credit, the bill expands the subtraction for foreign dividends by removing a current exclusion to the subtraction for dividends from jurisdictions presumed to be locations of tax avoidance. These changes are effective for tax years beginning on or after Jan. 1, 2026.
For more information on the Colorado tax law changes, please read our article, Colorado acts to counter the OBBBA.
The District of Columbia delays net deferred tax liability deduction
On Sept. 4, 2025, Mayor Muriel Bowser signed B26-0265, which delays the date when a combined group may start taking a deduction for a net deferred tax liability. Eligible combined groups whose net tax liability increased as a result of the District of Columbia’s change to a mandatory combined reporting regime are allowed a deduction equal to the total increase in the taxpayer’s net deferred tax liability, to be taken ratably over a period of seven years. Initially, taxpayers who filed combined reports beginning in the 2011 tax year were scheduled to begin taking a deduction on the 2025 tax return. B26-0265 delays the deduction until the first seven tax years beginning after Dec. 31, 2029. B26-0265 is subject to a 30-day review period by Congress before the law takes effect.
Illinois provides guidance on the tax amnesty program
On Sept. 25, 2025, the Illinois Department of Revenue issued guidance on its tax amnesty program that will run from Oct. 1, 2025 through Nov. 17, 2025. For eligible tax types and taxpayers, the program offers a full waiver of penalties and interest for past due tax liabilities from the periods ending after June 30, 2018 and prior to July 1, 2024.
Illinois adopts changes to apportionment regulations for financial organizations
On Sept. 12, 2025, the Illinois Department of Revenue adopted amended regulations regarding the apportionment for financial services organizations. The changes reflect previously enacted legislative changes for investment income for tax years beginning on or after Dec. 31, 2024. Effective for tax years ending on or after Dec. 31, 2024, receipts from investment assets and activities and trading assets and activities are generally sourced to Illinois if earned in Illinois or otherwise attributable to Illinois’ marketplace. The amended regulations provide additional guidance on how to source such receipts to Illinois and clarifies the definition of a financial organization for corporate income tax purposes. In determining whether a business is considered a small loan company, the amended regulations increase the limit to include entities making loans not exceeding $40,000, up from $25,000.
Maine updates its conformity to the IRC
On July 1, 2025, Maine Gov. Janet Mills signed bill LD 48 updating the state’s conformity with the IRC to Dec. 31, 2024 from Dec. 31, 2023. The change applies to tax years beginning on or after Jan. 1, 2024.
Maryland releases report analyzing the state impact of the OBBBA
On Sept. 5, 2025, the Comptroller of Maryland released a 60-day Report, with an initial analysis of the state income tax impact of relevant federal provisions of the OBBBA. The purpose of the report is to understand the impact of the federal tax changes under the OBBBA and determine whether Maryland will decouple from changes enacted to the IRC on July 4, 2025. While Maryland generally conforms to the IRC on a rolling basis, the state automatically decouples from federal provisions to the extent that the federal amendments impact the calculation of federal taxable income for: 1) any taxable year that begins in the calendar year in which the federal amendment is enacted, or 2) for any fiscal year preceding the calendar year for which the federal amendment is enacted. There is an exception to the decoupling if the comptroller determines that the impact of an amendment to the IRC on Maryland state would be less than $5 million for 1) the fiscal year that begins during the calendar year in which the amendment is enacted; or 2) any fiscal year that precedes the calendar year in which the amendment is enacted.
Based on the 60-day report, three amendments of the OBBBA trigger automatic decoupling for Maryland corporate income purposes due to revenue impacts, including:
- Full expensing of domestic R&E costs
- The new bonus depreciation allowance for qualified production property under section 168(n)
- The modification of the business interest deduction limitation calculation under section 163(j)
Decoupling from these provisions is temporary, effective for tax years beginning on or after Jan. 1, 2025. Maryland will conform to these provisions of the OBBBA for tax years 2026 and beyond unless the state takes additional legislative action.
Minnesota court finds that pharmacy benefit management services are received at the ultimate customer’s location in Minnesota
On Sept. 24, 2025, the Minnesota Supreme Court upheld the tax court’s decision in Humana MarketPoint, Inc. v. Commissioner of Revenue, Minn. S. Ct., Dkt. No. A25-0058 (‘Humana’). In Humana, the taxpayer earned receipts from pharmacy benefit management services provided to its direct business customer (a related insurance company). On its originally filed Minnesota corporate income tax return, Humana sourced the receipts from the services based on the ratio of the insurance company’s plan members in Minnesota to plan members everywhere. Humana filed refund claims instead, sourcing the receipts from services to the headquarter location of its direct customer, citing Minn. Stat. Section 290.191, Subd. 5(j). The Minnesota Department of Revenue denied the refund claims and the tax court found in favor of the department that the language of the relevant sourcing statute did not preclude the finding that the service could be ‘received’ based on a look-through approach to the customer’s customer. The Supreme Court affirmed the summary judgment in favor of the Commissioner.
Missouri enacts capital gain deduction
On July 10, 2025, Missouri Gov. Mike Kehoe signed House Bill 594, which allows a subtraction for capital gains reported on a federal corporate income tax return. The allowable deduction for Missouri corporate income tax purposes is 100% of the capital gain included in federal taxable income, and the deduction is not allowed until the Missouri individual income tax rate reaches a certain threshold. Specifically, the deduction is allowed for corporate income tax purposes for tax years beginning on or after Jan. 1 of the year immediately following the first tax year in which the top individual income tax rate is reduced to 4.5% or less.
For more detail on the capital gains deduction, see our tax alert Missouri eliminates capital gains deduction.
Trade association files suit in New Jersey challenging rules on P.L. 86-272
On Sept. 12, 2025, a trade associate representing remote sellers filed suit with the New Jersey Tax Court (Case No. 010021-2025) challenging the state’s recently adopted rules that limit the protections of P.L. 86-272 for certain internet activities of remote sellers as a violation of the federal law. On June 16, 2025, New Jersey formally adopted rules classifying certain ‘internet activities’ as exceeding the protections of P.L. 86-272 consistent with the Multistate Tax Commission’s (MTC) guidance released in 2021. A similar case is pending in New York.
For more information on New Jersey’s adoption of P.L. 86-272 rules impacting remote sellers, please see our tax alert, New Jersey adopts MTC revised guidance on P.L. 86-272.
Philadelphia Business Income & Receipts Tax (BIRT) clarification
The City of Philadelphia Department of Revenue issued a policy clarification that will help businesses that must file and pay the BIRT tax for the first time in tax year 2025. This filing will be due April 2026. If a business did not file BIRT in the prior three years because their Philadelphia sales were below $100,000, they will be considered a ‘new business’ in the city. The city eliminated the $100,000 BIRT exemption in 2025. Under this policy, ‘new businesses’ will not be required to make an estimated payment when they file their 2026 return–they will only pay tax on 2025 activity. In 2027, these businesses will also have the option of paying their second-year estimate in quarterly installments instead of paying the full estimate on April 15 for the next tax year. The department issued this guidance to ease the burden on small businesses that will now be required to pay BIRT on a go-forward basis.
Rhode Island enacts 2026 budget bill, expanding definition of net income
On June 29, 2025, Rhode Island enacted House Bill 5076 without the governor’s signature. The bill amends the definition of net income for corporate tax purposes. For tax years beginning on or before Jan. 1, 2025, ‘net income’ will include any income, deduction or allowance that would have been subject to federal income tax if not excluded by the OBBBA or any similar Congressional enactment. House Bill 5076 also provides that the enactment of the OBBBA and or any similar Congressional enactment, or changes to IRS forms, regulations or processing that take effect currently or within six months of the beginning of the next tax year, shall be considered as grounds for Rhode Island to issue emergency rules and regulations. As a result, House Bill 5076 decouples Rhode Island from federal changes of the OBBBA for tax years beginning on or before Jan. 1, 2025 (including calendar year 2025).
Rhode Island issues guidance on the treatment of IRC section 174 expenses
On Sept. 12, 2025, the Rhode Island Department of Revenue issued guidance clarifying the treatment of R&E expenses under section 174 for Rhode Island corporate income tax purposes for the 2024 and 2025 tax years. As noted above, Rhode Island previously paused its rolling conformity to federal amendments to the IRC, including the treatment of R&E expenses under section 174. The guidance clarifies that for the 2025 tax year, taxpayers that currently deduct R&E expenses, eligible R&E expenses for federal purposes ‘will be required to amortize the expenditures on the Rhode Island return.’ Additionally, the guidance clarifies that the state will decouple from the federal election for taxpayers to deduct any remaining unamortized section 174 expenses from tax years 2022 through 2024. As a result, the taxpayer must add these deductions back to Rhode Island taxable income. The notice also provides guidance on new forms that must be included with the Rhode Island corporate income tax return, to report the Rhode Island section 174 modifications.
Texas provides guidance on the treatment of sales-type lease
On July 31, 2025, the Texas Comptroller of Public Accounts issued Memorandum Decision 202507015M that states that for the purpose of qualifying for the reduced franchise tax rate and calculating eligible expenses for the cost of goods sold (COGS) deduction, the terms ‘sale,’ ‘selling,’ and ‘sold’ include transactions that are classified as sales-type leases under Financial Accounting Standard (FAS) 13. Thus, sales-type lease receipts will be considered when determining eligibility for the reduced tax rate and determining the COGS deduction.
