State income tax law changes for the first quarter of 2025

The following state tax developments were enacted during the first quarter of 2025 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended March 31, 2025. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.

Arizona updates conformity to the IRC

On Feb. 28, 2025, Arizona Gov. Katie Hobbs signed House Bill 2688 updating the state’s conformity to the IRC in effect as of Jan. 1, 2025. House Bill 2688 specifically adopts all retroactive effective dates of the IRC provisions, excluding any changes to the IRC enacted after Jan. 1, 2025.

Idaho updates conformity to the IRC

On Jan. 27, 2025, Idaho Gov. Brad Little signed House Bill 3 updating the state’s conformity to the IRC in effect as of Jan. 1, 2025. The change applies retroactively to tax years beginning on or after Jan. 1, 2025.

Idaho enacts corporate income tax rate reduction

On March 6, 2025, Idaho enacted House Bill 40 reducing the corporate income tax rate to 5.3% from 5.695%. The change applies retroactively to tax years beginning on or after Jan. 1, 2025.

Illinois adopts rule change regarding the net operating loss limitation

On Jan. 31, 2025, the Illinois Department of Revenue adopted administrative rule changes implementing the previously enacted legislation limiting  the net operating loss deduction for tax years 2024 through 2026.

Indiana adopts rules related to market-based sourcing legislation enacted in 2019

On Jan. 29, 2025, the Indiana Department or Revenue published administrative rule 45 IAC 3.1-1-55.5, which is updated for 2019 legislation that adopted market-based sourcing for receipts in lieu of the cost of performance methodology. The new rule provides guidance on the application of market-based sourcing of receipts for various transactions, in an effort to provide more certainty to taxpayers on most sales of services or intangibles. The rule refers to the Multistate Tax Commission’s (“MTC”) model regulations for market-based sourcing, however the department highlights instances where Indiana will depart from the MTC model regulations. The new rule also repeals the old rule for cost of performance sourcing.

Kentucky updates conformity to the IRC

On March 27, 2025, House Bill 775 became law without Kentucky Gov. Andy Beshear’s signature. House Bill 775 updates the state’s conformity to the IRC in effect as of Dec. 31, 2024­. The change applies retroactively to tax years beginning on or after Jan. 1, 2025. House Bill 775 clarifies that this change is exclusive of any amendments made to the IRC after Dec. 31, 2024, except for those that would extend provisions that would otherwise expire that were in effect as of Dec. 31, 2024.

Michigan court finds that receipts from the sale of electricity are sourced to Michigan

On Feb. 13, 2025, a Michigan Tax Tribunal held against a taxpayer’s request for a refund claim in a case involving the sourcing of receipts of electricity to a wholesaler for Michigan corporate income tax purposes. In MTT Docket No. 19-003783, CMS Energy Corporation filed refund claims for the 2013 through 2016 tax years. The taxpayer argued that receipts it earned from selling electricity in the wholesale market should be sourced to the ultimate destination of the recipient, rather than to the location of a title transfer to the wholesaler in Michigan. CMS claimed that sales from of electricity or gas are in Michigan if the contract for the sale requires the gas or electricity to be shipped or delivered to a purchaser in the state based on the ultimate destination of where ethe property comes to rest. The tribunal disagreed, finding that the receipts must be sourced to the location of the title transfer because once the electricity enters the transmission grid, it is not possible to determine where the electricity comes to rest or ultimately is used by the end customer.

Michigan R&D credits

On Jan. 13, 2025, Michigan Gov. Gretchen Whitmer signed several bills into law that re-establish the research and development (R&D) tax credit. Effective for tax years beginning on or after Jan. 1, 2025, Michigan allows a credit against the state’s corporate income and withholding tax for qualified R&D expenses incurred within Michigan. The tax credit is calculated at 3% of a corporation’s qualifying R&D expenses incurred during the calendar year up to the base amount. "Base amount" is the average annual amount of R&D expenses incurred during the three calendar years immediately preceding the calendar year ending with or within the tax year for which a credit is claimed. The credit is calculated differently for businesses with 250 or more employees (large businesses) or those with less than 250 employees (small businesses). To the extent that a taxpayer incurs eligible R&D expenses greater than the base amount, the credit increases to 10% and 15% for large and small businesses, respectively, for the portion of eligible expenses above the base amount. Additionally, the maximum credit allowed is $2 million per year for a large business and $250,000 per year for a small business.

The credit is capped at $100 million per year for all taxpayers, and taxpayers must submit a claim for the R&D credit by March 15 of the calendar year following the period for which the credit is claimed. One exception is a claim for credits within the 2025 tax year are due by April 1, 2026. An additional credit is available for qualified R&D expenses that are incurred in collaboration with a Michigan research university pursuant to a written agreement.

New York receipts threshold for 2025 corporate tax filings remains unchanged

The New York Department of Taxation and Finance announced that the thresholds at which a corporation and unitary group are deemed to be deriving receipts from activity in New York State and in the Metropolitan Commuter Transportation District (MCTD) for the franchise tax and the Metropolitan Transportation Authority (MTA) surcharge will remain at $1,283,000 for the 2025 tax year (periods beginning before Jan. 1, 2026).

North Dakota issues guidance on Voluntary Disclosure Program

The North Dakota Office of the State Tax Commissioner provided updated guidance on its Voluntary Disclosure Program. The guidance explains that the look-back period for the program generally is a period of three years (not including the current year if the original or extended due date has not passed). However, the length of the look-back period will depend on the disclosures in the taxpayer’s application. Additionally, in certain “circumstances of limited presence,” North Dakota will consider entering into an agreement for prospective compliance. The Voluntary Disclosure Program is available to eligible taxpayers that have conducted business activities in North Dakota or have collected but not remitted sales tax in North Dakota for eligible tax types including income, withholding, and sales and use taxes. An eligible taxpayer is one that has not filed any tax returns or made any payments for the tax types in the program, and that has not previously been contacted by the Office of the State Tax Commissioner or the MTC.

Ohio updates conformity to the IRC

On March 7, 2025, Ohio Gov. Mike DeWine signed House Bill 14 updating the state’s conformity to the IRC. The state’s conformity now includes amendments made to the IRC through March 15, 2023. For taxpayers with a tax year end after March 15, 2023, and prior to March 7, 2025, House Bill 14 allows taxpayers to elect to apply the provisions of the IRC in effect for federal tax purposes for that tax year end.

South Dakota updates conformity to the IRC

On Feb. 18, 2025, South Dakota Gov. Larry Rhoden signed House Bill 1028 updating the state’s conformity to the IRC for purposes of the franchise tax imposed on banks and financial institutions. Effective July 1, 2025, South Dakota will conform to the IRC in effect on Jan. 1, 2025.

Texas update on franchise tax credits

On Jan. 3, 2025, the Tax Policy Division of the Texas Comptroller’s Office issued Tax Policy Division Memorandum 202501001M that provides guidance on the proper order for applying franchise tax credits and carryforwards when the entity has more than one credit or carryforward available. The guidance is intended to help taxpayers optimize available credits against the franchise tax.

Utah enacts corporate income tax rate reduction

On March 26, 2025, Utah Gov. Spencer Cox signed House Bill 106 reducing the corporate income tax rate to 4.5% from 4.55%. The change applies retroactively to tax years beginning on or after Jan. 1, 2025.

Utah makes changes to apportionment for financial institutions

On March 25, 2025, Utah Gov. Spencer Cox signed Senate Bill 219 which makes changes to apportionment for financial institutions. Senate Bill 219 grants the Utah State Tax Commission with rule making authority to establish the sales to be included in the sales factor for financial institutions. The legislation specifically provides that in calculating the sales factor of a financial institution:

• the numerator may not include sales from investment activities and assets and trading activities and assets; and
• the denominator must include sales from investment activities and assets and trading activities and assets.

Senate Bill 219 also provides various definitions related to the sales factor for financial institutions. The changes apply to tax years beginning on or after Jan. 1, 2026.

West Virginia updates conformity to the IRC

On Feb. 24, 2025, West Virginia Gov. Patrick Morrisey signed House Bill 2025 updating the state’s conformity to the IRC. West Virginia will conform to the IRC, including any amendments made to the IRC after Dec. 31, 2023, but prior to Jan. 1, 2025. Amendments made to the IRC on or after Jan. 1, 2025, will have no effect for West Virginia corporate income tax purposes. The change applies retroactively to tax years beginning on or after Jan. 1, 2025.