Alabama decouples from section 174
On May 14, 2025, Gov. Kay Ivey signed House Bill 163, retroactively decoupling from section 174 as amended by the Tax Cuts and Jobs Act (TCJA). Effective for tax years beginning on or after Jan. 1, 2024, Alabama allows taxpayers to deduct research and experimental expenses in the current year, or to treat such expenses pursuant to the provisions of section 174 that were in effect prior to the TCJA amendments. For federal corporate income tax purposes, taxpayers are required to capitalize and amortize such expenses over a period of five or 15 years for domestic and foreign expenses, respectively.
For more detail on House Bill 163 and other changes enacted in Alabama during the second quarter of 2025, please read our article, Alabama enacts suite of taxpayer-friendly changes.
Arkansas enacts several corporate income tax changes, including market-based sourcing
Market-based sourcing
On April 16, 2025, Arkansas Gov. Sarah Huckabee Sanders signed Senate Bill 567 adopting market-based sourcing provisions in lieu of the current cost-of-performance methodology for receipts other than tangible personal property for purposes of the Arkansas corporate income tax sales factor. The change to market-based sourcing is effective for tax years beginning on or after Jan. 1, 2026. Senate Bill 567 allows certain corporations that provide telecommunications services, internet access services and some television services to elect to continue using the cost-of-performance method until Dec. 31, 2035.
Economic nexus threshold
For tax years beginning on and or Jan. 1, 2026, Senate Bill 567 adopts an economic nexus threshold providing that non-resident corporations without a physical presence in the state will be subject to the state’s corporate income tax if Arkansas-sourced receipts exceed $250,000 annually.
Alternative apportionment
Additionally, Senate Bill 567 adopts the current references in the 2014 amended Article IV of the Multistate Tax Compact (MTC). These changes include replacing provisions related to ‘business income’ with ‘apportionable income’ and ‘receipts factor’ to ‘sales factor,’ as well as adopting clarifying rules addressing how either taxpayers or the state can utilize alternative apportionment.
For more detail on Senate Bill 567, please read our article, Arkansas adopts market-based sourcing and corporate nexus threshold.
California enacts changes to apportionment for financial institutions
On June 27, 2025, California Gov. Gavin Newsom signed Senate Bill 132, a budget trailer bill, which among other changes, requires the use of a single sales factor apportionment formula for financial institutions for tax years beginning on or after Jan. 1, 2025. Prior to the 2025 tax year, businesses with more than 50% of gross business receipts derived from qualified banking and financial activities are required to apportionment income using a three-factor apportionment formula. The change applies only to financial institutions, as non-financial institutions already are required to use a single sales factor to apportion income for California corporate income tax purposes.
Connecticut extends surtax on certain corporations and makes other corporate income tax changes
On June 30, 2025, Connecticut Gov. Ned Lamont signed House Bill 7287, the state’s two-year budget, which makes several changes to the corporate income tax.
Extends the 10% surtax on certain corporations
House Bill 7287 extends the 10% surtax currently in place for tax years ending prior to Jan. 1, 2026. The surcharge applies to corporate taxpayers that have greater than $250 in Connecticut corporate income tax and either (1) at least $100 million in annual gross income; or (2) file a corporate income tax return on a combined or unitary basis. House Bill 7287 would extend the corporate tax surcharge though periods ending prior to Jan. 1, 2029.
Tax cap elimination
For tax years beginning on or after Jan. 1, 2025, the bill eliminates the provision that a combined group’s tax on a combined unitary basis cannot exceed its tax on a nexus combined basis by more than $2.5 million (the Aggregate Maximum Tax).
Net operating loss (NOL) deduction adjustments for certain taxpayers
House Bill 7287 eliminates an alternative rule for certain combined groups that had more than $6 billion in Connecticut NOLs for tax years prior to 2013. Such taxpayers were eligible to make an election in the 2015 tax year to forego 50% of their NOL carryforward in exchange for the ability to utilize their remaining NOL carryforward to fully offset their state tax liability, up to $2.5 million in Connecticut corporate income tax annually (before the surcharge or application of credits). Connecticut otherwise limits taxpayers from offsetting more than a 50% of state taxable income with NOLs. Taxpayers electing this alternative rule are only subject to the 50% limitation once all NOL carryforwards from years prior to 2015 have been utilized.
The bill eliminates the alternative NOL rule and requires the taxpayer to recalculate their pre-2015 NOL carryforward as if the taxpayer was not required to give up 50% of the NOL carryforward. Under House Bill 7287, the taxpayer may apply such NOLs, subject to the 50% standard limitation and original carryforward period for tax years beginning on or after Jan. 1, 2025.
The bill also provides relief from interest on any underpayment of estimated tax caused by the changes to the alternative NOL rule or the elimination of the $2.5 million cap described above.
Refund value for research and development (R&D) or research and experimentation (R&E) tax credits
The bill provides for an increase from 65% to 90% of the total value of the unused R&D tax credits for a qualifying small biotechnology company that earns less than $70 million in sales.
Florida updates conformity to the IRC
On June 30, 2025, Florida Gov. Ron DeSantis signed House Bill 7031, updating the state’s conformity to the IRC. Retroactive for tax years beginning on or after Jan. 1, 2025, ‘Internal Revenue Code’ means the IRC as amended and in effect on Jan. 1, 2025.
Georgia updates conformity to the IRC
On May 14, 2025, Georgia Gov. Brian Kemp signed House Bill 290 updating the state’s conformity date to the IRC. For tax years beginning on or after Jan. 1, 2024, Georgia conforms to the IRC as enacted on or before Jan. 1, 2025. For any relevant provisions that were enacted federally, but not yet effective as of Jan. 1, 2025, the provisions will be effective for Georgia corporate income tax purposes on the same date they became effective for federal tax purposes.
Georgia enacts corporate income tax rate reductions
On April 15, 2025, Georgia Gov. Brian Kemp signed House Bill 111, reducing Georgia’s corporate income tax rate from 5.39% to 5.19%, applicable for taxable years beginning on or after Jan. 1, 2025. House Bill 111 also reduces the corporate income tax rate by 0.10% each year for tax periods beginning on or after Jan. 1, 2026, subject to certain revenue thresholds being met, until the rate reaches a 4.99% corporate income tax rate.
Georgia makes updates to appeals process
On May 14, 2025, Georgia Gov. Brian Kemp signed Senate Bill 141, which makes changes to the state’s process for appeals and protests. Notably, Senate Bill 141 extends the time for a taxpayer to contest any assessments or any claim for refund that has been denied, by filing a protest within 45 days, an increase from 30 days, from the date of the notice of denial or assessment. The bill also clarifies that the final determination date for federal income tax adjustments that must be reported to the state.
Hawaii updates conformity to the IRC
On May 29, 2025, Hawaii Gov. Josh Green signed Senate Bill 1464, updating the state’s conformity to the IRC. For all taxable years beginning after Dec. 31, 2024, ‘Internal Revenue Code’ means the IRC as amended and in effect as of Dec. 31, 2024.
Illinois enacts several corporate income tax changes, including a new amnesty program
On June 16, 2025, Illinois Gov. JB Pritzker signed House Bill 2755, the state’s 2026 fiscal year budget, with significant changes to the corporate income tax as described below. The relevant provisions are effective for tax years ending on or after Dec. 31, 2025.
Taxation of global intangible low-taxed income (GILTI)
The dividends received deduction (DRD) for GILTI under IRC section 951A is reduced from 100% to 50%. The provision that disallows a deduction from Illinois taxable income for the amount of the GILTI deduction under section 250(a)(1)(B)(i) remains unchanged.
Income apportionment changes
Under Senate Bill 2755, Illinois will adopt the ‘Finnigan’ method for determining the sales factor numerator, meaning that the numerator will include the Illinois-sourced sales from each member of the unitary group, regardless of whether the member has nexus in the state. For purposes of the ‘throwback rule’, in determining whether a combined group member is taxable in another state, the “taxpayer shall be considered taxable in any state in which any member of its unitary business group is considered taxable.”
Interest and intangible expense addback changes
Currently, Illinois requires the addition of certain interest and intangible expenses paid or accrued to a related foreign party with 80% or more of its total business activity outside the U.S. during the tax year. However, several exceptions apply to the addback requirement. Under Senate Bill 2755, two exceptions to the addback rule are repealed:
- Subject to tax: No longer excluded if the expense is paid or accrued to a related party to the extent that the party receiving the income was subject to a net income tax in a foreign country or another state jurisdiction.
- Not for purposes of tax avoidance: No longer excluded even if the expense is paid or accrued to a related party in a transaction that is at arm’s length and not for purposes of tax avoidance.
Capital gains and losses from the sale of certain pass-through entities
House Bill 2755 provides that gains and losses from sales or exchanges of an S corporation or from an interest in a partnership, other than an investment partnership, are allocated to Illinois if the pass-through entity is taxable in Illinois. The gain and losses are allocated in proportion to the average of the pass-through entity’s Illinois apportionment factor in the year of the sale or exchange and the two tax years immediately preceding the year of the sale or exchange.
Tax amnesty program
Pursuant to Senate Bill 2755, Illinois will run a tax amnesty program from Oct. 1, 2025, through Nov. 15, 2025, covering taxes due after June 30, 2018, and before July 1, 2024. Eligible participants will receive penalty and interest waivers and will not be subject to civil or criminal prosecution. Refunds from tax periods covered under the amnesty program will be allowed for unrelated issues or overpayments due to estimated liabilities.
For more detail on House Bill 2755, please read our article, Illinois enacts significant tax bill to raise revenue.
Indiana establishes amnesty program for all tax types
On May 6, 2025, Indiana Gov. Mike Braun signed House Bill 1001, establishing an amnesty program for taxpayers with unpaid tax liabilities for specific tax types that are due prior to Jan. 1, 2023. The amnesty provisions are effective as of July 1, 2025, with a period to be determined by the Department of Revenue. The amnesty program must conclude by Jan. 1, 2027, or if earlier, the date set by the department. Notably, the amnesty program will provide a waiver of both interest and penalties for eligible taxpayers. House Bill 1001 allows the department to adopt administrative rules to establish the amnesty program.
Iowa establishes new R&D tax credit
On June 6, 2026, Iowa Gov. Kim Reynolds signed Senate File 657 which establishes a new R&D tax credit effective for tax years beginning on or after Jan. 1, 2026. The bill repeals the research activities tax credit that was effective for prior periods and establishes a new R&D tax credit specific to certain qualifying industries. The new R&D tax credit will be administered by the Iowa Economic Development Authority. Eligible taxpayers that incur qualified research expenses in Iowa for tax years beginning on or after Jan. 1, 2026, may be eligible to claim the R&D credit.
The research expenses must be incurred in Iowa and meet the definition of research expenses under section 41. A qualified taxpayer may be eligible for a credit of up to 3.5% of relevant research expenses, and the total amount of credits available in a fiscal year for all taxpayers will not exceed $40 million.
Senate File 657 allows a taxpayer the option to make the R&D credit refundable to the extent that the available credit is greater than the taxpayer’s Iowa corporate income tax liability, or to apply the excess credit to the following tax period. The R&D credit may be claimed over a five-year period.
For more information, please read our article, Iowa reshapes R&D tax credit program.
Kansas enacts single sales factor apportionment and market-based sourcing
On April 24, 2025, Kansas Gov. Laura Kelly signed House Bill 2231 making several changes to the corporate income tax for tax years beginning after Dec. 31, 2026, as described in more detail below.
Single sales factor
House Bill 2231 adopts a single sales factor apportionment for tax years beginning after Dec. 31, 2026. Financial institutions will use a single receipts factor and alcohol manufacturers will continue to use the three-factor apportionment formula.
Market-based sourcing
House Bill 2231 also enacts market-based sourcing for receipts other than tangible personal property and provides that sales other than tangible personal property are sourced to Kansas if the taxpayer’s market for the sale is in Kansas. The bill also provides a description of when various receipts from services, intangibles, and items of other income, such as interest from loans and payments of dividends, have a market for the sale within the state. Certain communications service providers may continue to source sales other than sales of tangible personal property, under a costs-of-performance methodology.
Income tax deduction for deferred tax impact
The bill creates an income tax deduction meant to offset the impact to net deferred tax assets and liabilities as a result of the change to single sales factor apportionment and market-based sourcing. A deduction may be available to taxpayers, where the net change results in:
- An aggregate increase in a net deferred tax liability (DTL).
- An aggregate decrease in a net deferred tax asset (DTA).
- A conversion from a net DTA to a net DTL.
Taxpayers wishing to claim the deduction must submit an application to the Kansas Secretary of Revenue by July 1, 2027, and if approved, the deduction is claimed ratably over a ten-year period beginning with tax periods on or after Jan. 1, 2035.
Contingent corporate income tax rate reductions
House Bill 2231 allows the secretary to reduce the corporate income tax rate for tax years beginning after Dec. 31, 2028, contingent on meeting certain revenue thresholds. The secretary must publish any rate reductions by Oct. 1, 2028, to be effective for tax years beginning after Dec. 31, 2028. House Bill 2231 addresses contingent reductions to the regular corporate income tax rate, but also see below for our summary of contingent rate reductions to the corporate surtax enacted under Senate Bill 269.
For more detail on House Bill 2231, please read our article, Kansas enacts corporate income tax reform legislation.
Kansas enacts contingent corporate tax rate reductions
Senate Bill 269 became law with the Kansas legislature overriding Gov. Laura Kelly’s veto on April 10, 2025. The bill allows for contingent rate reductions to the corporate surtax if the revenue exceeds a certain threshold and a certain amount in the budget stabilization fund is maintained. Individual income tax rates will first be reduced until the maximum individual rate reaches 4%, at which point corporate surtax rates will be reduced when the conditions are met. Kansas currently imposes a corporate income tax rate of 3.5% with a surtax of 3.0% on corporations with more than $50,000 in Kansas apportioned taxable income. Pursuant to Senate Bill 269, the surtax would be reduced until the combined rate is only 4.0%, compared to the current tax rate of 6.5%.
Maine addresses the state’s conformity to the IRC
On June 17, 2025, Maine Gov. Janet Mills signed House Bill 144 addressing the state’s conformity to the IRC. The bill provides the governor with authority to adjust Maine tax law in response to federal law changes that are enacted. Specifically, if the legislature has not had the opportunity to formally update the state’s conformity to the IRC to respond to federal tax reform prior to the time the Maine Department of Administrative and Financial Services must begin processing corporate income tax returns, the governor may make temporary adjustments to Maine tax law to address the impact of federal tax reform on the state’s annual revenue.
The temporary adjustments must be based on a report provided by the department that analyzed the anticipated state corporate income tax impact of the federal tax law changes. The authority granted to the governor to make such changes is contingent on the state’s legislature enacting legislation that addressed the federal tax law changes at a later date. House Bill 144 also provides detail as to the information the state is required to publish regarding the tax law changes and any relevant filing instructions, as well as certain options available to the taxpayer. House Bill 144 is effective 90 days after the last day of the legislature’s first special session.
Minnesota enacts omnibus tax bill
On June 14, 2025, Minnesota Gov. Tim Waltz signed House File 9 which, among other things, makes the state’s R&D credit partially refundable for tax years beginning on or after Dec. 31, 2024. To the extent that the tax credit available exceeds the amount allowed to be utilized in a taxable year, the taxpayer may make an irrevocable election to receive a refund of the credit. The amount of credit that may be refunded is equal to the refundability rate multiplied by the excess credit available for the current year. The refundability rate is:
- For tax years beginning after Dec. 31, 2024, the rate is 19.2%, and prior to Jan. 1, 2026.
- For tax years beginning after Dec. 31, 2025, the rate is 25%, and prior to Jan. 1, 2028.
- For tax years beginning after Dec. 31, 2027, the refundability rate is the lesser of 25%, or the rate at which the Department of Revenue determines the refunds would be approximately $25 million or less.
The Minnesota Department of Revenue is required to determine the refundability rate by Dec. 15, 2027, and is also required to publish the refundability rate on the department’s website. Any remaining portion of the R&D credit that cannot be utilized or converted to refundable in the current year is allowed as a carryover to the next taxable year.
New Hampshire enacts tax amnesty program
On June 27, 2025, New Hampshire Gov. Kelly Ayotte signed House Bill 2, establishing an amnesty program for taxpayers with unpaid tax liabilities for specific tax types that are unpaid and due prior to June 30, 2025. The amnesty program will be available between Dec. 1, 2025 and Feb. 15, 2026. The amnesty program will provide a waiver of penalties, as well as “interest exceeding 50 percent of the applicable interest” for eligible taxpayers.
New Jersey adopts proposed regulations, including guidance on P.L. 86-272
New Jersey adopted final regulations impacting the corporate income tax and combined reporting regroups. The regulations implement rules related to changes to the New Jersey state corporate income tax regime that was enacted in 2023. The rules create an economic nexus threshold for corporate income tax and adopt rules around the sharing and utilization of NOLs between members of the same combined reporting group. Notably, the regulations formally adopt several elements of the MTC’s updated guidance on P.L. 86-272, primarily establishing that, on a prospective basis, certain internet activities within the state will create corporate income tax nexus for taxpayers. The new rules were published in the June 16, 2025, edition of the New Jersey Register.
New York court upholds state’s position on P.L. 86-272, but disallows retroactive application
On April 28, 2025, a New York Supreme Court found in American Catalog Mailers Associations vs. the Dept. of Taxation and Finance (N.Y. Sup. Ct., Albany County) that the state’s regulations limiting the protections of P.L. 86-272 did not preempt federal law. The New York Department of Finance Taxation and Finance previously issued regulations in December 2023, defining which activities were not protected by P.L. 86-272, including a number of internet related activities that would go beyond mere solicitation of orders, in alignment with MTC guidance. As part of the combined reporting regulations, the new P.L. 86-272 rules were made retroactive to the 2015 tax year, when New York first adopted a mandatory combined reporting tax regime for unitary businesses. The American Catalog Mailers Association (ACMA) sued the department, claiming that the state did not have the authority to further limit the protection of P.L. 86-272, which is a federal law under the authority of U.S. congress and not state legislatures or taxing authorities.
With regard to the technical merits of the claim, the court ruled that the state is not limited in issuing regulations that define which activities are ancillary or not to the solicitation of sales, and thus whether those activities receive the protection of P.L. 86-272. However, the court found against the department with regard to the retroactivity of the regulations. In its ruling, the court held that a nine-year retroactive period would violate the due process of taxpayers, as they were not provided sufficient notice to comply with the retroactive regulations. As a result, the court ruled that while the P.L. 86-272 regulations issued by New York were valid, such regulations may only apply as of the date the regulations were issued on Dec. 27, 2023.
Either party may choose to appeal the court’s decision, and similar cases are pending in various statuses in other states.
Philadelphia reduced tax rate for the Business Income and Receipts Tax (BIRT)
Philadelphia enacted Bill No. 250199, reducing the BIRT rate on receipts and net income for tax years 2025 through 2038. The receipts tax rate will decrease from 1.415 mills in 2024 to 0 mills by 2038. The net income tax rate will decrease from 5.81% in 2024 to 2.80% starting in 2038. The rate reductions begin with the 2025 tax year, and the $100,000 exclusion for taxable receipts is eliminated also as of the 2025 tax year.
South Carolina updates conformity to the IRC
On May 22, 2025, Gov. Henry McMaster signed Senate Bill 507, updating South Carolina’s conformity to the IRC in effect and as amended through Dec. 31, 2024, including the effective dates of the relevant IRC provisions. In contemplation of federal tax reform being enacted in 2025, Senate Bill 507 provides that to the extent any relevant IRC sections (or portions thereof) which expired on Dec. 31, 2024, “are extended, but otherwise not amended, by congressional enactment during 2025” the IRC provisions are also extended for South Carolina corporate income tax purposes.
Texas expands R&D tax credit
On June 22, 2025, Texas Gov. Greg Abbott signed Senate Bill 2206, amending the Texas R&D tax credit incentive framework, effective Jan. 1, 2026. The new legislation repeals the current sales and use tax exemption for R&D expenses, and replaces the current franchise tax credit with a more substantial, permanent structure. Senate Bill 2206 increases the base credit to 8.722% from 5%. Additionally, an enhanced 10.903% rate is also available to research conducted through Texas-based higher education institutions. The amount of credit is based on the relevant rate multiplied by the difference between the qualified research expenses incurred during the period and 50% of the average of qualified research expenses incurred during the three tax periods preceding the current period. For businesses without a prior three-year R&D history, a standard rate of 4.361% or an enhanced rate of 5.451% would apply. The credit is not transferrable and is limited to 50% of the franchise tax due in a taxable year. Any unused credit may be carried forward up to 20 years, but certain ordering rules apply in conjunction with prior R&D credits.
For more detail on the new Texas R&D tax credit framework, please read our article, Texas expands R&D tax credit; ends sales tax exemption.
Vermont updates conformity to the IRC
On May 21, 2025, Gov. Phil Scott signed House Bill 493, updating Vermont’s conformity to the IRC in effect and as amended through Dec. 31, 2024. The provisions are effective retroactively to tax years beginning on or after Jan. 1, 2024.
Virginia updates conformity to the IRC
On May 2, 2025, Virginia Gov. Glenn Youngkin signed House Bill 1600, which among other changes, updates the state’s conformity to the IRC in contemplation of federal tax reform enacted during 2025. Specifically, House Bill 1600 clarifies that Virginia will not conform to certain federal amendments to the IRC, including:
- Any amendment enacted on or after Jan. 1, 2025, and before Jan. 1, 2027, with a projected impact that would increase or decrease Virginia revenues by any amount in the fiscal year in which the amendment was enacted or any of the succeeding four fiscal years.
- All amendments enacted on or after Jan. 1, 2025, and before Jan. 1, 2027, if the cumulative projected impact of the amendments would increase or decrease Virginia revenues by any amount in the fiscal year in which the amendments were enacted or any of the succeeding four fiscal years.
