California updates conformity to the Internal Revenue Code (IRC)
On Oct. 1, 2025, Gov. Gavin Newsom signed Senate Bill 711, updating California’s IRC conformity date to Jan. 1, 2025 from Jan. 1, 2015 for corporate income tax purposes. However, California continues to decouple from several major provisions of the IRC that were enacted or amended by the Tax Cuts and Jobs Act, P.L. 115-97 (TCJA) and the One Big Beautiful Bill Act, P.L. 119-21 (OBBBA). California’s decoupling continues to include but is not limited to, business interest expense limitations of section 163(j), the treatment of domestic and foreign research & experimental (R&E) expenditures under section 174, bonus depreciation under section 168(k), section 179 expensing, and the federal treatment of global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII).
Additionally, Senate Bill 302, also enacted on Oct. 1, 2025, addresses conformity to federal sections 6417 and 6418 of the IRC. For tax years beginning on or after Jan. 1, 2026 and before Jan. 1, 2031, California taxable income will exclude any payments made under sections 6417 and 6418 as it relates to payments and transfers for applicable federal clean energy credits.
Delaware decouples from key provisions of the OBBBA
On Nov. 19, 2025, Gov. Matt Meyer signed House Bill 255, decoupling Delaware from several federal corporate income tax provisions of the OBBBA. For domestic R&E expenditures made after Dec. 31, 2021, but on or before Dec. 31, 2024, taxpayers must continue the expensing of such expenditures under the IRC in effect immediately before the enactment of the OBBBA. As a result, Delaware does not allow the acceleration of amortized domestic R&E costs incurred in the 2022 through 2024 tax years, and such costs must continue to be deducted over the remaining amortization period provided by the TCJA. House Bill 255 does not decouple from the OBBBA as it relates to domestic R&E costs incurred on or after Dec. 1, 2025.
House Bill 255 also decouples the state from the OBBBA’s reinstatement of 100% bonus depreciation on qualified property, and increased section 179 expense limitations. For property that is placed in service between Jan. 20, 2025, and before Jan. 1, 2031, taxpayers must follow the relevant provisions of the IRC that were in effect immediately prior to the enactment of the OBBBA.
District of Columbia decouples from several provisions of the OBBBA
On Dec. 3, 2025, the District of Columbia enacted emergency legislation B26-0457 without the signature of Mayor Muriel Bowser, decoupling from several provisions of the OBBBA, including sections 163(j), 168(k), 168(n) and 174A. While the legislation does not provide for the complete decoupling from section 163(j) as amended by the OBBBA, taxpayers are required to continue to calculate ‘adjusted taxable income’ using earnings before interest and taxes (EBIT) in determining the business interest expense limitation, and the floor plan financing interest rule under section 163(j)(9) will not apply.
No deduction is allowed for special depreciation allowances under sections 168(k) or 168(n), but note that the District previously decoupled from federal bonus depreciation. For tax years beginning after Dec. 31, 2021, the deduction for domestic R&E expenditures under section 174A must be capitalized and amortized over a five-year period. B26-0457 further states that no taxpayer shall be allowed the election under ‘sections 174A(f)(1) or 174A(f)(2)’ under the IRC. This provision aims to clarify that the District will not conform to the acceleration of capitalized domestic R&E expenditures from the 2022 through 2024 tax years, however, the legislation references transition rules which are not codified under the IRC instead of referencing sections 70302(f)(1) and (f)(2) of the OBBBA. Technical corrections to the transition rule references are anticipated.
The provisions are effective for tax years beginning on or after Jan. 1, 2025. Additionally, as B26-0457 was enacted as emergency legislation, the legislation will expire on March 3, 2026, 90 days after the effective date. Legislation making these changes permanent is currently in the legislative process.
Illinois decouples from certain provisions of the OBBBA
On Dec. 12, 2025, Illinois Gov. JB Pritzker signed Senate Bill 1911, making changes to the state’s conformity to the IRC. Specifically, Senate Bill 1911 decouples Illinois from the special depreciation allowance under section 168(n). Additionally, for tax years ending on or after Dec. 31, 2025, Illinois has updated relevant statutes and regulations to include reference to Net CFC Tested Income (NCTI), in addition to GILTI. Previously, Illinois enacted House Bill 2755 on June 16, 2025, reducing the dividends received deduction from Illinois corporate taxable income to 50% from 100% for tax years ending on or after Dec. 31, 2025. Senate Bill 1911 updated the language of the relevant statute to include reference to NCTI, confirming that the 50% deduction will apply to NCTI, similar to GILTI.
Iowa 2026 corporate income tax rates to remain the same as 2025
On Oct. 21, 2025, the Director of the Iowa Department of Revenue signed Order 2025-02, certifying that the statutory threshold for calculating the corporate income tax rate was not met. As a result, the corporate income tax rates for tax years beginning on or after Jan. 1, 2026 will remain the same as the rates for 2025. The Iowa corporate income tax rate is 5.5% for Iowa corporate taxable income up to $100,000, and 7.1% for Iowa corporate taxable income over $100,000.
Iowa issues guidance on the state’s treatment of NCTI
On Nov. 4, 2025, the Iowa Department of Revenue issued guidance that for tax years beginning on or after Jan. 1, 2026, taxpayers are not allowed to deduct NCTI from Iowa taxable income. Although Iowa historically has allowed a deduction for GILTI under section 951A, the Department concluded that because the state statute does not specifically reference ‘NCTI’, a deduction will not be allowed for Iowa purposes for tax years beginning on or after Jan. 1, 2026.
Kansas 2026 corporate income tax rates to remain the same as 2025
On Oct. 2, 2025, the Kansas Department of Revenue issued Notice 25-06, certifying that there will be no corporate income tax rate reduction for the 2026 tax year. The rate reductions previously enacted under Senate Bill 269 (2025) were contingent upon revenue thresholds that were not met. As a result, the corporate income tax rates for tax years beginning on or after Jan. 1, 2026, will remain the same as the rates for 2025. The Kansas corporate income tax rate is 3.5%, with an additional 3% surtax on Kansas corporate taxable income exceeding $50,000.
Massachusetts issued final regulations limiting P.L. 86-272 protections
Effective Oct. 10, 2025, Massachusetts promulgated final regulations amending its corporate nexus rules (830 Mass. Code Regs 63.39.1) to address internet-based activities and taxpayers claiming the protection of P.L. 86-272. Massachusetts did not fully adopt the revised guidance of the Multistate Tax Commission (MTC) issued in 2021 but instead published one example of an unprotected activity. The example explains that if a business website places internet cookies on devices accessible by persons in Massachusetts, and those cookies collect data that aid business decisions, then that activity is not entirely ancillary to the solicitation of sales of tangible personal property and is unprotected. Businesses that engage in this activity are subject to the income measure of the corporate excise tax if Massachusetts-sourced receipts exceed $500,000. The regulation cites the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., 585 U.S. 162 (2018) to support a broader interpretation of nexus.
For more detail on the Massachusetts nexus regulations, please refer to our article, Massachusetts limits P.L. 86-272 protections.
Maine OBBBA conformity
On Oct. 1, 2025, Maine Gov. Janet Mills published a tax alert related to OBBBA conformity. Previously on July 1, 2025, Maine updated its conformity to the IRC as in effect on Dec. 31, 2024. Due to the state’s conformity to the IRC prior to the enactment of the OBBBA, Maine does not automatically adopt the provisions of the OBBBA. However, Gov. Mills issued a Determination of Direction, accepting recommendations from a report from the Maine Department of Finance and Administration regarding whether and how the state should conform to or decouple from certain provisions of the OBBBA for the 2025 tax year. The tax alert indicates that the state intends to conform to or decouple from the following provisions of the OBBBA for the 2025 tax year:
- Conform to section 163(j) limitations on business interest deductions;
- Decouple from section 168(n) providing a special depreciation allowance for qualified production property;
- Conform to section 179 expensing;
- Conform to the transition rules under sections 70302(f)(1) of the OBBBA only as it relates to the election for small businesses to amend returns for prior years to currently deduct domestic R&E costs incurred in the 2022 through 2024 tax years; and
- Decouple from section 174A as it relates to domestic R&E expenditures incurred on or after Jan. 1, 2025
As legislation has not been formally adopted, taxpayers may choose to wait for future state legislative enactment(s) that address the federal tax law changes by filing under extension. Tax returns filed prior to enactment of any legislation by the Maine legislature that addresses the federal tax law changes must be consistent with the issued Maine tax returns, forms, instructions, and other guidance in effect at the time, including the governor's direction. The governor indicated that the state intends to issue further guidance related to less urgent conformity items at a later time, as well as further guidance on the provisions of the OBBBA for tax years 2026 and beyond.
Michigan updates IRC conformity and decouples from several provisions of the OBBBA
On Oct. 7, 2025, Gov. Gretchen Whitmer signed House Bill 4961 updating Michigan’s conformity to the IRC and specifically decoupling the state from several significant provisions of the OBBBA. House Bill 4961 updates the state’s conformity to the IRC as in effect on Jan. 1, 2025, from Jan. 1, 2018. Michigan law continues to provide the option for taxpayers to elect to use the IRC in effect for the current tax year in determining Michigan taxable income, subject to specific decoupling provisions including those noted below.
House Bill 4961 provides that for tax years beginning after Dec. 31, 2024, sections 163(j), 174, and 179 of the IRC shall apply for corporate taxpayers as those provisions were in effect in the IRC on Dec. 31, 2024. Additionally, the legislation provides that corporate taxpayers must treat sections 168(n) and 174A as though there were not in effect. As a result, Michigan conforms to the federal provisions of 163(j), 174 and 179 of the IRC as they existed under the TCJA, and decouples entirely from sections 168(n) and 174A. Michigan continues to specifically decouple from section 168(k) for corporate taxpayers.
Additionally, for tax years beginning after Dec. 31, 2021, federal taxable income must also be calculated as if the transition rules under the OBBBA, including, but not limited to, any provisions related to the application of section 174A of IRC, do not apply. Accordingly, Michigan does not allow the acceleration of amortized domestic R&E costs incurred in the 2022 through 2024 tax years, and such costs must continue to be deducted over the remaining amortization period provided by the TCJA.
Pennsylvania decouples from OBBBA provisions
On Nov. 12, 2025, Pennsylvania Gov. Josh Shapiro signed House Bill 416 decoupling the state from several corporate income tax provisions of the OBBBA. For tax years beginning on or after Dec. 31, 2024, business interest expense limitations under section 163(j) must be calculated in accordance with section 163(j) of the IRC as it was in effect on Dec. 31, 2024. Additionally, deductions for qualified production property under section 168(n) of the OBBBA must be added back to Pennsylvania corporate taxable income to the extent such deductions are included in federal taxable income, and qualified production property must be expensed under normal depreciation rules. Finally, the law makes changes to its treatment of R&E expenditures under sections 174, 174A, 59(e) and 481. Pursuant to the new legislation, taxpayers are required to add back to Pennsylvania corporate taxable income any deductions related to R&E expenses under sections 174, 174A, 59(e) and 481 that are included in federal taxable income for the tax year. Taxpayers may then deduct 20% of the amount added back over a five-year period. The rule does not differentiate between the treatment of domestic and foreign R&E expenditures under sections 174A and 174, respectively. Additionally, the rule would apply to R&E costs incurred beginning on or after Jan. 1, 2025, as well as deductions included in federal taxable income for accelerated amortization of R&E costs that were incurred in the 2022 through 2024 tax years.
New York City proposes regulations
On Oct. 16, 2025, the New York City Department of Finance issued proposed regulations for the Business Corporation Tax, addressing several topics including economic nexus and the application of P.L. 86-272.
Tennessee issues guidance on state treatment of bonus depreciation
In December 2025, the Tennessee Department of Revenue issued Notice #25-36 Federal Bonus Depreciation Conformity affirming that Tennessee remains coupled with the TCJA bonus depreciation provisions under section 168(k). Accordingly, taxpayers must continue to apply the applicable bonus depreciation percentages enacted under the TCJA for purposes of calculating the Tennessee corporate excise tax of 40% for 2025, 20% for 2026, and 0% for tax years 2027 and after.
Texas issues guidance on IRC conformity
On Dec. 19, 2025, the Texas Comptroller of Public Accounts issued guidance regarding the agency’s interpretation of the state’s conformity to the IRC, including the treatment of bonus depreciation under section 168(k) in determining the deduction for costs of goods sold (COGS) from the margin tax base. Texas historically has required taxpayers to apply the relevant provisions of the IRC as in effect on Jan. 1, 2007, in determining the Texas margin tax base. However, the comptroller has determined that beginning with the 2026 report year, taxpayers must determine the margin tax base under the federal law in effect for the federal tax year, unless a state statute or rule specifically references the IRC. To the extent a Texas statute or rule makes reference to the IRC, the taxpayer must continue to apply the relevant provisions of the IRC as in effect on Jan. 1, 2007.
Two areas that could significantly impact Texas margin taxpayers are changes to the state’s treatment of bonus depreciation on qualified assets and the deduction for foreign dividends, specifically GILTI/NCTI under section 951A. For taxpayers using the COGS deduction in determining the margin tax base, COGS is determined using the direct costs of acquiring or producing goods, as well as certain indirect associated costs. Texas Tax Code section 171.1012(c)(6) includes depreciation reported on the federal income tax return, to the extent associated with and necessary for the production of goods as an amount of costs of goods sold. As the deprecation costs eligible for the COGS deduction are tied to amounts on the federal tax return, and the Texas statute does not reference IRC section 168(k), the comptroller has indicated that the state intends to conform to the federal bonus depreciation rules for eligible assets placed in service after Jan. 19, 2025, beginning with the 2026 franchise report year.
The guidance also calls for a one-time net depreciation adjustment on the 2026 report year margin tax return for taxpayers that reported gains or losses on the sale of depreciable assets included in the COGS deduction. The adjustment is meant to account for basis differences between the federal and state depreciation previously allowed in determining the Texas COGS deduction.
Texas Tax Code section 171.1011(c)(1)(B)(ii) provides a subtraction from the margin tax base for foreign royalties and dividends, specifically amounts under sections 78 and 951 through 964 of the IRC. Because the IRC is referenced, taxpayers must apply sections 78 and 951 through 964 of the IRC as in effect on Jan. 1, 2007, which would exclude from the subtraction any GILTI/NCTI that was enacted federally after Jan.1, 2007.
Note that the guidance provides a description of the comptroller’s intended interpretation of the state’s conformity to the IRC and is not based on an enactment of new law. However, regulations adopting this approach have been proposed.
Texas updates no tax due threshold
On Oct. 30, 2025, the Texas Comptroller of Public Accounts announced an update to the no tax due threshold and compensation deduction limit for report years 2026 and 2027. For these years, the no tax due threshold will be $2,650,000 and the compensation deduction limit will be $480,000, increased from $2,470,000 and $450,000, respectively, from report years 2024 and 2025.
Virginia addresses apportionment of pass-through entities (PTEs)
On Oct. 28, 2025, the Virginia Department of Taxation issued Tax Bulletin 25-5 addressing the treatment of apportionment for corporations owning non-unitary PTEs. The bulletin clarifies that corporations must treat the income of the PTE as allocable income, instead of income subject to apportionment. As a result, the apportionment factors of the PTE will not flow through to the apportionment factor of the corporate owner’s Virginia corporate income tax return. The policy change represents a departure from the previous rule that allowed corporate owners of non-unitary PTEs to use a blended apportionment formula that combined the corporate’s owners share of the PTE’s apportionment factors with its own apportionment. The blended apportionment was applied to taxpayer’s Virginia taxable income, including the flow-through income of the PTE. The policy change was in response to Dep’t of Taxation v. FJ Mgmt., Inc., 907 S.E.2d 541 (Va. App. Ct. 2024), where the Virginia Court of Appeals held that the apportionment of a PTE could not be blended with that of the corporate owner in determining Virginia corporate taxable income because the corporate owner and the PTE were not engaged in a unitary relationship. The policy change is effective for the 2025 tax year. For tax years prior to 2025, the allocation of PTE income is allowed, but not required, and impacted taxpayers may file an amended return to apply the allocation rules instead of using the blended apportionment approach for income and apportionment from non-unitary PTEs.
