By Saleem A. Shareef, Esq., Checkpoint News
The Maryland Comptroller’s Office has alerted income taxpayers of the impact of the federal One Big Beautiful Bill (OBBB) Act (P.L. 119-21) on Maryland’s conformity to the IRC. (Maryland Tax Alert, Maryland Impacts of the One Big Beautiful Bill Act (PL 119-21), Maryland Comptroller’s Office, 01/06/2026.)
Maryland’s IRC Conformity Provision
Generally, Maryland income tax law conforms to federal income tax law except when the Maryland General Assembly has enacted decoupling legislation, or when automatically decoupled. Maryland law provides for automatic decoupling when: (1) an amendment to the IRC affects the determination of federal adjusted gross income (FAGI) or federal taxable income for the taxable year the amendment is enacted or any preceding taxable year; and (2) the amendment has a revenue impact of $5 million or more for the fiscal year that begins during the calendar year in which the amendment is enacted or any preceding fiscal year. The revenue impact is determined by the Maryland Bureau of Revenue Estimates (BRE) in a report issued 60 days after an amendment to the IRC.
Regarding the OBBB, the BRE concluded that each of the following sections of the Act would have an impact of greater than $5 million in each affected year: (1) P.L. 119-21, § 70302, relating to the full expensing of domestic research and experimental expenditures; (2) P.L. 119-21, § 70303, relating to the modification of limitation on business interest; and (3) P.L. 119-21, § 70307, relating to the special depreciation allowance for qualified production property. Also, the BRE concluded that the following provisions of the Act do not impact Maryland revenues: tips, interest on vehicle loans, overtime pay, and an additional deduction for individuals 65 years of age or older.
Full Expensing of Domestic Research or Experimental Expenditures
The OBBB added IRC § 174A, which allows an election to deduct the full amount of domestic research or experimental expenditures in the year incurred. The amendment is retroactive to tax year 2022 for certain eligible small businesses. Also, special rules apply for domestic research or experimental expenditures incurred in tax years 2022 through 2024.
However, Maryland decouples from IRC § 174A(a), as it applies to a taxable year beginning in calendar year 2025 as well as from P.L. 119-21, § 70302(f), for any taxable year preceding 2025. A decoupling addition modification is required for the amount of the federal deduction claimed under IRC § 174A(a) as a domestic research or experimental expenditure paid or incurred during the taxable year beginning in, or preceding, taxable year 2025 that exceeds the amount allowable under the IRC prior to the enactment of IRC § 174A.
Instead, for Maryland income tax purposes, domestic research or experimental expenditures paid or incurred in 2025 or in prior years must be capitalized and claimed as a deduction over the 5-year amortization period. Similarly, an eligible taxpayer under P.L. 119-21, § 70302(f)(1)(B) (i.e., a small business) and every other taxpayer that paid or incurred a domestic research or experimental expenditure in a taxable year preceding 2025 must continue, on their Maryland income tax returns, to claim deductions over the remaining portion of the 5-year amortization period, as they would have but for the enactment of IRC § 174A.
Maryland amended returns for prior years to claim the domestic research or experimental expenditure deduction in full in the year it was incurred will not be accepted. Taxpayers who paid or incurred domestic research or experimental expenditures in taxable years beginning after December 31, 2021, but before January 1, 2026, must claim any deduction remaining for domestic research or experimental expenditures ratably over the existing 5-year amortization period on their Maryland income tax returns.
The deduction for domestic research or experimental expenditures must be reported on a 2025 Maryland income tax return by completing a pro forma federal income tax return that shows the allowed domestic research or experimental expenditures according to the 5-year amortization schedule, and reporting a decoupling modification on Maryland Form 500DM for the years remaining on the amortization schedule, if the taxpayer claims on their federal return a deduction under IRC § 174A(a) (i.e., including P.L. 119-21, § 70302(f)(2)(A)(i) and P.L. 119-21, § 70302(f)(2)(A)(ii)) for domestic research or experimental expenditures paid or incurred. However, there is no need to complete a pro forma federal return or claim a decoupling modification on Maryland Form 500DM, if the taxpayer elects to ratably claim on their federal return a deduction over not less than 60 months for domestic research or experimental expenditures paid or incurred.
Modification of Limitation on Business Interest Deduction
For federal income tax purposes, beginning in tax year 2022, to calculate adjusted taxable income (ATI) for the purpose of determining the limit on deductible business interest, expenses for depreciation, amortization, and depletion must be deducted. These non-cash deductions decrease ATI as well as the allowable business interest deduction, which is capped at 30% of ATI. The OBBB allows ATI to be calculated without regard to deductions for depreciation, amortization, and depletion expenses. Therefore, the deductions are included with taxable income increasing ATI as well as the allowable business interest deduction.
However, Maryland decouples from the amendment to IRC § 163(j)(8)(A)(v) in P.L. 119-21, § 70303, as it applies to a taxable year beginning in calendar year 2025. A decoupling modification is required to add back to FAGI or federal taxable income any amount of depreciation, amortization, or depletion expenses used to calculate ATI in determining the limit on deductible business interest for any tax year beginning in calendar year 2025.
Special Depreciation Allowance for Qualified Production Property
The OBBB created IRC § 168(n), which provides a new special depreciation allowance for “qualified production property,” and permits the immediate full expensing of certain manufacturing, production, or refining facilities. These properties would otherwise have been depreciated as provided in IRS Pub. 946.
However, Maryland decouples from IRC § 168(n), as it applies to a taxable year beginning in calendar year 2025. A decoupling modification is required to add back to FAGI or federal taxable income any amount deducted on the federal return as special depreciation for qualified production property under IRC § 168(n) for any taxable year beginning in calendar year 2025.
OBBB Provisions That Do Not Impact Maryland Income Tax
In tax years 2025 through 2028, the OBBB allows the following special deductions from an individual’s FAGI when calculating federal taxable income: (1) income from tips (i.e., IRC § 224; P.L. 119-21, § 70201); (2) income from overtime pay (i.e., IRC § 225; P.L. 119-21, § 70202); (3) interest paid on an automobile loan (i.e., IRC § 163(h)(4); P.L. 119-21, § 70203); and (4) an additional deduction for individuals 65 years of age or older (i.e., IRC § 151(d)(5)(C); P.L. 119-21, § 70103).
Since these are federal deductions, they do not impact the calculation of an individual’s Maryland income tax liability and are not reported on the Maryland return because they do not affect the calculation of FAGI. They also cannot be claimed as an itemized deduction on the Maryland return because they cannot be claimed as itemized deductions on an individual’s federal return.
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