As states scramble to adjust their laws after major changes to the federal tax code under the One Big Beautiful Bill Act (OBBB), experts shared what they’re watching on the business tax front.
Plante Moran’s David DeCew told Checkpoint that state conformity to the federal tax code after the OBBB is “continually evolving.” He stressed that “it’s important to keep thinking about it, knowing that the decision made last year or the treatment last year may not be the same as what’s required next year.”
“As states see the budgetary impact over the next few years, there may be additional decoupling provisions,” DeCew added.
EY’s Jess Morgan noted the “the volume and form of state responses to OBBB so far.” Morgan, speaking during a February 13 webinar, added that “there’s a lot of studying being performed by state economic councils, by state legislatures, and other interested parties as to what’s going to be the effect on state tax revenue and the proportionate effect on businesses, specifically when it comes to conformity decisions.”
Morgan and DeCew highlighted key provisions that businesses should be aware of when it comes to OBBB conformity. Those provisions include bonus depreciation, the qualified small business stock (QSBS) exclusion, the IRC § 163(j) limitation on interest expenses, and expensing of domestic research and experimental (R&E) expenditures.
Bonus Depreciation
The OBBB restored and made permanent 100% bonus depreciation under IRC § 168(k) – reversing course from a Tax Cuts and Jobs Act (TCJA) provision that phased down bonus depreciation and ultimately ended it by 2027. The OBBB also provided for qualified production property expensing under new IRC § 168(n).
Morgan said that “states have long decoupled from bonus depreciation.” However, because § 168(n) is new, she said she’s seeing “a lot of proposals to decouple there.”
DeCew told Checkpoint that amid the changes, clients are often faced with “the decision between taking § 168 bonus or taking § 179 and expensing it.” And that decision is very jurisdiction-specific, he added.
It typically comes down to both whether and how a state decoupled from IRC § 168(k) and IRC § 179, he explained. Some states “flat out” decouple, said DeCew, while others may have “some type of specific decoupling where they would allow depreciation or § 179 rules through a certain date, but not include those under OBBB.”
DeCew said the conversation he’s having now is “what you could do to benefit yourself under the new provisions based on the states you’re filing in and how those states have decoupled.”
QSBS Exemption
Another area that DeCew is urging taxpayers to pay attention to is state conformity to the IRC § 1202 QSBS exemption. “It’s one of the topics that I think may be overlooked,” he explained, “just because of the holding period.”
The QSBS provisions allow taxpayers an exemption from capital gains on disposition of certain C corporation stock, so long as it is held for a certain period. The OBBB provides for a phased-in exclusion starting after a three-year holding period. It also increased the gross asset value for eligible corporations and increased the maximum gain that is excludible.
“None of those holding periods have yet been met to start claiming exclusions,” said DeCew, “so it’s nothing that’s come up in practice.” But he’s still talking about the OBBB changes to § 1202 with clients so they can start planning now.
With state-level § 1202 provisions, DeCew explained that it also comes down to the residency of the individual who will be claiming the exemption. And while some clients may not be willing to relocate for tax benefits, others “may see that as part of a greater financial plan for themselves and their family and selling the business.”
But DeCew said his message to clients on state-level responses is that things can change, “especially with something like § 1202, where it hasn’t become a hot button issue yet because no one’s claiming the benefit yet.”
Limitation on Business Interest Expense
The TCJA limited the IRC § 163(j) business interest expense deduction – beginning in 2022, taxpayers had to calculate their adjusted taxable income (ATI) by including depreciation and amortization deductions. The OBBB permanently reinstated earnings before interest, taxes, depreciation and amortization (EBITDA) when calculating business interest expense limitation.
Morgan said that some states had already decoupled from IRC § 163(j) after the TCJA. But she noted that now, there’s an “emerging new category of conformity.”
“We have states that follow the limitation, but they follow the EBIT measure – the pre-cliff version of the TCJA measure – of ATI” said Morgan, “They’re not following the less restrictive EBITDA measure.”
R&E Expensing
And Morgan has seen even more state variance on the domestic R&E expenditures deduction under IRC §§ 174 and 174A. The OBBB permanently allowed for full expensing of domestic R&E expenditures paid or incurred in 2025 or later – and provided transition provisions regarding unamortized expenditures in 2022 – 2024.
For R&E expensing, “there have emerged a variety of categories of conformity,” said Morgan. There are states that have adopted the pre- and post-TCJA versions of IRC § 174, she said.
And while some states are following the OBBB domestic expensing provisions, others “are enacting entirely new, unique versions of research and experimentation cost policies,” Morgan added.
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