Public Law No. 119-21, also known as the One Big Beautiful Bill Act (“OBBBA”), was signed into law nearly a year ago in July 2025. However, for many taxpayers the state income tax implications of the One Big Beautiful Bill Act remain unclear.

Key areas of concern for multi-state business entities include:

1. Overall state conformity, changes to IRC Sec. 174 Research and Development Expenditures
2. Changes to IRC 163(j) business interest expense limitations, and IRC 168(k) bonus depreciation.
3. For individual taxpayers, the temporarily increased $40,000 SALT deduction limitation may potentially impact whether passthrough entity partners or shareholders decide to participate in elective entity level tax filings versus composite elections or nonresident withholding.

State Conformity

Although OBBBA was enacted on July 4, 2025, the tax law changes are effective retroactively for tax years beginning after December 31, 2024. Very few state Departments of Revenue have released any specific guidance for taxpayers to determine how the federal changes will impact state level income tax considerations.

From this perspective, taxpayers who typically file their state income tax forms prior to the original statutory due date may consider filing state tax extensions while various state legislative sessions take place. Even then, some states have indicated that OBBBA conformity is not planned to be addressed during their next legislative session.

This leaves many taxpayers in limbo, particularly taxpayers who are significantly impacted by the OBBBA changes to Sec. 174. Business entity taxpayers commonly take one of two approaches in these situations:

1. As previously mentioned, extend state returns and wait for additional state guidance to be released once the state legislative sessions take place.
2. File using the guidance currently available, and be prepared to amend state returns as needed if and when additional state guidance is released. With this approach, taxpayers should also take into consideration the additional costs associated with amending a large volume of state tax returns. Any additional tax liability calculated on an amended return may potentially trigger late payment penalties and interest in some scenarios.

To make a well-informed decision, taxpayers must be familiar with each state’s statutory conformity to the Federal Internal Revenue Code (IRC). For example, nearly every state jurisdiction that imposes an income based taxed generally conforms to the IRC in one of the following ways:

• Rolling Conformity: Approximately 27 state jurisdictions automatically conform to the current version of the IRC. These states generally require specific legislation to decouple from the IRC.
• Static Conformity: Approximately 19 state jurisdictions conform to a specific version of the IRC as it existed on a specific date. Specific legislation is required to adopt changes that occur after the static conformity date or decouple from IRC provisions within the conformity date. Additionally, each year these 19 jurisdictions must be closely monitored, as some may routinely update their static conformity date to align with the current version of the IRC. For example, Arizona conforms to the IRC as it existed on January 1, 2025 while Wisconsin conforms to the IRC as it existed as of December 31, 2022. Idaho conforms to the IRC in effect as of January 1 2026.
• Selective Conformity: A few jurisdictions, such as New Jersey, do not conform to a specific version of the IRC. Instead, these jurisdictions selectively adopt IRC sections by reference throughout their state tax laws. These states must also be closely monitored throughout the year, especially when significant tax bills are enacted.

For taxpayers who are not already aware of the various nuances of state and local income tax, the state income tax implications of the One Big Beautiful Bill Act can be surprisingly more complex than expected. These conformity methodologies should generally serve as a starting point not only when considering the impact of the OBBBA, but for any modification reported on a state income tax return.

IRC 174

Prior to the OBBBA, the Tax Cuts and Jobs Act (“TCJA”) required taxpayers to capitalize and amortize research and development expenditures under Section 174.  The OBBBA modifications to Section 174, described in detail here, introduce an additional layer of nuance to pre-existing Section 174 modifications that were already applicable due to the TCJA. State jurisdictions can be divided into the following groups when determining how state taxable income is impacted by the new rules:

• Decouple entirely from both the TCJA and OBBBA treatment of amortized R&D

For states in this group, a state modification will be reported to reverse the applicable Sec. 174 amortization deducted at the federal level, and instead fully deduct the expenses in the year incurred for state purposes. For all subsequent tax periods where corresponding federal amortization expense is deducted, that expense must be included as an addition modification on the state return.

• Decouple from OBBBA Sec. 174 changes, Conform to TCJA treatment.

These states will continue to treat Sec. 174 as it existed prior to the changes made by the OBBBA. Any difference in Sec. 174 calculations between TCJA and OBBBA must be reported as a modification on the state tax return.

• Conform to current Sec. 174 as modified by OBBBA

This group of states likely have rolling conformity with the IRC and have not released any guidance indicating that they specifically decouple from the OBBBA’s Sec. 174 changes. These follow the federal treatment of Sec. 174, as a result, there is no state modification applicable.

As previously mentioned, many states have yet to release specific guidance regarding OBBBA and conformity. This means for all states with selective conformity or static conformity, taxpayers remain uncertain whether the state will subsequently adopt the OBBBA’s changes.

Likewise for rolling conformity states, the state may or may not retroactively decouple from the OBBBA’s Sec. 174 changes prior to the extended due date of the state income tax return. For these reasons, taxpayers must ensure they are closely monitoring state tax law updates.

IRC 168(k) Bonus Depreciation, 179 Expensing, and 163(j) Business Interest Expense

Consistent with the three groupings mentioned in the previous section, the same general idea applies to the OBBBA’s changes to depreciation and business interest expense. State conformity and lack of state specific guidance remain the central theme and key concern taxpayers should be aware of.

The OBBBA restored 100 percent bonus depreciation for assets placed in service after January 19, 2025, the expensing threshold amounts under Section 179 were increased, and the definition of adjusted taxable income (ATI) was modified as it relates to business interest expenses limitations.

For each jurisdiction where a taxpayer files an income tax return, the taxpayer must consider whether or not these changes are applicable by first determining conformity, reviewing state guidance and recalculating federal amounts accordingly to accurately report the appropriate state specific modification.

Elective Passthrough Entity Tax (PTE Tax or PTET)

The OBBBA notably did not have any impact on passthrough entity tax elections and the ability for certain individual taxpayers to bypass the federal SALT deduction limitation. This was initially an area of concern in earlier drafts of the OBBBA where the benefits of PTET would have been eliminated for certain business. Taxpayers should keep this in mind as it is common for some to inadvertently refer to a previous draft of the OBBBA rather than the finalized version signed on July 4, 2025.

The SALT deduction limitation is temporarily increased to $40,000 beginning with the 2025 tax year through 2029, until it resets back to $10,000 in 2030. The threshold increases by 1% each year and is subject to phaseout starting at $500,000 of Modified Adjusted Gross Income (MAGI) and increasing 1% each year for married filing joint filers through 2029.

For some passthrough entities’ individual partners or shareholders, the increased limitation may potentially impact the entity level determination whether to elect PTET, continue to pay nonresident withholding or elect composite where applicable.

Conclusion

While this discussion focused primarily on the state income tax implications of the One Big Beautiful Bill Act as it relates to Sec 174, Sec. 179, Sec 168(k), and 163(j), it certainly does not include a comprehensive discussion or analysis of all changes that may potentially impact multi-state business entities. For a more thorough discussion, please read FGMK’s President Signs One Big Beautiful Bill Act into Law.

For any state and local income tax compliance, consulting, or planning questions, please reach out to Edsel Caprice, Director, or Matthew Fuller, Partner, at ecaprice@fgmk.com or mfuller@fgmk.com.