OBBB income tax changes and your 2025 tax strategy
The One Big Beautiful Bill (OBBB) Act, signed into law on July 4, 2025, made major changes to the federal income tax treatment of both corporations and individuals. Because most states’ income tax laws incorporate the Internal Revenue Code (IRC), the OBBB will have a ripple effect on the state income taxes for individuals, pass-through entities (PTE) — such as S corporations and partnerships — and C corporations.
Here’s an overview of how changes to OBBB income tax may impact you:
OBBB federal income tax conformity
For most taxpayers, these state-level OBBB conformity issues will first affect tax year 2025. However, for small and midsized businesses with significant research and experimentation (R&E) expenses, these issues may also affect tax years 2022-2024.
Depending on the method they use to conform with the IRC, states may follow all, some or none of the OBBB’s income tax changes:
- Rolling conformity automatically aligns a state’s tax laws with all federal changes.
- Static conformity links a state’s tax laws to the IRC as of a specific date.
- Selective conformity gives a state flexibility to adopt or reject federal changes.
Rolling conformity states
The OBBB’s effects will be most predictable in rolling conformity states, because they will automatically follow the OBBB absent legislative action to decouple. For example:
- In May, Colorado became the first rolling conformity state to adopt OBBB legislation (H.B. 25B-1001, H.B. 25B-1002 and H.B. 25B-1005), which generally decoupled from the OBBB’s provisions.
- In May, Alabama enacted legislation (H.B. 163) that selectively departed from its rolling conformity approach in the case of R&E expenses, and instead adopted IRC Section 174 as it existed prior to 2022.
Static conformity states
In states that use static conformity, legislative action would be required to conform to the OBBB. For example:
- In October, California enacted legislation (S.B. 711) that advanced its IRC conformity date from January 1, 2015, to January 1, 2025, effective for tax years 2025 and later. Because the new date falls before July 4, 2025, California does not follow any of the OBBB’s provisions.
- In October, Rhode Island published rulings about the impact of its January 1, 2025, IRC conformity date upon its state tax returns for 2025 and beyond, and also for 2022-2024.
In states that use selective conformity, their approach to conformity generally depends upon the fiscal impact of conforming to any particular IRC section:
- Maryland is a rolling conformity state, but only for federal changes that would have a state revenue impact of $5 million or less for its current fiscal year. In September, Maryland issued a report explaining which OBBB provisions it automatically conformed to and which provisions would require legislative action to achieve conformity.
- In October, Massachusetts published a draft ruling to illustrate the widely varied impact of the OBBB on its corporate and personal income tax laws.
Because most states have adjourned their 2025 legislative sessions, their decisions about OBBB conformity will likely not come until at least 2026.
What are the tax changes for OBBB?
In addition to state conformity issues, the following OBBB tax changes may have a material impact on taxpayers’ state corporate, PTE and personal income tax filings. Taxpayers should closely monitor their largest filing states for guidance about conformity to these provisions, especially as 2026 state legislative sessions begin:
IRC Section 163(j): Interest expensing
For most taxpayers other than qualified small businesses, the Tax Cuts and Jobs Act (TCJA) limited the deductibility of business interest expense to 30% (50% for 2019 and 2020) of adjusted taxable income (ATI), defined as EBITDA before 2022 and as EBIT from 2022 onward.
Under the OBBB and effective 2025, ATI returns to the EBITDA definition (a higher limit than EBIT).
Due to revenue concerns, some states decoupled from the 2019-2020 limitation increase, creating state-only Section 163(j) carryovers. Now that the ATI limit has increased, states may choose to further decouple from Section 163(j).
IRC Section 168(k): Bonus depreciation restoration
Under the TCJA, depreciation was applied at a 100% rate under Section 168(k), with the percentage decreasing by 20% starting in 2023.
The OBBB makes 100% bonus depreciation permanent, retroactively to property acquired on or after January 20, 2025.
Many states have historically decoupled from TCJA bonus depreciation, required associated state tax addbacks and created state-specific depreciation calculations. In these states, nonconformity is generally expected to continue.
IRC Section 168(n): Depreciation for qualified production property
The OBBB created the new IRC Section 168(n), which allows a 100% deduction for the cost of “qualified production property,” generally covering U.S. nonresidential real property integral to the manufacturing of tangible personal property.
States’ conformity or nonconformity with IRC Section 168(n) is generally expected to track their treatment of bonus depreciation under IRC Section 168(k).
IRC Section 174 and 174A: Domestic research expenses
The TCJA amended IRC Section 174 to require research and experimentation (R&E) expenses to be capitalized and amortized over a 5-year (domestic R&E) or 15-year (foreign R&E) period.
Under the OBBB, domestic R&E expenditures paid or incurred on or after January 20, 2025, are immediately deductible (the new IRC Section 174A), but can be electively capitalized and amortized under IRC Section 174A(c) or IRC Section 59(e).
For domestic R&E expenses incurred from 2022-2024, all taxpayers may elect to deduct unamortized amounts in 2025 or over 2025-2026, and small business taxpayers may elect to claim this same deduction on amended returns for 2022-2024, which must be filed on or before July 3, 2026.
State conformity to these changes will be challenging to analyze, as states have historically taken a variety of inconsistent approaches to R&E expenses:
- Many states, including Illinois and New York, currently conform to the new IRC Section 174A because they use rolling conformity.
- About a third of states, including Florida and Minnesota, currently have a pre-July 4, 2025, fixed conformity date that causes them to follow the OBBB changes to IRC Section 174 but not yet IRC Section 174A.
- A few other states, including California, Georgia and Wisconsin, currently conform to pre-TCJA Section 174, which requires full expensing of both domestic and foreign R&E costs.
- Several states, including Alabama and Mississippi, allow taxpayers flexibility to elect particular versions of IRC Section 174 or potentially even IRC Section 174A.
IRC Section 179: Immediate expensing of certain business assets
The TCJA allowed small and midsized taxpayers to immediately expense up to $1 million of the cost of machinery, equipment or property improvements placed in service during the year, with a benefit phaseout beginning when $2.5 million or more of such property is placed in service.
Under the OBBB, and for property placed in service on or after January 20, 2025, the annual limit increases from $1 million to $2.5 million, and the phaseout threshold grows from $2.5 million to $4 million.
Because the OBBB more than doubles the TCJA limits, significant complexity is expected relating to state conformity in this area, as states may potentially impose their own annual limits and phaseout thresholds.
IRC Section 1202: Expanded qualified small business stock gain exclusion
Enacted in 1993, IRC Section 1202 allows individuals to avoid paying taxes on up to 100% of the gain on the sale of qualified small business corporation stock (QSBS).
The OBBB sweetens IRC Section 1202 by using shorter holding periods, increasing the exclusion cap and using a greater asset threshold for a company to qualify as a small business.
Even though certain states, such as Alabama, California, Mississippi and Pennsylvania, have never conformed to IRC Section 1202, many other states may adopt the OBBB’s expanded concept of IRC Section 1202 and grant significant state tax benefits for the sale of QSBS in 2025 and beyond.
New Jersey recently announced that it will conform to IRC Section 1202 as of 2026 (Bill A4455/S4503, enacted June 30, 2025).
IRC Section 951A: Global intangible low-taxed income
Under the TCJA, some foreign-sourced income became subject to taxation under the global intangible low-taxed income (GILTI) and foreign-derived intangible income (FDII) regimes, which effectively provided a deduction of 50% of GILTI and 37.5% of FDII.
Under the OBBB, these deductions are reduced from 50% to 40% of GILTI (now called net controlled foreign corporation tested income or NCTI) and from 37.5% to 33.34% of FDII (now called foreign-derived deduction eligible income or FDDEI). The OBBB offsets the resulting increase to federal taxable income by increasing the amount of foreign tax credit (FTC) that companies may claim against NCTI from 80 to 90%.
Even though the OBBB offsets the net taxable income increase of NCTI and FDDEI through increased foreign tax credit usage, the fact that states generally don’t have an FTC means that full conformity to this OBBB change would raise state taxes.
The OBBB impact on elective pass-through entity taxes
In 2017, the TCJA imposed a $10,000 cap on the state and local tax (SALT) deduction under IRC Section 164(b)(6)(B), which was set to expire after 2025. In response, all but six of the states with a personal income tax have since enacted elective pass-through entity tax (PTET) regimes to permit individual owners of PTEs to circumvent the cap. In 2020, the IRS in Treasury Notice 2020-75 confirmed the effectiveness of state PTET regimes.
The OBBB extended the cap to 2029 and increased it to $40,000, phased out (but not below $10,000) for taxpayers with income between $250,000 and $500,000. Under the OBBB, Congress considered but did not enact legislation that would have overturned Treasury Notice 2020-75 and eliminated the benefit of state PTET regimes.
Because the SALT deduction cap still exists under the OBBB (though at a higher limit), elective state PTET regimes will remain relevant through at least 2029. Even though most states’ PTET regimes are permanent, absent legislative action, they will expire after 2025 in Illinois, Minnesota, Oregon and Utah; after 2026 in Virginia; and after 2029 in California.
Your next steps
Even though rolling conformity states should generally conform to the OBBB, their legislatures may decide that full conformity is too expensive and enact legislation decoupling from one or more OBBB provisions. In static and selective conformity states, legislatures will need to affirmatively act if they want to conform.
Because many states will not provide guidance about these issues until their legislatures meet again in early 2026, individuals and businesses should take proactive steps to manage the related uncertainty. This includes modeling out the impact of various conformity and nonconformity scenarios and staying closely connected with a tax advisor regarding legislative actions in key filing states.
How Wipfli can help
To stay ahead of a rapidly changing tax environment, it’s essential to understand how federal changes like the OBBB may influence your state and business tax strategy. Our team closely monitors legislative developments to provide timely insights and planning support. Contact our tax team today for more guidance on 2025 regulatory and tax changes.
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