While Republican-led states are mostly adopting the various tax changes from the One Big Beautiful Bill Act, not all states —especially those controlled by Democrats — are enacting them and instead are explicitly "decoupling" from some of the new provisions of the Internal Revenue Code to preserve their much-needed tax revenue. That lack of uniformity can cause problems for taxpayers and businesses that operate across state lines.
"Roughly half of the states automatically conform to the IRC as the changes occur, but in the other half, it's a mixed bag," said Ian Boccaccio, a principal and income tax practice leader at the tax firm Ryan. "They either conform to an older version of the IRC or they're very selective about which provisions of the IRC the state will adopt. At least half of the states aren't going to follow the IRC as implemented today. Coupled with state revenue challenges, we believe that will give rise to more decoupling. We've got less federal funding at the state level, but also the federal tax base, in aggregate, if you follow the IRC, has been greatly reduced because of all these things about R&D expensing, bonus depreciation, etc. The states are in a bind, and these revenue constraints will give rise to more decoupling to generate more revenue at the state level."
He anticipates states will continue to adopt the OBBBA provisions at their own pace, but in some cases that can take years. He cited the example of California, which finalized its adopting and decoupling provisions last June for the Tax Cuts and Jobs Act of 2017, only one month prior to the enactment of the OBBBA.
"That took an awfully long time for California to line up with what this 2017 law was," said Boccaccio. "It was seven or eight years. That's the tough part. Taxpayers aren't going to know in every state today. The operational trap is further complicated by the state's interpretation of an IRC provision."
For example, he noted that in Colorado, there is an 80/20 test from case law that disconnects the state from federal LLC classification of whether a domestic corporation must be excluded due to significant foreign factor representation. In New Jersey, case law has determined that net operating loss carryovers could be time barred from changes, but that's been reversed by legislation.
"In Colorado, for instance, there's a disconnect where a domestic corporation must be included," said Boccaccio. "They take this 80/20 rule, and they change the calculation effectively to say, if greater than 80% of property and payroll are outside the U.S., we exclude it. But other states could look at that 80/20 rule totally differently, and not just limit it to property and payroll. That 80/20 calculation could be totally different. Colorado is an example of a different state where you can't just assume the 80/20 rules apply everywhere. Another interesting example is New Jersey if you utilize a net operating loss carryforward. This is a loss that was incurred in a prior year, and you utilize it on this year's return. There's case law in New Jersey that bars the tax authority from going back to that year in which the loss was created."
He pointed out that the OBBBA was enacted last July, around the time many states ended their legislative sessions. "That means that state action to either update IRC conformity and/or to decouple from OBBBA provisions has been delayed," said Boccaccio. "The result is that a majority of state action relative to OBBBA will drag deep into 2026 and will be at varying effective dates."
Some of the commercial tax preparation software and services have not yet caught up with all the changes, he noted.
In at least one case, with the District of Columbia, Congress is actually blocking D.C. from decoupling from 13 provisions of the OBBBA, but D.C. has less autonomy than state governments in making its own laws.
Naming conventions
International tax provisions can also be affected, such as GILTI, the acronym for Global Intangible Low-Taxed Income under the Tax Cuts and Jobs Act, which was renamed in the OBBBA as Net CFC Tested Income, or NCTI, with CFC standing for Controlled Foreign Corporation.
"Though GILTI represents U.S. shareholder-level recognition of what, in essence, is income of foreign subsidiaries, approximately 12 states tax GILTI," said Boccaccio. "But the number of states taxing a portion of GILTI is growing, with recent additions of Illinois and Minnesota and with Massachusetts considering legislation."
Despite the name change in Section 951A of the Internal Revenue Code, some states are continuing to call it GILTI.
"Oddly, several states included provisions that referred directly to 'GILTI' and those states will need to update their statutes to fix potential problems," said Boccaccio. "For example, a couple of states allow the IRC 250 deduction related to GILTI, Illinois being one of the states that has already updated their statute to account for the change in naming convention."
He believes the incremental state tax on GILTI will increase significantly under the OBBBA version known as Net CFC Tested Income. "Companies that haven't already challenged states taxing GILTI should examine the incremental state tax on Net CFC Tested Income and consider filing claims challenging states' ability to tax such income, particularly since the wave of states taxing GILTI is growing," said Boccaccio. His firm, Ryan, is working with numerous clients on GILTI and Net CFC Tested Income refund claims.
Another firm, Cherry Bekaert, has also been meeting with clients who need to take into account GILTI and Net CFC Tested Income on their returns. "The calculations have gotten a little simpler," said Nelson Yates, international tax leader at Cherry Bekaert. "You maybe have more tested income at the end of the day, but you're getting more credits in theory. I would expect our client base, on the whole, would be probably neutral between them. I do think it's important, when you look at the value of inclusion percentage now, that's really going to be one of the key factors in driving the amount of [foreign tax credits] you have available. You need to start looking at do I have tested losses in the system? Because there's some planning that can be done to mitigate those. That's going to drive down that inclusion percentage. It puts a greater emphasis on GILTI [or NCTI] hygiene now and then."
R&D expensing
An area where some states may decide to decouple is Secton 174A, which allows for faster write-offs of domestic research and development expenses, eliminating the five-year amortization requirement introduced by the TCJA in Section 174.
"Most states follow generally federal treatment of 174 and, in most cases, the federal deduction is not modified by state law," said Boccaccio.
However, the new 174A provision brings different challenges, he noted. "If a state adopts the OBBB code through rolling or select conformity, they will be allowing for full expensing of domestic R&E," said Boccaccio. "Given the revenue impact, we believe several states will decouple from this provision. However, any de-coupling would have to indicate 174A only and not mention 174 if a state wants to maximize capitalization."
The OBBBA still requires amortization of R&D costs abroad, but that may conflict with state laws and court precedents, he cautioned.
"The less favorable federal treatment of foreign research costs (amortized over 15 years versus full expensing or five-year amortization) is prohibited by constitutional restraints against states discriminating against foreign commerce under Kraft," referring to a 1992 U.S. Supreme Court ruling in the case of
He advises companies to consider challenging states' ability to dovetail federal treatment of foreign research costs under Section 174. "We are advising that clients take this position on original returns," he added.
Depreciation
Another thorny area where some states might decouple is the permanent extension of 100% bonus depreciation under the OBBBA for property placed in service after Jan. 19, 2025.
"Any time the federal accelerates depreciation is problematic for states that leverage from the IRC to compute state tax," said Boccaccio. "Put simply, many states cannot afford to be as generous as the federal government in allowing accelerated depreciation deductions. Even if states have decoupled from the bonus depreciation statute, taxpayers may be allowed IRC 168(n) since it is a new section under the IRC."
He advises corporate tax teams to maximize their profitability by keeping abreast of the state law changes and staying vigilant in making sure those changes flow through the company's tax return.
"Missing applicable adoption by state to ensure minimization of state tax cash payments is the biggest trap," said Boccaccio. "States conform to the federal code on differing dates. Rolling conformity automatically updates state tax laws to match federal IRC changes as they occur, reducing administrative effort but creating revenue unpredictability. Conversely, static fixed date conformity adopts state laws to a specific date, requiring state legislative action to adopt new federal tax changes."
