As corporate tax teams finalize their 2025 strategies following the One Big Beautiful Bill Act, savvy leaders are already looking ahead to 2026.
The landscape emerging from recent legislative changes presents both opportunities and challenges that require careful navigation, particularly around research and development taxation and state conformity issues.
The R&D expensing rollercoaster: planning for 2026's reality
While businesses celebrate the return of immediate domestic R&D expensing, the celebration may be tempered by 2026's tax reality. Companies that elect to accelerate their remaining unamortized Section 174 costs from 2022–2024 into tax year 2025 will likely face higher federal tax liabilities in 2026 compared to 2025.
This isn't cause for alarm; it's a return to normalcy. By examining their 2021 tax liability (the last year before forced R&D amortization took effect), companies can gauge their potential 2026 exposure, assuming steady business growth. The key strategic decision lies in whether to accelerate all unamortized costs into 2025 or spread them evenly over 2025 and 2026.
For companies with significant interest expense limitations under Section 163(j) or other considerations, spreading these costs over two years may result in lower taxes through 2026, with the increase delayed until 2027. This decision requires careful modeling based on each company's specific circumstances, projected income, and other deduction limitations.
Understanding the "reduced" R&D credit value
The return to immediate R&D expensing brings a corresponding adjustment to R&D credit values. With domestic costs once again fully deductible, the net R&D credit companies realize will be approximately 21% less than during the 2022–2024 amortization period. However, this represents a return to pre-2022 treatment, not a new limitation.
More importantly, the benefit gained through immediate expensing far outweighs the credit adjustment. Companies investing heavily in R&D will find the cash flow advantages of immediate deductions significantly more valuable than the temporary credit enhancement they experienced during the amortization years.
State conformity creates new constitutional challenges
Perhaps the most significant development for multistate businesses is the emerging constitutional challenge to state adoption of federal R&D provisions. States that conform to the Tax Cuts and Jobs Act version of Section 174 now face an even more compelling discrimination argument under the precedent set by Kraft v. Iowa Department of Revenue.
Under OBBBA, domestic research costs receive immediate expensing, while foreign research costs remain subject to 15-year amortization. This creates facial discrimination against foreign commerce, precisely the issue the Supreme Court addressed in Kraft. States cannot simply adopt federal Internal Revenue Code provisions that discriminate against foreign commerce, even if the adoption appears facially neutral.
This presents a "lay-up" litigation opportunity for affected taxpayers. Companies with significant foreign R&D operations in states that conform to federal Section 174 should evaluate their potential claims. The discriminatory treatment is clear, measurable, and directly conflicts with established Supreme Court precedent.
The GILTI conformity puzzle deepens
Approximately a dozen states include some portion of Global Intangible Low-Taxed Income, now renamed "net CFC tested income," in their tax base, with inclusion ranging from 5 to 50%. This creates significant constitutional and policy questions that will likely intensify in 2026.
The fundamental issue: If a state includes income from foreign subsidiaries that are part of a unitary business enterprise, that income must receive equal treatment in apportionment calculations. States cannot have it both ways; either foreign subsidiary income is part of the unitary business (and thus entitled to apportionment), or water's-edge filing represents a form of separate accounting that excludes such income entirely.
Interestingly, states have struggled to understand GILTI's nature since the TCJA's passage, often calling it a "new category of income." The fact that Section 951A allows deduction of foreign income taxes, while taxes on income are generally nondeductible, raises questions about whether states have thoroughly analyzed the federal provisions they're adopting.
Tax credit transferability market dynamics
The OBBBA retained transferability as an extremely beneficial permanent cash tax savings opportunity, cementing acquisition of discounted tax credits as a permanent fixture in tax planning for 2026 and beyond. The favorable deduction provisions of the OBBBA reduced federal cash tax in aggregate for 2025, thereby reducing demand and driving down tax credit pricing. With pre-OBBBA R&D (Section 174) capitalization largely running off in 2025, taxable income may begin to normalize in 2026, driving more demand and potentially a reduction in tax credit discount rates. Those that act early will enjoy the most favorable discount rates from the most reputable tax credit sellers.
Strategic planning for 2026
As businesses prepare for 2026's tax landscape, several strategies emerge:
- Model R&D acceleration scenarios carefully, considering not just federal impacts but state conformity positions.
- Document foreign R&D operations in preparation for potential constitutional challenges to discriminatory state treatment.
- Review state GILTI inclusion policies and prepare unitary business arguments for equal apportionment treatment.
- Monitor state legislative responses to federal changes, as states may decouple from problematic provisions.
- Engage in the tax credit market as early as possible to command the highest discount rates from the most reputable sellers, while driving estimated tax payment efficiency throughout 2026.
The 2026 tax year will test whether recent federal simplifications translate into state-level complexity. Companies that plan proactively, understanding both the opportunities and constitutional arguments available, will be best positioned to optimize their total tax position while managing compliance risks.
