Key takeaways
- States are taking different approaches to OBBBA conformity, creating significant variation in how federal tax changes affect state income tax calculations.
- Section 174A R&E expensing, bonus depreciation, qualified production property, and NCTI are among the OBBBA provisions creating the greatest multistate complexity.
- Tax teams should continuously monitor state legislation and administrative guidance, model potential tax impacts, and document filing positions as state responses continue to evolve.
The One Big Beautiful Bill Act (OBBBA) introduced sweeping federal tax changes that will significantly impact state income tax calculations. Because federal taxable income is the starting point for most corporate income tax calculations, these changes flow directly into state income tax calculations unless a state modifies or decouples from the new rules.
A recent Bloomberg Tax webinar, State Responses to the One Big Beautiful Bill Act: A Legislative Season Wrap-Up, covered how each state has responded so far. The panel included Bruce Ely from Bradley Arant Boult Cummings LLP, Marilyn Wethekam from the Council on State Taxation, and Corey Gibbs, Bloomberg Tax’s associate analyst covering OBBBA developments.
This article discusses how diverging priorities and policy objectives shape the state response to the OBBBA, and why applying it varies from one jurisdiction to the next.
State conformity choices
“When you’re looking for where to begin your research, you typically want to start with the conformity status of the state,” Gibbs said.
States don’t always automatically adopt new federal tax rules. Instead, each has a unique approach to conformity based on fiscal and policy priorities.
These approaches fall into three broad categories:
- Rolling conformity: States automatically integrate most federal tax changes as they become law. While this adds simplicity, it may force states to act if federal tax cuts threaten their own revenue, prompting decoupling strategies.
- Static or fixed-date conformity: States adopt the federal code as it stood on a specific date. Conforming to OBBBA’s provisions requires legislative action, creating lag periods with different rules for taxpayers.
- Selective or partial conformity: States choose specific federal provisions to adopt, while decoupling from all others. This flexibility appeals to states wanting maximum control, but it also creates the most difficult compliance environment.
State legislatures may choose to decouple when federal changes might erode their tax base or increase administrative complexity to balance the desire for administrative ease and reliable revenue. These differences can mean federal relief doesn’t always extend to the state level. Additionally, the risk of unexpected tax obligations rises. For multistate businesses, knowing which rules apply and in which states is crucial for effective tax planning.
Hear Marilyn Wethekam, of counsel to the Council On State Taxation, explain why federal tax policy objectives do not always align with state revenue and economic-development priorities. [4:26]
Watch the full webinar for a deeper look at how states are responding to OBBBA and what those decisions mean for multistate tax planning and compliance.
State decoupling from OBBBA tax changes
State legislatures may choose to decouple when federal changes erode their tax base or increase administrative complexity. These differences can mean federal relief doesn’t always extend to the state level.
The most frequently decoupled provision of the OBBBA is Section 168(n), the new first-year expensing rule for qualified production property. This section allows a business to deduct the full cost of a qualifying facility in the year it is placed in service rather than depreciating it over a longer recovery period.
Economic development officials pushed for conformity in several states, viewing the provision as a competitive tool for attracting large manufacturing investments. However, legislators in several states judged the projected revenue impact too significant to absorb.
How states are handling bonus depreciation
Bonus depreciation under Section 168(k) is another area where several states decoupled from the OBBBA, particularly those that had already decoupled from bonus depreciation following the TCJA.
Retroactivity compounded the fiscal effect in rolling-conformity states. Because the OBBBA reinstated 100% bonus depreciation retroactive to property placed in service after January 19, 2025, some states felt the revenue impact almost immediately as companies reduced estimated payments.
For example, in Alabama, Ely notes the retroactive provisions “wiped out the entire corporate income tax revenue for a couple of months” before legislators could respond.
That kind of fiscal shock, combined with the sunset dates built into several OBBBA provisions, may prompt legislators to revisit their initial decisions next session, weighing revenue estimates against the political risk of appearing to raise taxes in an election year.
“You may lose $50 million on this change or the conformity, but economic impact may double that over time.”
Hear the full discussion on state conformity, decoupling, and emerging compliance challenges. Watch the webinar on demand.
Guidance from state tax departments
Departments of Revenue and other state tax agencies play a key role in shaping compliance by interpreting and communicating new laws.
They often issue preliminary guidance through formal publications, forms, and instructions, offering businesses an early glimpse of future requirements before final legislation is passed.
Regularly reviewing administrative notices helps your team stay ahead of policy changes, file on time, and avoid surprises, especially since some decisions might not take effect until late 2026 or 2027.
Texas, a static-conformity state with a 2007 conformity date, issued a comptroller’s memo directing that current federal rules apply where the state’s code does not separately address the Internal Revenue Code, effectively extending immediate expensing treatment.
Arizona Governor Katie Hobbs issued an executive order directing that tax forms apply conformity rules before the legislature enacted anything. This left taxpayers to decide, in the interim, whether to follow the firms or the underlying statute.
On the other hand, North Carolina initially issued a notice confirming its existing fixed conformity date applied unchanged, but has since updated its IRC conformity date to July 5, 2025, and decoupled from the new IRC section 174A(a) deduction.
“Some of this less binding guidance has turned into something a lot more concrete as time has gone on,” said Gibbs. “But when federal legislation drops, you’re looking for any kind of information that’s going to help you make plans for your future.”
For practitioners, it’s crucial to monitor administrative notices, memos, and executive actions, since some state decisions will not take effect until late 2026 or 2027.
Multistate concerns and uncertainty
Operating across multiple states introduces significant compliance issues under OBBBA.
Two federal provisions illustrate how the OBBBA makes multistate compliance more complex.
State treatment of R&E expenditures
The first is the split of Section 174 research and experimental (R&E) expenditures. Domestic R&E costs now qualify for immediate expensing under new Section 174A, while companies must amortize foreign R&E costs.
States that previously conformed to a single Section 174 must now decide separately whether to adopt 174A and its accompanying transition rule (OBBBA Section 70302(f)), which some states have addressed differently than the underlying deduction itself.
NCTI conformity and apportionment challenges
The second is the treatment of foreign source income under Section 951A, where net CFC-tested income (NCTI) replaced the GILTI regime. States have split on whether to adopt NCTI.
“It’s the one that you’re going to see the potential litigation over and also a much greater debate over whether or not the states are going to go down the road of adopting it or not,” said Wethekam.
Minnesota and Illinois currently tax 50% of NCTI without any corresponding adjustment to the apportionment formula. Starting January 1, 2027, New Mexico will tax 100% of NCTI and has codified a specific apportionment adjustment for it.
Listen to Marilyn Wethekam break down the filing, audit, estimated-payment, and reporting challenges created by diverging state responses to OBBBA. [2:35]
This lack of uniform adoption creates a growing compliance burden for multistate businesses. These organizations must track separate conformity statutes, effective dates, and apportionment rules for Section 174A, bonus depreciation, qualified production property, and NCTI in every state where they file and also document their positions well enough to withstand audit years later.
Timelines for state decisions
State responses to OBBBA unfold at different paces.
More than half of taxing jurisdictions have fully addressed OBBBA through legislation or guidance. Others, including California, updated general conformity dates without directly addressing substantive provisions, leaving their eventual position uncertain.
“I think you’re going to see a lot of hindsight reviews coupled with revenue estimates to see if what the legislature did originally – or didn’t do – should be reversed next spring,” said Ely.
A technical corrections proposal affecting qualified production property is also pending at the federal level, and several OBBBA provisions, including Section 168(n), have built-in sunset dates that are only a few years away. This adds another deadline for tax teams to track.
During this period, you may be preparing filings with incomplete information, requesting filing extensions, or amending prior returns as rules are finalized.
Hear Bruce Ely, counsel at Bradley Arant Boult Cummings, explain why states may revisit their initial OBBBA conformity decisions as revenue and economic impacts become clearer. [2:03]
How to prepare for state conformity decisions
While states work through their decisions, acting now positions you to navigate this changing environment confidently:
- Monitor legislative and regulatory updates: Track legislative sessions and DOR guidance, including notices, bulletins, and executive orders, in every relevant state. Substantive positions increasingly come from outside formal statutes before eventual codification. Subscriptions to tax news and leveraging state tax research platforms can help you respond to developments in real time.
- Model scenarios: Analyze how state conformity choices affect your tax position. Projecting liabilities, cash flow implications, and compliance risks ensures you’re prepared for a range of outcomes.
- Prepare a compliance plan: Use your monitoring and analysis to prepare flexible filing strategies. Document the technical basis for return positions in states with divergent guidance and be ready to file extensions or amend prior returns as final rules.
See how tax experts are interpreting state responses to OBBBA and what to watch next. Access the full webinar.
Moving forward
The state tax implications of the One Big Beautiful Bill Act are still a moving target, shaped as much by fiscal politics as by tax policy. States that moved quickly this year may revisit those decisions once they’ve had a full filing cycle to see the impact on state income tax collections. States that have yet to act may generate new guidance and legislation well into 2027.
Ongoing monitoring, modeling, and collaboration across your team is the best way to manage that uncertainty and respond quickly as each state’s position becomes clear.