Pennsylvania and Delaware recently enacted legislation decoupling their corporate income tax bases from several important income tax provisions contained in the One Big Beautiful Bill Act (OBBBA),1 including the treatment of research and experimental (R&E) expenditures under IRC Secs. 174 and 174A and the special depreciation for qualified production property (QPP) under IRC Sec. 168(n).2 Pennsylvania also decoupled from the business interest expense limitation under IRC Sec. 163(j). Pennsylvania and Delaware adopted this legislation in an effort to prevent significant revenue losses that would otherwise result from automatically conforming to favorable federal tax provisions.
Pennsylvania Act 145
After a nearly five-month delay, Pennsylvania Gov. Josh Shapiro approved Act 45, and enacted budget legislation for the 2026 fiscal year on Nov. 12, 2025.3 In making amendments to the Commonwealth’s Fiscal Code,4 Act 45 makes significant legislative changes in response to several OBBBA provisions generally effective for tax years beginning in 2025 and thereafter.
With respect to R&E expenditures, the definition of “taxable income” for corporate net income tax (CNIT) purposes is expanded to include the amount of deductions for R&E expenditures claimed and allowable under the following provisions:
- IRC Sec. 174 (addressing the amortization of R&E expenditures);
- 59(e) (providing for the election of certain qualified expenditures);
- 174A (addressing domestic R&E expenditures); and
- 481 (addressing R&E expenditures originally made in tax years beginning in 2022, 2023, or 2024).5
To the extent that such R&E expenditures are included in taxable income, an additional deduction for such expenditures is allowed until the total amount deductible under Secs. 174, 59(e) or 174A for the tax year has been claimed. However, the deduction is limited to 20% of: (i) the remaining unamortized qualified R&E expenditures under Secs. 174 or 59(e) or (ii) the qualified R&E expenditures under Sec. 174A.6 If amounts related to a change in a taxpayer’s accounting method under Sec. 481 were included in taxable income, an additional 20% deduction of the remaining unamortized R&E expenditure is allowed until the total amount originally amortizable under Sec. 174 has been claimed.7
In other words, for tax years beginning in 2025 and thereafter, Pennsylvania requires that R&E deductions made under Secs. 174, 174A, 59(e) or 481 be added back to taxable income for CNIT purposes and then provides a 20% deduction for all R&E expenses, which also appears to apply to foreign R&E expenses. The total amount of additional deductions under any of the above provisions may not exceed the qualified R&E expenditures allowed under these provisions.
An addback is also required for the amount of the special depreciation deduction for QPP claimed and allowable under new Sec. 168(n).8 For Pennsylvania CNIT purposes, the amount of the deduction for QPP must be taken in accordance with normal depreciation rules under Secs. 167 and 168, except that Sec. 168(n) does not apply.9 If the QPP is sold or disposed of during the tax year for which depreciation was added back to taxable income, an additional deduction is allowed to the extent the depreciation has not yet been recovered.10 Effectively, Pennsylvania does not recognize the special depreciation of QPP placed in service during the tax year, and so normal depreciation rules must be followed.
Next, the calculation of the business interest expense limitation for CNIT purposes is to be applied as if Sec. 163(j) were in effect on Dec. 31, 2024.11 This means that Pennsylvania will continue to calculate the Sec. 163(j) limitation based on a calculation of adjusted taxable income (ATI) using earnings before interest and taxes (EBIT) that remained in place through the 2024 tax year for federal income tax purposes, in contrast with the more favorable calculation implemented by the OBBBA that also includes depreciation and amortization.
Finally, Act 145 requires the Pennsylvania Department of Revenue to prepare a report to the state legislature by Dec. 31, 2026, on the revenue impact of decoupling from the major OBBBA provisions, including the relative impact of decoupling compared with the reduction in taxes collected resulting from the scheduled annual CNIT rate reductions and the increase in net loss deductions adopted in recent budget legislation.12
Delaware House Bill 255
After convening a special legislative session, Delaware Governor Dan Meyer approved legislation on November 19, 2025, also decoupling from several OBBBA provisions beginning with the 2022 tax year for corporate income tax purposes and the 2026 tax year for personal income tax purposes.13
Corporate income tax
For domestic R&E expenditures incurred in 2022, 2023 and 2024, the capitalization and amortization of such expenses continues under the federal provisions in place immediately before the enactment of the OBBBA.14 In other words, the corporate income tax decouples from the transitional rules under Sec. 174A, allowing for the acceleration of unamortized amounts of R&E expenses incurred during the 2022-2024 tax years. Under current law, Delaware will prospectively conform to the current expensing of R&E expenditures incurred beginning in the 2025 tax year.
For property acquired and placed in service between Jan. 20, 2025, and Dec. 31, 2030, that would be eligible for expensing under Sec. 168(k), such property will follow the expensing methods according to the federal provisions in effect immediately before the enactment of the OBBBA.15 As such, Delaware will temporarily decouple from the restoration of 100% bonus depreciation for qualified property placed in service beginning in the 2025 tax year.
Finally, QPP placed in service between Jan. 20, 2025, and Dec. 31, 2030, will be subject to the amortization and depreciation rules for such property that were in place immediately prior to enactment of the OBBBA.16 Therefore, Delaware will not conform to the special depreciation rules for QPP provided under new Sec. 168(n) and will instead follow regular depreciation rules for such property.
Personal income tax
Delaware will also decouple from the following OBBBA provisions for personal income tax purposes effective Jan. 1, 2026:
- 168(k) bonus depreciation: Delaware will decouple from 100% bonus depreciation for eligible property acquired and placed in service from Jan. 1, 2026 to Dec. 31, 2030, and follow the applicable amortization and depreciation rules in place immediately prior to the enactment of the OBBBA.17
- 168(n) special depreciation for QPP: Delaware will decouple from special depreciation rules for QPP placed in service between Jan. 1, 2026 and Dec. 31, 2030, and regular depreciation rules in place immediately before enactment of the OBBBA apply.18
Commentary
With these legislative enactments, Pennsylvania and Delaware join a growing number of states that have already acted in 2025 to decouple from the taxpayer-favorable OBBBA provisions in an effort to prevent significant revenue shortfalls.19 As rolling conformity states, both Pennsylvania and Delaware would have automatically incorporated the federal changes into their tax codes absent further legislative action. A Pennsylvania Senate fiscal note estimated that decoupling from Secs. 174A, 163(j) and 168(n) would prevent the Commonwealth from losing an estimated $1.1 billion in tax revenue during the 2026 fiscal year.20 Likewise, the Delaware Economic and Financial Advisory Council (DEFAC) projected a $400 million budget shortfall if Delaware conformed to changes to Secs. 174, 168(k) and 168(n).21
In reaching a budget agreement in Pennsylvania, state lawmakers weighed the impact of decoupling from the OBBBA provisions against resorting to other measures such as slowing the reductions to the CNIT rate that resulted from landmark budget legislation enacted in 202222 and increases to the state’s NOL deduction limitation enacted in
2024.23 In exchange for decoupling from OBBBA provisions, the Commonwealth has been able to maintain CNIT rate reductions that are scheduled to reach 4.99% by the 2031 tax year.
In particular, Pennsylvania’s addback of the federal R&E expense deduction under Secs. 174 and 174A and five-year amortization rule makes for a potentially complex state-specific calculation that will require taxpayers to separately track their R&E expense deductions for CNIT purposes. Further, the legislation as currently drafted refers to “any [R&E] expenditures claimed and allowable” under Secs. 174 and 174A, meaning that the amortization deduction does not appear to distinguish between domestic and foreign R&E expenses. As such, foreign R&E expenses are potentially subject to an accelerated deduction under the Pennsylvania rules given that foreign R&E expenses remain subject to a 15-year amortization period for federal purposes under new Sec. 174A.
Likewise, Pennsylvania’s nonconformity to the calculation method of the Sec. 163(j) business interest expense limitation will create differences in the calculation for federal and Pennsylvania purposes. In light of these changes, one question is whether the Department will continue to follow its historic position that if there is no Sec. 163(j) limitation for federal consolidated return purposes, the limitation is not required to be calculated on a separate company basis for CNIT purposes. It remains to be seen whether the Department will maintain its position given Pennsylvania’s calculation of the Sec. 163(j) limitation as of Dec. 31, 2024. Pennsylvania’s decoupling from both Sec. 174A and Sec. 163(j) provides several instances where the Pennsylvania Department will likely be required to provide further guidance on the implementation of Act 145.
1 P.L. 119-21 (2025).
2 Pa. Act 45 of 2025 (H.B. 416), Laws 2025; Del. H.B. 255, Laws 2025.
3 Pa. H.B. 416, Laws 2025.
4 Pa. Act of 176 of 1929 (P.L. 343).
5 H.B. 416, § 3, adding § 216(a)-(e).
6 H.B. 416, § 3, adding § 216(a)-(f).
7 For taxpayers that elect under the Sec. 174A transitional rule to accelerate unamortized domestic R&E expenses from tax years 2022 through 2024, an addback is required of any deduction claimed under § 481 related to such R&E expenses, and an additional 20% deduction of the remaining unamortized qualified R&E expenses is allowed. H.B. 416, § 3, adding § 216(f).
8 H.B. 416, § 3, adding § 216(g).
9 H.B. 416, § 3, adding § 216(h).
10 H.B. 416, § 3, adding § 216(i).
11 H.B. 416, § 3, adding § 217.
12 H.B. 416, § 3, adding § 216.1.
13 Del. H.B. 255, § 3.
14 H.B. 255, § 1, amending Del. Code Ann. tit. 30, § 1903(d)(1).
15 H.B. 255, § 1, amending Del. Code Ann. tit. 30, § 1903(d)(2).
16 H.B. 255, § 1, amending Del. Code Ann. tit. 30, § 1903(d)(3).
17 H.B. 255, § 2, amending Del. Code Ann. tit. 30, § 1106(d)(1).
18 H.B. 255, § 2, amending Del. Code Ann. tit. 30, § 1106(d)(2).
19 For further discussion, see GT Tax Hot Topics: State decoupling from OBBBA likely to continue into 2026.
20 Fiscal Note, Pa. Senate Appropriations Committee, Nov. 12, 2025.
21 Delaware Economic & Financial Advisory Council, Press Package, Oct. 20, 2025.
22 For further discussion, see GT SALT Alert: Pennsylvania reduces corporate income tax rate.
23 For further discussion, see GT SALT Alert: Pennsylvania increases NOL deduction limitation.
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