State decoupling from OBBBA likely to continue into 2026

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Following the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, many states have spent the second half of 2025 assessing the likely revenue impact of the major business tax provisions of the GOP bill. As we anticipated earlier this year, several states have already acted to decouple from the taxpayer-favorable OBBBA provisions in an effort to prevent significant revenue shortfalls. Such decoupling measures are guaranteed to impact the state income tax filing posture for both corporate and noncorporate taxpayers, adding to the complexity of navigating the 2025 tax compliance season.

Several OBBBA provisions are of critical importance to the states from a revenue perspective, including the treatment of domestic research and experimental (R&E) expenditures under Section 174A, bonus depreciation under Section 168(k), the adoption of a full deduction for qualified production property under Section 168(n), and changes to the business interest expense limitation under Section 163(j).

During their legislative sessions since the federal bill’s enactment, states have grappled with the challenge of balancing the desire to incentivize investment with declining revenues that would result from the federal tax changes. The challenge is especially difficult for the states that conform to the Internal Revenue Code (IRC) on a rolling basis, meaning that they adopt IRC changes as the changes occur and would automatically conform to the OBBBA’s provisions unless they take specific action.

Ultimately, the need to prevent revenue shortfalls has driven some recent state legislative efforts to decouple from federal tax changes. Rhode Island became the first state to address the new law, decoupling from all aspects of the OBBBA in budget legislation enacted in late June. In October, California enacted significant legislation moving its IRC conformity date forward from Jan. 1, 2015 — but only to Jan. 1, 2025, ensuring the revised conformity date does not incorporate any OBBBA provisions.

More recently, several rolling-conformity states acted to decouple as part of budget legislation or during special legislative sessions. For example, Michigan and Pennsylvania have enacted budget legislation to address potentially significant revenue losses resulting from OBBBA changes. Beginning with the 2025 tax year, both states will decouple from the immediate expensing of domestic R&E expenditures, the new depreciation allowance for qualified production property, and the more generous calculation of the business interest expense limitation.

Delaware convened a special legislative session in November to address an estimated $400 million revenue loss, choosing to decouple from the bonus depreciation provisions under Sections 168(k) and 168(n), as well as from the transition rules addressing the acceleration of unamortized amounts of R&E expenses from the 2022-2024 tax years. Most recently, the District of Columbia enacted emergency legislation that decouples its corporate income tax from the OBBBA changes to Sections 163(j) and 168(k), along with the new provisions under Sections 174A and 168(n), effective Jan. 1, 2025.