The following provisions were included in the Act and will require an analysis of the potential state impact of such provisions in relation to a state's conformity guidance.
Section 174: Expensing of domestic research expenditures
One of the last rounds of significant federal tax reform, the TCJA, amended IRC section 174 to require taxpayers to capitalize their research and experimental (R&E) expenditures and amortize the costs over a five-year period for domestic costs and 15-year period for foreign costs for tax years beginning after Dec. 31, 2021.
Under the Act, domestic R&E expenditures paid or incurred in tax years beginning after Dec. 31, 2024, are immediately deductible under the new IRC section 174A. Alternatively, taxpayers can make an election to capitalize and amortize R&E costs over different periods based on IRC section 174A(c) or IRC section 59(e). Further, the Act provides taxpayers the ability to accelerate the remaining unamortized domestic amounts for previously capitalized R&E costs in tax years beginning after Dec. 31, 2021, and before Jan. 1, 2025, over a one-year period or equally over two years beginning with the 2025 tax year.
State and local tax (SALT) considerations: The new R&E provisions will present state conformity issues between states that automatically conform to the new provisions and those that do not based on decoupling or fixed-date conformity as there are states that have previously decoupled from the TCJA section 174 provisions. Specifically, Alabama, a rolling conformity state, enacted legislation (HB 163) in May 2025, that retroactively decouples from TCJA’s changes to section 174. for tax years beginning on or after Jan. 1, 2024. Rather, Alabama taxpayers shall have the option to currently deduct research and experimental expenditures or treat the expenditures as deferred expenses that are capitalized and amortized.
As such, taxpayers will need to analyze the section 174 conformity provisions from the viewpoint of both general IRC conformity discrepancies and previous section 174 decoupling provisions. For multijurisdictional taxpayers that have R&E expenditures, a separate section 174 analysis and calculation may be required based on the state specific guidance.
Bonus depreciation
The Act makes 100% bonus depreciation under IRC section 168(k) permanent avoiding the phase out as previously scheduled by TCJA.
The Act further includes new bonus depreciation provisions for qualified production property (QPP) under IRC section 168(n). This new provision allows taxpayers to immediately deduct 100% of the cost of nonresidential real property that meets the definition of QPP. QPP includes manufacturing, production, or refining of specific tangible personal property acquired after Jan. 19, 2025, and before Jan. 1, 2029, but does not include property located outside the U.S.
SALT considerations: Many states have historically decoupled from bonus depreciation under IRC section 168(k), required associated state tax addbacks, and provided for their own bonus depreciation calculations. As such, it is important for taxpayers to track federal and state differences in depreciable assets in order to appropriately apply state modifications, if applicable.
Further, similar to IRC section 168(k), states will need to address conformity with the new depreciation provisions provided by IRC section 168(n). Specifically, rolling conformity states will automatically adopt the new provisions but could legislatively decouple in the future.
Interest expense deduction limitation – IRC section 163(j)
TCJA provided a limit on the deductibility of business interest expense to 30% of earnings before interest and taxes (EBIT). However, beginning in 2025, the Act provides a less restrictive limitation on the business interest expense deduction which is calculated based on earnings before interest, taxes, depreciation and amortization (EBITDA).
SALT considerations: Tracking differences between the state and federal section 163(j) limitation carryforwards has been historically nuanced due to state conformity issues in both separate and combined filing states. To add to the complexity, the limitation was temporarily increased to 50% from 30% in 2019 and 2020 due to the CARES act. However, many states decoupled from the increase in the limitation and created additional tracking complexities where the federal carryforward and state carryforward balances differ. Further, the Act adds another layer to the IRC section 163(j) conformity issues as multijurisdictional taxpayers will need to understand a state's conformity to the Act's changes to section 163(j) and determine the potential impact to its state tax filings and associated carryforward attributes.
Global intangible low-taxed income (GILTI)
The Act changed the GILTI deduction under IRC section 250 to 40% for tax years beginning after Dec. 31, 2025. Note: the deduction was set to change to 37.5% if TCJA had expired as contemplated. In addition to the section 250 change, the Act also changes how GILTI is calculated (e.g. eliminates the adjustment for qualified business asset investment) which may increase the overall GILTI amount.
SALT considerations: Historically, states have issued guidance on the taxability of GILTI in their state via state specific guidance. Many have allowed for a full or partial exclusion of GILTI through its dividends received deduction (DRD) rules while others have taxed fully or partially taxed GILTI outside the DRD regimes.
The Act adds additional complexity and requires further state analysis for states that do not conform (i.e. followed the GILTI regime prior to the Act) or decouple from the new GILTI regime; a separate proforma calculation may be required to arrive at the correct starting point for determining state taxable income.
SALT cap
The cap on individual SALT deductions was one of the more contentious issues evaluated when drafting and enacting the Act. The SALT cap, currently limited to $10,000, was set to expire at the end of 2025. However, the Act extended the SALT cap providing taxpayers with a $40,000 cap through 2029, but the higher limit phases out when taxpayers reach $500,000 in income.
SALT considerations: The SALT cap led most states to implement pass-through entity tax (PTET) regimes, allowing PTEs (e.g. partnerships and S corporations) to pay state taxes at the entity level and avoid the SALT cap for individual owners. States enacted PTET regimes at different times, with expiration dates that either align with the SALT cap expiration, are permanent, or set for a fixed date. Some states require legislative action to extend their PTET regimes—for example, California and Virginia recently passed extensions, although Virginia's is only for one year. At this point, the PTET regimes in Oregon, Utah and Illinois will all expire at the 2025 tax year. If the PTET regimes in these states are to continue into 2026 and thereafter, there will need to be a legislative change. Ongoing monitoring of PTET regime extensions will be important for taxpayers that have historically made PTET elections.
Qualified Small Business Stock (QSBS) exclusion – IRC. section 1202
The Act modifies the scope and potential benefits of IRC. section 1202, including shorter holding periods, increased exclusion cap and greater asset threshold for a company to qualify as a small business for section 1202 purposes.
SALT considerations: Generally, states conform to section 1202 and the changes detailed in the Act are taxpayer friendly, aiming to incentivize taxpayers to invest in small businesses and start-ups. Specifically, the changes allow certain taxpayers to potentially exclude from federal tax capital gains from the sale of QSBS when certain criteria are met. However, in the event a state adopts the IRC based on fixed conformity prior to July 4, 2025, the less favorable section 1202 rules would apply, and absent any legislative action to adopt the updated provision, an individual would be required to recalculate its section 1202 limitation.
