State-Level Implications of the OBBB’s R&D Expensing Rules

With the enactment of the One Big Beautiful Bill (OBBB) on July 4, 2025, the federal landscape surrounding research and development (R&D) expenditures has shifted meaningfully. Among its provisions, OBBB restores the immediate expensing of domestic R&D costs for tax years beginning after Dec. 31, 2024. While this federal change offers significant relief to businesses, it introduces a complex array of implications at the state level, especially given the varied conformity frameworks across jurisdictions.

Anticipated State Conformity Dynamics

State conformity to the Internal Revenue Code (IRC) is generally categorized as rolling or static. In rolling conformity states, the tax code is tied to the IRC on a continuous basis, meaning these states will automatically adopt the OBBB’s retroactive R&D deductions without legislative action. In contrast, static conformity states only conform to the IRC as of a fixed date, and any federal tax changes made after that date do not apply unless the state legislature explicitly updates its laws. Many state legislatures have already adjourned for 2025, effectively locking in the R&D regime for this tax year.

In rolling conformity states like Colorado, which projects a sizable revenue shortfall tied to the change, the question is whether policymakers will call special sessions or defer decoupling efforts to 2026. An even more disruptive possibility would be retroactive decoupling, shifting taxpayer’s anticipated liability after the close of the tax year. For now, the situation remains fluid, and the lack of state response may worsen compliance and tax planning burdens in the months ahead.

Impact on 2025 Estimated Payments

Ignoring the future headaches for a moment, the retroactive application of immediate expensing to the start of the 2025 tax year presents potential volatility in state-level estimated tax payments. States, like Indiana, that previously decoupled from IRC § 174 and permitted full expensing may now require an addback to avoid double deductions. This dynamic could result in scenarios where a taxpayer has a federal loss due to increased R&D deductions yet reports positive state taxable income.

Additional Federal-State Considerations

The impact of the R&D provisions are not simply contained to whether or not the state will conform to the immediate expensing. There are several other considerations taxpayers and advisors should be aware of, some of which include the following:

• IRC §280C Adjustments – OBBB modifies IRC §280C(c)(1), mandating a reduction in deductible R&D expenses by the amount of the federal research credit unless an election is made under §280C(c)(2). States’ treatment of this adjustment will vary – some will conform to the reduction, while others may allow a full deduction by decoupling and offering a state-level modification.
• Accounting Method Changes – The reversion to immediate expensing represents a change in accounting method under federal rules, generally requiring taxpayers to file a Form 3115. While many states mirror federal treatment, others – like California – may impose distinct procedural requirements that businesses must address.
• Amended Returns and Partnership Considerations –The law permits small businesses to retroactively claim deductions for 2022-2024 by filing amended returns. However, partnerships should tread carefully. Approximately 20 states adhere to federal (or similar) partnership audit regimes, introducing potential complexities and compliance costs when amending state returns.

Key Takeaways

The taxpayer friendly provisions enacted under OBBB introduce a multi-faceted set of issues for state taxation. Taxpayers and advisors should closely monitor legislative activity across jurisdictions to anticipate conformity changes, estimated payment obligations, and procedural nuances, especially for entities with multistate operations or complex pass-through structures.

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