Breaking down the OBBBA: will state tax policy conform to it?

The enactment of the One Big Beautiful Bill Act (OBBBA) represents one of the most significant recent shifts in federal tax policy. But each state has the authority to decide which provisions, if any, to incorporate into its own tax code. The OBBBA’s impact will vary widely at the state level depending on each one’s approach to conformity.

States generally follow one of three conformity models when aligning with the Internal Revenue Code (IRC):

• Rolling conformity: States automatically adopt IRC changes, unless they specifically decouple from certain provisions.
• Fixed date conformity: States conform to the IRC as of a set date. IRC changes after that date don’t apply unless the state legislature compels it to update its conformity statute.
• Selective conformity: Legislative action is required to adopt any IRC changes.

Key OBBBA provisions likely to affect states

• State and Local Tax (SALT) deduction cap changes: Temporarily raising the cap and introducing income-based phaseouts
• Exclusion of tips and overtime pay: Removing certain earnings from taxable income
• Business interest expense limitation shift: The limit to be calculated based on EBITDA, generally increasing deductible interest
• Bonus depreciation expansion: Allowing 100% expensing of certain assets and property
• Research and development (R&D) deductions: Deducting domestic R&D costs the year they occur. Taxpayers may also elect to deduct the unamortized balance of previously capitalized domestic R&D costs.
• Global intangible low-taxed income (GILTI): Revised rules for controlled foreign corporations and foreign income deductions, rebranded as Net CFC-tested income (NCTI)

Explore a more detailed breakdown of OBBBA provisions in our OBBBA content hub.

How conformity models may affect individuals and businesses

The impact of these provisions on taxpayers and businesses depends on a state’s conformity model:

• Rolling conformity:
  • A resident in a rolling conformity state would immediately benefit from the higher SALT cap, potentially deducting more property taxes.
  • Tips and overtime pay for individuals would be untaxed.
  • Businesses could expense new equipment right away under expanded bonus depreciation.
• Fixed date conformity:
  • A resident in a fixed date state would see no change until the legislature updates the conformity date. Their SALT deduction would remain capped at the prior federal level.
  • Tips and overtime pay would taxed until the state legislature updates the IRC conformity date.
  • Businesses would continue applying older interest expense rules until legislative action.
• Selective conformity:
  • A resident in a selective state might benefit from the SALT cap increase if lawmakers adopt it, but not from the exclusion of tips and overtime if that provision is rejected.
  • Businesses could see mixed treatment, with R&D deductions allowed but bonus depreciation denied, depending on legislative choices.

State responses

Several states have already issued guidance on how they plan to address the OBBBA:

Alabama has released administrative guidance regarding IRC §174 Amortization of Research and Experimental (R&E) Expenditures. The state will retroactively apply the new rules to R&E expenses incurred after December 31, 2023. Taxpayers may either deduct all R&E expenses currently or follow the pre-Tax Cuts and Jobs Act (TCJA) IRC §174 treatment.

Colorado was the first state to address OBBBA changes. It required the add-back of the qualified business income (QBI) deduction, under IRC §199A, when calculating income. Additionally, Colorado decoupled from IRC §250, the foreign-derived deduction eligible income (FDDEI) statute.

District of Columbia enacted emergency legislation on December 3, 2025 to decouple from the OBBBA. For tax years starting after December 31, 2024, D.C. will decouple from:

• IRC §163(j): Limitation on Business Interest Expense Deduction
• IRC §163(n): Limitation on Interest Deduction for Multinational Groups
• IRC §168(k): Special Allowance for Certain Property (bonus depreciation)
• IRC §174: Research and Experimental Expenditures

Under D.C. law, emergency legislation cannot take effect for more than 90 days. They will expire then if there’s no further action.

Michigan has proposed House Bill 4961, which would amend the Income Tax Act. For tax years starting after December 31, 2024, taxpayers would:

• Ignore:
  • IRC §168(n): Special Allowance for Qualified Production Property
  • IRC §174A: Domestic Research or Experimental Expenditures
• Apply (as they existed on December 31, 2024):
  • IRC §163(j): Limitation on Business Interest Expense Deductions
  • IRC §168(k): Additional First-Year Depreciation (bonus depreciation)
  • IRC §174: Research and Experimental Expenditures
  • IRC §179: Election to Expense Certain Depreciable Business Assets

Additionally, for tax years starting after December 31, 2021, the bill stipulates that taxpayers must disregard the transition rules under OBBBA §70302: Transition Rules for Amortization of Research Expenditures, including those related to IRC §174A. These provisions would apply to individuals, resident estates or trusts and corporate income taxpayers, including flow-through entities.

What to expect

More state-level legislative guidance on OBBBA policy adoption is expected in January. States typically take consistent approaches to conformity, and these norms are displayed in the table below. However, strained state budgets may result in more non-conformity or decoupling than convention suggests.

All taxpayers should be aware of OBBBA changes that impact their 2025 taxes. Sikich’s state and local tax team can assist with understanding and adhering to all OBBBA guidelines.

State conformity conventions