The Ripple Effect: What Will State and Local Tax Look Like Under the One Big Beautiful Bill?

At a glance

• The main takeaway: The One Big Beautiful Bill introduces changes to state and local tax practices and policies, prompting some states to consider measures to limit its impact.
• Impact on your business: Many individual states, whose legislative sessions for 2025 have already passed, will now need to evaluate federal policy to determine if states will comply or modify provisions.
• Next steps: Aprio’s State and Local Tax (SALT) team are continuously monitoring the various ways that states will respond to the One Big Beautiful Bill and are prepared to navigate you through these changes.

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The full story:

Federal tax policy under the second Trump administration has been set with the passing of the One Big Beautiful Bill (OBBB) Act. While the federal piece is now established, individual states must determine which parts of the new policy their budgets can adopt.

Here is a look at some of the key issues that will impact state income tax policy from the OBBB.

State and Local Tax Deduction Limitation

Prior to the passage of the OBBB, a significant topic of debate revolved around a provision from the 2017 Tax Cuts and Jobs Act (TCJA):  whether to keep the SALT deduction limitation, increase it, or let the provision expire. Ultimately, legislators opted to keep a limitation, but increased it to $40,000 for taxpayers earning less than $500,000. Taxpayers with income exceeding $500,000 will see a phase down of the deduction allowance to a minimum of $10,000.

State pass-through entity tax (PTET) election regimes will remain valuable to owners of partnerships and S corporations. However, many states originally enacted their election statutes to terminate at the end of the 2025 tax year. States with an automatic sunset must determine if they want to extend their provision to match the federal limitation through the 2029 tax year.

Bonus Depreciation & Asset Expensing

The OBBB permanently enacts the 100% bonus depreciation for qualifying property and extends the increased Section 179 expense deduction for business assets placed in service. States have adopted these two deductions in varying ways:

1. States that have generally followed the federal treatment will now need to decide if their budgets can sustain the full deductions long-term.
2. Other states that have disallowed the federal bonus and Section 179 expenses will need to determine how to incorporate these specific changes.

New to bonus depreciation is a provision that allows for 100% depreciation on nonresidential real property used in manufacturing and production. This provision is separate from the IRC 168(k) bonus depreciation, which states generally reference in their adoption of bonus depreciation. States may have to separately address this provision.

Certain individual states must evaluate several additional provisions and determine if they will comply with federal policy or make modifications. Some of these additional provisions include:

Research & Experimental Expenditures

Many companies have long awaited the repeal of Section 174 requiring the capitalization of domestic and foreign research and experimental (R&E) expenses. The OBBB repeals capitalization for domestic expenses on a going-forward basis. Additionally, it allows taxpayers to elect to accelerate the remaining amortization for expenses incurred prior to 2025.

Business Interest Expense Calculation

Starting in tax year 2022, businesses calculated adjusted taxable income for purposes of the interest expense limitation without depreciation and amortization. The OBBB changes the adjusted taxable income calculation to again include depreciation and amortization. This could result in an adjusted taxable income calculation that differs for state purposes.

Foreign Derived Dividend Deduction & Global Intangible Low-Taxed Income

Both of these foreign provisions saw changes to the calculation and percentages of inclusion and deductions for foreign income items. States will again have to evaluate the fiscal impacts of these changes and whether they warrant continued conformity.

The bottom line

While the state and local landscape after the passage of OBBB remains uncertain, many states have completed their legislative sessions for 2025 without being able to address these policies. States may call a special legislative session later in the year to address the provisions which would give taxpayers more certainty. However, as states review the OBBB’s impacts, they may not produce policy responses until the beginning of 2026.

Aprio’s State and Local Tax (SALT) Services team are continuously monitoring the impacts taxpayers may face and state responses to the various provisions of the new legislation. Aprio’s tax advisors can help you navigate the potential changes and devise a tax plan that works for your business.