State conformity to Section 174 now varies widely: after the One Big Beautiful Bill Act restored immediate deduction of domestic research and experimental costs through new Section 174A for tax years beginning after December 31, 2024, some states automatically allow the full deduction, others have decoupled and require their own amortization or add-backs, and a handful use conditional or entity-specific rules that produce a different answer depending on how the business is organized or which credits it claims. Foreign R&E remains subject to 15-year amortization at the federal level, and states generally follow that piece.
Why the State Map Fractured
The Tax Cuts and Jobs Act required all R&E expenditures to be capitalized starting with tax years beginning after December 31, 2021, over five years for domestic research and 15 years for foreign, with a half-year convention. New Section 174A permanently reverses that for domestic R&E, and taxpayers can alternatively elect 60-month capitalization or a 10-year amortization under Section 59(e).1Internal Revenue Service. Revenue Procedure 2025-28
Because every state with a corporate income tax starts from some version of federal taxable income, the federal flip from capitalization back to expensing forced each state to react, or not. Two conformity mechanisms drive the split:
- Rolling conformity states automatically adopt federal changes as they take effect. A rolling state incorporated TCJA capitalization in 2022 and now automatically allows Section 174A expensing in 2025 unless it enacts a targeted opt-out.
- Fixed-date (static) conformity states adopt the Internal Revenue Code only as it existed on a legislatively chosen date. Whether Section 174A applies depends on that date and any specific carve-outs.
Either type of state can decouple from a specific provision by statute. The result is a patchwork where the same domestic R&E dollar can be fully deductible in one state, subject to a state-specific five-year schedule in another, and governed by older pre-TCJA rules in a third.
States That Allow Immediate Deduction Under Section 174A
Rolling-conformity states that have not passed decoupling legislation follow the federal treatment automatically. Colorado, Illinois, New York, and Oregon fall into this group. For these filings, the federal return already reflects the full domestic R&E deduction, and no state modification is needed for current-year expenses. Oregon’s rolling conformity is the clean illustration: it required capitalization when the TCJA mandated it, and it allows full expensing now that the OBBBA restored it, without any separate state legislation in either direction.
Some states arrived at the same destination by a different route. Georgia, Indiana, and Tennessee had already decoupled from TCJA capitalization through targeted legislation, so they allowed immediate deduction at the state level throughout the 2022-2024 window. Georgia applied Section 174 as it existed before the TCJA. Indiana used specific addition and subtraction modifications to restore full expensing. Tennessee applied Section 174 as it existed immediately before the TCJA for excise tax purposes.2Tennessee Department of Revenue. Notice 22-03 – Research and Development Expenditures The bottom line now matches the federal outcome in each of these states, but the state reporting forms still reflect the older decoupling mechanics.
States That Decouple From Section 174A
Several states have rejected the federal restoration of immediate deduction, either by explicit statute or by leaving their conformity dates fixed at a point that predates the OBBBA. Businesses filing in these states must add back the federal Section 174A deduction and follow the state’s own recovery schedule.
Maryland automatically decouples from any federal tax change with a revenue impact exceeding $5 million, and the comptroller has confirmed Section 174A falls within that rule. Maryland requires an addition modification for any federal deduction claimed under Section 174A that exceeds what the pre-OBBBA code would have allowed.3Maryland Comptroller. Tax Alert – Maryland Impacts of the One Big Beautiful Bill Act Maryland taxpayers cannot take the immediate federal deduction on their state return.
Pennsylvania enacted Act 45 of 2025, which requires corporations to add back all federal R&E deductions and amortize those costs over a state-specific five-year period for Corporate Net Income Tax purposes, with 20 percent deductible each year beginning in the year of the add-back.4Pennsylvania Department of Revenue. Schedule C-15 – Adjustment for Research and Experimental Expenditures REV-1826
Michigan decoupled through HB 4961 in 2025. Delaware, despite being a rolling-conformity state, has decoupled from Section 174 treatment. Rhode Island’s Department of Revenue has issued guidance confirming decoupling.
California updated its general conformity date to January 1, 2025, through SB 711 but explicitly continued its long-standing decoupling from Section 174 changes.5California Franchise Tax Board. California Conformity to Federal Law California taxpayers apply Section 174 as it existed before the TCJA, which allows immediate deduction or a 60-month amortization election. The bottom-line result often resembles Section 174A, but the statutory framework differs, and the interaction with California’s own R&D credit provisions can produce different answers.
Arkansas follows the Internal Revenue Code as it existed on January 1, 2019, which predates TCJA capitalization. Alabama applies Section 174 as it existed in 2021. Virginia halted its rolling conformity until 2027, creating a static window whose treatment depends on the frozen date. Each of these states effectively allowed immediate deduction during the 2022-2024 capitalization era, and whether they adopt Section 174A depends on future legislative action.
States With Conditional or Split Treatment
A smaller group of states applies rules that don’t fit either the conform or decouple label cleanly.
Pennsylvania’s Entity-Level Split
Pennsylvania’s Act 45 divides treatment by business structure. C corporations must add back federal R&E deductions and amortize over five years for Corporate Net Income Tax purposes, and corporations that incurred R&E costs before 2025 must also capitalize any federal deductions claimed in prior years and amortize those over five years, potentially stretching recovery over eight or more years.4Pennsylvania Department of Revenue. Schedule C-15 – Adjustment for Research and Experimental Expenditures REV-1826 Pass-through entities and individuals are not affected, because Pennsylvania’s personal income tax is largely independent of federal calculations.
New Jersey’s Credit-Linked Deduction
New Jersey ties R&E deduction treatment to its state R&D credit. Taxpayers that claim the Corporation Business Tax R&D credit for New Jersey qualified research expenditures can deduct those expenses in the same year they claim the credit, rather than amortizing them.6NJ Division of Taxation. Timing of New Jersey Qualified Research Expenditures Taxpayers that don’t claim the credit follow federal amortization and capitalization treatment. Two businesses with identical R&E spending can have entirely different New Jersey deduction timelines based solely on the credit claim.
Wisconsin and Louisiana
Wisconsin requires a modification for R&E expenses that can be calculated by three different methods, and businesses must evaluate which applies. Louisiana, starting with tax years beginning in 2025, allows an election to deduct R&D expenses in the year incurred but prohibits duplicating any amortization already claimed federally.
Section 280C Conformity Is a Separate Question
Section 280C requires businesses claiming the federal R&D credit under Section 41 to reduce their R&E deduction by the credit amount, unless they elect the reduced credit and keep the full deduction. The OBBBA preserved this framework for tax years beginning after December 31, 2024.7Office of the Law Revision Counsel. 26 USC 280C – Special Rules for Research Credit
State conformity to Section 280C is independent of conformity to Section 174 or 174A. A state can decouple from one and not the other, and the two positions don’t track each other. Some states fully conform to Section 280C’s expense disallowance, others allow the full R&E deduction regardless of any federal credit, and others apply a state-specific modification. Indiana, for example, explicitly excludes from its state R&E deduction any expenditures disallowed under Section 280C(c) federally. Analyze each state twice: once for Section 174A, once for Section 280C.
Handling the 2022-2024 Transition Amounts
The OBBBA lets businesses handle unamortized domestic R&E balances from 2022-2024 three ways: continue the original five-year schedule, deduct the entire remaining balance in the first tax year beginning after December 31, 2024, or spread it ratably over two tax years. Qualified small businesses with average annual gross receipts of $31 million or less can retroactively apply Section 174A back to expenses paid or incurred after December 31, 2021, by filing amended returns.1Internal Revenue Service. Revenue Procedure 2025-28
How each state treats the transition depends on its position. Rolling-conformity states that haven’t decoupled follow the federal transition automatically: accelerate the balance federally, and the state allows the accelerated deduction. Maryland’s decoupling from Section 174A applies to both current-year expenses and transition amounts from pre-2025 years, so the accelerated federal deduction gets added back.3Maryland Comptroller. Tax Alert – Maryland Impacts of the One Big Beautiful Bill Act Pennsylvania requires its own five-year add-back schedule for federal deductions claimed for prior-year costs.
States that decoupled from TCJA capitalization in the first place present the opposite problem. In Georgia, Indiana, and Tennessee, the R&E expense was already fully deducted at the state level in the year incurred. When the federal transition rules now allow a taxpayer to deduct the remaining federal unamortized balance, those states have to prevent a second deduction of the same expense, so expect specific add-back or exclusion requirements.
A qualified small business that files amended federal returns to apply Section 174A retroactively should expect corresponding amended state returns wherever it filed during 2022-2024, with the outcome in each year controlled by that state’s conformity position at the time.
Practical Compliance Across Multiple States
Businesses operating in more than one state need separate R&E workpapers for every filing jurisdiction. Each workpaper tracks the federal deduction, the state-allowed deduction, the cumulative difference, and any modification adjustments reported on state forms. Those differences persist as long as amortization continues at either level, so a single 2022 R&E expense can require tracking through 2027 or later in states with their own schedules.
Pass-through entities carry extra weight. Partnerships and S corporations have to calculate state-level R&E treatment and report it to each partner or shareholder on state-specific K-1 equivalents. Indiana’s addition and subtraction modification codes must appear on the entity forms so owners can properly report their share of state-adjusted income. Pennsylvania’s entity-level split means a partnership may report one treatment for its Corporate Net Income Tax filing and a different treatment flowing through to owners for Personal Income Tax purposes.
Apportionment is affected too. R&E costs can influence sales, property, or payroll factors, and a state allowing immediate deduction produces different net income subject to apportionment than a state requiring five-year recovery. Apportionment calculations should use the correct state-adjusted income for each jurisdiction, not the federal figure.
State auditors scrutinize large R&E modification adjustments, and negligence penalties for misreporting typically range from 5 to 20 percent of the underpayment depending on the state. Documentation that traces each state’s modification from federal taxable income down to the state-specific deduction is the practical defense.