State Tax Considerations for the “One Big Beautiful Bill Act”

By Merrill Barter July 11, 2025

Co-authored by Lori Paci

Note:  This article is one of many that BNN is publishing to cover the tax features of the so-called “Big Beautiful Bill.”  Each one is authored by one of BNN’s own tax professionals.  Our coverage includes a summary article that briefly describes many of the bill’s features and many more that are deeper dives into specific areas of interest to our clients.  A topical list of those in-depth articles may be found at the front of our summary article.

President Trump signed the One Big Beautiful Bill Act (BBB) on July 4^th, resulting in a flurry of changes to federal tax laws. As always, when the Internal Revenue Code (IRC) changes, there are consequences for states, whose tax systems are generally tied to the IRC in one way or another.

When new legislation like the BBB becomes law, it takes state legislatures and tax administrators time to review and understand the impacts to their state budgets and tax codes and to react accordingly. Most states have some sort of balanced budget requirement which may prevent them from conforming to all aspects of federal tax changes.

Below we attempt to look through a crystal ball and predict some pain points that will appear in the coming months and years as the impacts of the BBB are fully understood by state governments. As so much is still in flux on the state level, we cannot set any of these outcomes in stone, though history tells us where the most obvious issues may arise.

State and Local Tax (SALT) Cap & State Passthroughs Entity Taxes (PTETs)

The BBB raised the SALT cap from $10,000 to $40,000 for tax years beginning after 12/31/2024 and before 1/1/2030 ($20,000 in the case of married filing separate). The increased cap begins to phase out, or decrease, after a taxpayer’s Modified Adjusted Gross Income reaches $500,000 ($250,000 in the case of married filing separate); the minimum deduction is equal to the previous cap of $10,000 ($5,000 for married filing separate). Both the new $40,000 cap and the income phase out increase by 1% each year through 2029. In 2030, the cap reverts to the $10,000 originally set by the 2017 Tax Cuts and Jobs Act (TCJA).

Observation: These temporary changes will result in the need for additional analysis by owners of pass-through entities (PTEs) and their tax advisors to determine whether there is a tax benefit to electing into a state’s pass-through entity tax (PTET) as discussed below. What may have been beneficial under the previous iteration may prove to be less or insufficiently beneficial under the new thresholds for some PTE owners.

After the SALT cap was enacted under the TCJA, states began enacting elective PTETs to provide a “workaround” for owners of PTEs. The PTETs allow the entity to compute and pay the state income tax attributable to eligible owners (the definition of “eligible owner” varies by state), which is then deducted on the PTE’s federal income tax return, enabling the owners to benefit from a state tax deduction. (This circumvents the SALT cap because the SALT cap applies at the individual, rather than entity, level.) In most states, the eligible owner receives a state tax credit equal to their share of the entity tax paid that can be claimed on their state tax return. (In some states, there is a modification on the owner’s state return to account for the entity income already taxed.) In Connecticut and Massachusetts, there is a cost to making a PTET election experienced by the owners because the credit is a percentage of the PTET paid, rather than the full amount, resulting in additional revenue for these states.

Observation: The additional cost noted above, known as a ‘haircut’, will need to be considered in the analysis of whether to elect into the state’s PTET regime or not. As the SALT cap has temporarily increased to $40,000, PTE owners that might not have been able to deduct state income taxes previously (due to the $10,000 cap) may now be able to do so, eliminating the benefit of the PTET.  However, there are instances when this analysis could be quite complex, for example when an owner has interests in multiple PTEs, some of which are profitable and some not, when PTE owners have varying ownership percentages and income levels, and when PTEs file in multiple states with varying PTET regimes (who’s an eligible owner?).

Another potential issue relates to the states’ PTET statutes themselves.  In some states, the statutes have specific provisions under which the PTETs sunset as of 1/1/2026. This was the date under the TCJA for which the SALT cap was set to expire.  The PTETs in California, Colorado, Illinois, and Indiana all sunset (end) as of 1/1/2026.  As BBB extends the SALT cap (albeit at a higher level), it seems very likely that the states will amend their PTET statutes to extend these programs.

Observation: It will take the states time to act in response to the federal bill. The best course of action is to speak with your tax advisor to model and consider the scenarios while understanding that states’ reactions will be delayed. 

Conformity

States’ reactions to the BBB’s tax provisions will depend greatly on several factors, one being the state’s general method of conformity with the IRC.

States generally conform to the IRC in one of 3 ways, and their approach may vary by tax type.

• Rolling conformity – the state automatically adheres to changes made in the IRC by the federal government, other than those from which it specifically decouples. For example, Massachusetts takes this approach for its corporate income tax, but specifically decouples from bonus depreciation (IRC Section 168(k)).
• Static conformity – the state conforms to the IRC as of a specific date other than for provisions from which it specifically decouples. For example, Massachusetts conforms to the IRC as of 1/1/2024 for personal income taxes, again decoupling from bonus depreciation. (Note that this differs from its rolling conformity for corporate income taxes).
• The IRC is incorporated by reference to specific provisions – the state’s statutes specifically reference IRC provisions. For instance, New Jersey specifically adopts certain provisions of the IRC and otherwise generally uses its own definitions and rules.

States that use static or rolling conformity will need to amend their statutes to incorporate or decouple from specific provisions of the BBB.  As mentioned, most states do have some form of balanced budget requirement, so it is likely that many will need to decouple from at least some of the BBB provisions due to the size of their fiscal impacts.  Some key sections of the BBB that could significantly impact states are listed below, and it’s worth noting that all are applied retroactively.

• The reinstatement of 100% bonus depreciation
• 100% bonus depreciation of “Qualified Production Property” (new Section 168(n)).
• Immediate expensing of qualified domestic research and experimental expenditures (this also has a retroactive component)
• Section 163(j) limitation computation amendments

If history is any guide, it is very likely that many states will decouple from some (potentially all) of the above provisions.

There are two noteworthy new deductions for personal income taxes: the deductions for overtime pay and tips.  Both of these are touted as “above the line” deductions.  However, like qualified business income (QBI), the deductions have no impact on adjusted gross income (AGI). Instead, they are deducted to bridge the gap between AGI and taxable income. Special provisions in the BBB allow for those that do not itemize to utilize the deductions.  As most states, including California, Maine, and New York, start with federal adjusted gross income when calculating their taxable income, these provisions won’t impact them.  However, some states including Colorado, Iowa, and Montana, start with federal taxable income and may need to decouple from these OBBB provisions to avoid negative fiscal impacts.

The BBB provides significant federal income tax benefits to many taxpayers.  Unfortunately, these changes to the IRC will add significant complexity for state tax compliance (as was the case with the TCJA).   Both businesses and individuals will need to work with their tax advisors to assess how these federal changes impact their state tax liabilities.  This challenge is compounded further by the uncertainty surrounding how states will respond.  State legislatures and tax agencies will face tremendous pressure to update their statutes and provide guidance to taxpayers ahead of the 2026 tax return filing season. Yet, if history is any indication, it is unlikely that all states will be able to respond in such a short amount of time.

For more information, please contact your BNN tax service provider at 800.244.7444.