When the One Big Beautiful Bill Act (OBBBA) brought sweeping federal tax changes, such as reinstating full expensing of domestic research & experimentation (R&E) expenditures and introducing new qualified production property rules, it triggered a ripple effect across the 50 states.
But those states differ in how (and whether) they adopt federal tax‑code amendments. The method of conformity matters a lot for businesses with operations in Illinois or across multiple states. At DHJJ, we see not just the federal rules but the state responses as a strategic part of tax planning for companies and their advisors.
Why State Conformity Matters After the OBBBA
Federal tax changes like those in the OBBBA reshape deductions, amortization periods, depreciation, interest‑expense limits and pass‑through entity (PTE) regimes. But if a state does not follow the federal rules (or follows them in part), the result may be unexpected add‑backs, different timing of deductions, and altered effective state tax rates.
For example, even when a business claims full expensing of R&E costs at the federal level, a state that only conforms to the older amortization regime may force a longer adjustment period or require an add‑back. That means compliance burdens and planning complexity increase.
For Illinois‑based businesses or those operating there, knowing how Illinois responds, whether through rolling, static, or selective conformity, is vital for both tax provision, cash‑flow, and planning decisions.
Rolling and Static Conformity Approaches by State
States generally adopt one of three approaches to federal IRC changes:
- Rolling conformity: The state law automatically incorporates federal tax‑code changes as they occur (unless the state explicitly opts out). Illinois is a rolling‑conformity state in many respects, so federal changes tend to flow into Illinois law unless decoupled.
- Static conformity: The state fixes the reference date at a particular federal IRC version and does not adopt later federal amendments automatically. Businesses operating in those states must watch for legislative updates each change.
- Selective (or elective) conformity: The state picks which federal provisions it wants to adopt, or allows taxpayer elections. Either way, conformity is partial or discretionary.
Knowing how your state handles federal tax changes, like whether they follow them automatically, on a fixed date, or pick and choose, can have a big impact on your tax planning. In Illinois, many federal rules are adopted automatically, but the state sometimes makes exceptions, so it’s important to check for any updates or adjustments.
State Responses to Full Expensing of R&E Costs
The OBBBA restores immediate expensing for domestic research and experimentation (R&E) costs under IRC §174A beginning in 2025. At the federal level, this is a straightforward change, meaning that qualifying R&E expenditures no longer need to be amortized over five years. But at the state level, the impact is far more varied.
States take different approaches to federal tax changes. Some automatically adopt the revised federal rules, others rely on an older version of the Internal Revenue Code, and many selectively pick which federal provisions they want to recognize. That means the federal deduction may move cleanly through to one state return, while another state may still require taxpayers to spread those same costs over several years.
For rolling‑conformity states like Illinois, the general expectation is that federal expensing rules will carry into the state tax base unless the legislature specifically rejects them. Historically, Illinois has conformed to federal §174 treatment. However, the state has also chosen to decouple from other federal provisions when the revenue impact is significant, such as bonus depreciation. Because of that track record, Illinois taxpayers cannot assume automatic conformity to §174A without reviewing legislative activity and Department of Revenue guidance.
This matters because the difference between full expensing and multi‑year amortization directly affects the timing of state deductions, the calculation of deferred tax items, and overall cash‑flow planning. A company investing heavily in research may see a large federal deduction immediately, while Illinois (or another state where the company files) may require an add‑back and phase the deduction in over several years.
Bonus Depreciation Treatment in State Tax Codes
The OBBBA and related federal rules expand bonus depreciation (IRC § 168(k)) and introduce qualified production property rules (IRC § 168(n)). That means large immediate deductions at the federal level, but states may respond differently.
In Illinois, for example, taxpayers claiming federal bonus depreciation must make an add‑back to Illinois taxable income via Form IL‑4562. Illinois’s rules require the addition for property placed in service after December 31, 2021.
So while the federal deduction reduces federal tax, the Illinois add‑back prevents an equivalent state relief, affecting effective state tax planning. For multistate operations, the disparity between federal and state timing and amounts can require modeling of deferred state taxes and cash‑flow impacts.
State Adoption of Qualified Production Property Rules
The OBBBA introduces new rules for § 168(n) qualified production property, such as an opening for properties for which construction begins after January 19, 2025, and before January 1, 2029. Some states are already preparing: Illinois recently passed legislation that would extend the state’s bonus depreciation add‑back regime to § 168(n) for tax years 2026 and thereafter.
This may signal that Illinois intends to decouple from the favorable federal rule for these assets, requiring add‑backs just as with § 168(k). Entities planning significant manufacturing, film, or production‑related investments should assess how the Illinois regime will treat the federal benefit and whether state tax‑provision entries must reflect differences.
Interest Expense Deduction Limits and State Impact
Another area affected by OBBBA relates to limiting interest expense deductions (often tied to § 163(j) federal rules). At the federal level, changes may reduce allowable interest deductions, which reduces taxable income for federal returns. However, states may not mirror those changes or may apply modifications differently.
The state tax base could allow full interest deduction while the federal base is limited, or vice versa. Each state’s conformity approach matters. For Illinois, because of rolling conformity, changes in the federal interest‑expense limitation may flow in, but any decoupling legislation or add‑back requirements will affect the effective state tax base.
Businesses working with inter‑company debt, leveraged operations, or multinational interest structures should conduct state‑by‑state analysis to avoid unexpected add‑backs or limitation mismatches.
SALT Cap Changes and the Future of PTE Tax Regimes
The OBBBA also affects state and local tax (SALT) deduction ceilings and the growing use of pass‑through entity (PTE) tax regimes designed to circumvent the federal SALT deduction cap. Illinois offers a PTE tax election (4.95%) for partnerships and S‑corporations, effective for tax years ending on or after December 31, 2021.
With federal changes under OBBBA, states may modify their PTE tax frameworks, for example, eliminating sunset dates or adjusting tax rates. Indeed, Illinois recently passed legislation removing the sunset of its PTE tax and expanding depreciation add‑back provisions.
For businesses operating in Illinois and elsewhere, monitoring how SALT‑cap relief and PTE elections evolve in each state is a key piece of federal‑state tax integration.
Partnering With DHJJ for State‑level Readiness
At DHJJ, we don’t replace your service providers or TPAs, but we bring the strategic vantage point of federal-and state tax integration. We help you map the implications of OBBBA tax changes across Illinois and other states, identify where add‑backs or decouplings may apply, and build a framework for scenario analysis that aligns with your broader tax strategy. If you are planning capital investments, revisiting R&E flows, or evaluating PTE elections in light of OBBBA, we’re ready to guide your next steps.
Ready to analyze how OBBBA tax changes affect your Illinois and multistate tax posture? Contact DHJJ today to discuss a state‑by‑state review and build a roadmap tailored to your operations and investments.
