From the State and Local Tax (SALT) cap to Global Intangible Low Taxed Income (GILTI) modifications, the One Big Beautiful Bill Act (OBBBA) ushers in several tax provisions that require SALT considerations and business owners to act. H.R.1, or the OBBBA, brings major changes to the tax law and extends several provisions first enacted under the Tax Cuts and Jobs Act (TCJA). Business owners should be aware of these changes so they can properly prepare and take advantage of any benefits.  

STATE AND LOCAL TAX DEDUCTION LIMITATION (SALT CAP)

The OBBBA temporarily raises the federal deduction limit to the SALT cap from $10,000 to $40,000 ($20,000 for married filing separate) beginning in 2025 and through tax year 2029. In 2029, the limitation reverts to $10,000 ($5,000 for married filing separate). This is advantageous for taxpayers in states with high state and local taxes; however, the deduction amount phases out for taxpayers with modified adjusted gross income over $500,000 ($250,000 for married filing separate).

GHJ Observation: The OBBBA does not limit the utilization of the Pass-Through Entity Tax (PTET) as a SALT cap workaround, which retains a pass-through entity’s ability to deduct the full amount of its state and local income taxes at the entity-level and preserves a key planning tool for pass-through businesses. The PTET allows the entity to compute and pay the state income tax attributable to eligible owners, which is then deducted on the pass-through entity’s federal income tax return. This provides a beneficial state tax deduction to owners.

The increased SALT cap and income limits may require some pass-through entity owners to reexamine state PTET elections. A careful consideration is required to determine whether PTET election is favorable. For example, owners of a pass-through entity may have varying ownership percentages and income levels when filing in multiple states with differing PTET regimes (including states that mandates PTET for all owners, if elected).

Taxpayers should note that, while the federal provisions maintain the PTET in its current form, several of the state PTET provisions sunset as of Dec. 31, 2025. For example, California has extended its PTET under S.B. 132, enacted on June 27, 2025, for an additional five years through tax year 2030. Taxpayers utilizing PTET should stay proactive by regularly reviewing state legislative developments related to their PTET regimes.

FEDERAL CONFORMITY CONSIDERATIONS FOR BUSINESSES

Reinstatement of 100% Bonus Depreciation 

The OBBBA permanently restores 100% bonus depreciation for assets acquired after Jan. 19, 2025, and introduces a new temporary 100% bonus depreciation deduction for Qualified Production Property (QPP) under Section 168(n). In order to qualify, construction must begin after Jan. 19, 2025, and before Jan. 1, 2029. Property must also be placed in service by Dec. 31, 2030. Section 168 broadens the scope of eligible assets to include nonresidential real property used in qualified production activities, such as manufacturing, production and refining. This provision applies to both newly constructed and placed-in-service properties within the specified timeframe.

GHJ Observation: The impact on state taxes depends on whether and how individual states conform to federal bonus depreciation rules. Taxpayers need to track federal and state basis differences separately for depreciable assets to compute state adjustments and the gain or loss from related dispositions. 

Section 174 Expensing 

The OBBBA restores the treatment of Section 174 Research and Experimental (R&E) expenses permanently. 

Section 174 is revised to allow businesses to immediately deduct qualified R&E expenses in the year incurred; opposed to the prior provision of capitalization and amortizing the expenses over five years, starting in 2025. The OBBBA also allows businesses to deduct unamortized Section 174 expenses over one or two years beginning in 2025. For eligible small businesses (with gross receipts less than or equal to $31 million), the OBBBA grants retroactive expensing, including deductions of post-2021 R&E expenditures that were previously capitalized. Note that the election to retroactively expense domestic R&E costs must be made by July 4, 2026.

GHJ Observation: Taxpayers should review state conformity if they elect to capitalize under new Section 174 or choose to expense previously capitalized Section 174 amounts. Taxpayers must analyze these provisions for the potential impact on 2025 state tax estimated payments and future tax planning decisions. In addition, federal amended returns filed for the prior year’s Section 174 adjustments for eligible small businesses may have state impact and require state tax returns to be amended.

Section 163(j) Interest Revisions 

The OBBBA permits taxpayers to calculate adjusted taxable income under the revised provisions of Section 163(j) after adding back depreciation and amortization. This addback, prior to applying the 30% interest limitation, allows taxpayers to deduct more interest expense. This provision is extended permanently starting in 2025.

GHJ Observation: Taxpayers need to track 163(j) carryforwards separately from their federal tax return due to varying conformity rules among the states. Taxpayers should analyze these provisions for potential impact on their 2025 state tax. 

Modification of Global Intangible Low Taxed Income (GILTI) and Foreign Derived Intangible Income (FDII)

The OBBBA effectively renamed GILTI to the Net CFC Tested Income (NCTI). It also changed the name of the Foreign-Derived Intangible Income (FDII) to the Foreign Derived Deduction Eligible Income (FDDEI). For tax years beginning after Dec. 31, 2025, the OBBBA sets the effective tax rate for NCTI and FDDEI permanently to 14% by changing the Foreign Tax Credit (FTC) reduction from 20% to 10% and the Section 250 deduction from 50% to 40% for NCTI and from 37.5% to 33.34% for FDDEI.

GHJ Observation: Taxpayers should assess state conformity relating to NCTI and FDDEI changes. While these provisions may impact the starting point of state taxable income, taxpayers can review state specific guidance to report adjustments on to these provisions. 

These legislative tax changes are poised to impact businesses and their state and local taxes. Speak with GHJ’s SALT advisors to learn more and examine what opportunities are available.