Massachusetts OBBBA Decoupling: What S Corporations Need to Know for 2025–2026

The One Big Beautiful Bill Act, signed into federal law in July 2025, made major changes to depreciation, research expenses, business interest deductions, and other tax provisions. But Massachusetts OBBBA conformity is far from automatic — the state does not follow every federal change, and for S corporations operating in the Commonwealth, that creates a real gap between federal taxable income and Massachusetts taxable income. As we covered in our broader look at OBBBA state conformity, this pattern is playing out across the country, but Massachusetts’ specific rules deserve their own close look for anyone building an S corp tax strategy around 2025 and 2026 filings.

Why Massachusetts OBBBA Conformity Isn’t Automatic

The root cause is that Massachusetts runs two separate conformity systems, and neither one automatically hands Congress the final word. For personal income tax purposes — which is what matters for S-corp shareholders reporting pass-through income — Massachusetts generally follows the Internal Revenue Code as it stood on a fixed date, currently January 1, 2024, with a specific carve-out that trade and business expense deductions instead follow current federal law. For corporate excise purposes, Massachusetts generally does track the current Code automatically as it changes — but only unless and until the legislature passes a law to decouple from a specific provision. Both paths give the state legislature an opening to reject a federal change on its own terms.

With OBBBA, Massachusetts used that opening deliberately. The Commissioner of Revenue estimated that the OBBBA would cost the Commonwealth roughly $664 million in fiscal year 2026 — about $442 million of it from provisions Massachusetts would otherwise conform to automatically — and the legislature responded with the Supplemental Budget signed June 12, 2026 (St. 2026, c. 101), which explicitly decoupled the state from several of the highest-cost provisions for 2025 and 2026. That same legislation also built in a standing rule for the future: going forward, Massachusetts will automatically decouple from any new federal IRC amendment for the tax year Congress enacts it and every year before that — unless the Department of Revenue estimates the change’s revenue impact is below a $20 million threshold, in which case it applies automatically — giving lawmakers a built-in window to evaluate the revenue impact before deciding whether to adopt a given change at all. An S corporation can claim a substantial federal depreciation deduction while calculating a meaningfully different number on its Massachusetts return, and that difference flows through directly to what shareholders ultimately report.

Bonus Depreciation Is Not the Only Difference

OBBBA introduced several provisions that Massachusetts treats differently than the federal government does, and the details vary year by year. Federal law restored permanent 100% bonus depreciation for qualifying property acquired after January 19, 2025, but Massachusetts continues to disallow the federal Section 168(k) deduction outright. The state also does not adopt the new federal Section 168(n) 100% deduction for qualified production property for tax years beginning in 2025 and 2026 — that provision is scheduled to align with federal law starting in 2027.

Research expenses follow their own timeline. Massachusetts initially decoupled from the new federal Section 174A deduction for domestic research and experimental expenditures, but that applies only to the 2025 tax year. For tax years beginning on or after January 1, 2026, Massachusetts now conforms to Section 174A, per its June 23, 2026 guidance in TIR 26-4 — while for research expenses from tax years beginning in 2022 through 2024, Massachusetts does not adopt OBBBA’s retroactive catch-up relief and instead continues to require five-year amortization under prior-law Section 174. That makes the specific tax year involved particularly important when preparing an S-corp return, and it is worth reading alongside our earlier article on the federal Section 174A deduction to see exactly where the state and federal timelines diverge.

What This Means for Massachusetts S-Corp Owners

A federal tax strategy does not automatically produce the same Massachusetts result, and that gap is exactly where S-corp tax strategy needs to do real work. An S corporation that purchases equipment, invests in qualifying production property, or claims federal accelerated depreciation may need Massachusetts-specific adjustments when calculating its state taxable income — sometimes an addition, sometimes a subtraction, depending on the provision and the year.

The same principle applies to business interest. Massachusetts does not follow OBBBA’s revised Section 163(j) adjusted-taxable-income calculation for tax years beginning in 2025 and 2026, continuing instead to use the older EBIT-based method rather than the more generous EBITDA-based approach OBBBA restored federally for tax years beginning after 2024; Massachusetts conformity is scheduled to begin with tax years beginning on or after January 1, 2027. Subchapter S companies with meaningful debt loads must recalculate adjusted taxable income under Massachusetts rules separately from the federal number when determining the applicable interest limitation. For S-corp owners, these differences can make federal-only projections genuinely misleading heading into year-end.

Plan for Two Tax Calculations

Massachusetts S corporations should not assume a federal deduction flows directly onto the state return. The more reliable approach is to identify, provision by provision, what Massachusetts has adopted, rejected, or modified, and calculate the resulting state adjustment separately — treating small business taxes at the state and federal level as genuinely two different calculations rather than one number that trickles down.

The Massachusetts Department of Revenue’s TIR 26-4, issued June 23, 2026, is the most current source for the state’s guidance on OBBBA conformity, and it’s worth having a CPA firm confirm your specific provisions against it directly rather than relying on general summaries. For S-corp owners planning major equipment purchases, research investments, or other significant deductions in the year ahead, reviewing the federal and Massachusetts treatment side by side — as part of ongoing accounting for small business, not a one-time exercise — can prevent an unexpected state tax bill and meaningfully improve year-end planning.