OBBBA State Tax Conformity: What S-Corp Owners Need to Know

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When the One Big Beautiful Bill Act (OBBBA) became law on July 4, 2025, it introduced permanent 100% bonus depreciation for qualifying property acquired after January 19, 2025, made the 20% Qualified Business Income (QBI) deduction under Section 199A permanent, and created new federal deductions for qualified tips and overtime for the 2025 through 2028 tax years. While many S-Corporation owners welcomed these tax benefits, they do not automatically apply at the state level. OBBBA state tax conformity for S-corps differs across the country, and businesses operating in states that do not fully conform to federal tax law could face higher state tax liabilities than expected in 2026.

How State Conformity Works

States generally adopt the Internal Revenue Code (IRC) using one of three approaches:

1. Rolling conformity automatically incorporates most federal tax law changes as they occur.
2. Static conformity adopts the IRC as of a specific date and requires legislative action to recognize later federal changes.
3. Selective conformity generally follows the IRC but expressly decouples from certain federal provisions.

For S-corp state taxes, this distinction matters. Several large states either have not updated their conformity statutes to reflect the OBBBA or continue to decouple from specific federal tax provisions, creating significant differences between federal and state taxable income.

Where Differences Commonly Arise

Under California’s current conformity rules, the state does not recognize federal bonus depreciation under Section 168(k) or the federal Section 199A Qualified Business Income deduction. The Conformity Act of 2025 (SB 711) moved California’s conformity date from January 1, 2015 to January 1, 2025 — still before the OBBBA was enacted — so treatment of newer OBBBA provisions, including the deductions for qualified tips and overtime, will depend on future legislative action.

New York and New Jersey also require state-specific depreciation adjustments that may differ from the federal treatment of bonus depreciation, while Illinois generally requires taxpayers to add back federal bonus depreciation and recover the deduction over time under state depreciation rules. Depreciation is not the only pressure point: California has not adopted the federal changes to research expenditure treatment under Section 174, and New York requires research costs paid or incurred on or after January 1, 2025 to be amortized over 60 months for state purposes rather than expensed under the new federal Section 174A rules. Businesses operating across multiple states may also encounter different apportionment rules that affect taxable income.

What This Means for Your S-Corp Tax Strategy

Consider an S-Corporation in California that places $500,000 of qualifying equipment into service during 2026. Under current federal law, the business may deduct the full amount immediately through permanent 100% bonus depreciation. California, however, generally requires the asset to be depreciated over its normal recovery period, resulting in substantially higher state taxable income during the first year.

A similar difference exists for the federal QBI deduction. While eligible shareholders may receive a federal deduction of up to 20% on qualified business income, California currently provides no comparable deduction, increasing the effective combined tax burden for many shareholders.

State conformity differences may also affect entity-level taxes, shareholder taxation, and elective Pass-Through Entity Tax (PTET) elections differently, making state-specific planning increasingly important.

Planning Around OBBBA State Tax Conformity

The first step is determining how your state currently conforms to the Internal Revenue Code. Because conformity rules continue to evolve, businesses should periodically review guidance issued by their state tax authority rather than relying on secondary summaries. Some states have gone further than simply staying silent: Massachusetts, for example, enacted legislation in 2026 that expressly decouples from several OBBBA provisions — see our companion guide to Massachusetts OBBBA decoupling for S corporations.

From an S-corp tax strategy perspective, some businesses may benefit from evaluating whether electing out of federal bonus depreciation is appropriate. Because this election is generally irrevocable for the applicable class of property and affects both current and future federal deductions, it should only be considered after modeling both federal and state tax consequences.

Maintaining separate federal and state depreciation schedules, accurate bookkeeping, and coordinated tax planning can help businesses comply with varying small business taxes by state while avoiding unexpected state tax liabilities. Consulting a qualified tax professional is often the most effective way to ensure your tax strategy reflects both federal law and your state’s current conformity rules.