The draft reconciliation bill released by the Senate Finance Committee on June 16, 2025, (H.R. 1 , the Senate Bill) contains numerous tax provisions, including extensions of many 2017 Tax Cuts and Jobs Act (TCJA) provisions expiring at the end of 2025. The Senate Bill follows the House budget reconciliation bill, which was passed May 22, 2025 (House-passed Bill).¹ (See Tax Alert 2025-1275 for an overview of the Senate Bill's provisions.) Although additional changes may arise as the Senate Bill advances through the legislative process, stakeholders should familiarize themselves with the Senate Bill, which could affect corporate and individual income taxes imposed by state governments on businesses and their owners.

State conformity to federal tax changes

Generally, most state income tax systems use federal taxable income (corporate) or adjusted gross income (individual) as a starting point for state income tax computations, so changes to the federal income determinations can affect state taxes. By contrast, states do not automatically conform to federal tax rate changes, and most do not adopt minimum tax regimes that exist outside of the general taxes imposed under IRC Sections 11 and 1 (for corporations and individuals, respectively). Only one state² currently adopts the IRC Section 59A base erosion and anti-abuse tax (BEAT), for example, so the changes to this tax would not directly affect tax computations in the other states. States also do not generally adopt the excise tax provisions under Subtitle D of the IRC; as such, proposed changes to federal excise taxes typically do not have immediate implications for state taxes, though some states may permit a deduction for any federal excise tax paid or accrued.

The Senate Bill's state income tax implications generally would depend on how each state conforms to the IRC and to affected provisions, such as the regime for global intangible low-taxed income (GILTI) under IRC Section 951A. States conform to the IRC in various ways. Most either automatically incorporate the federal tax law as it changes (known as "rolling" conformity) or adopt the federal tax law as of a specific date (known as "fixed" conformity). There are also several "selective" conformity states, which adopt a hybrid of rolling and fixed conformity. Upon enactment of a change in the IRC, rolling-conformity states that incorporate relevant IRC sections generally would automatically adopt the changes, while states with fixed conformity statutes generally would only incorporate changes if and when they were to update their conformity date to a date on or after the effective date of the corresponding federal tax changes — or otherwise adopt legislation to that effect.

Because the starting point for calculating "state taxable income" is typically subject to various modifications, taxpayers must consider specific conformity to IRC provisions in addition to states' general adoption of the IRC.

Provisions that could affect business-related state income taxes

Notable provisions in the Senate Bill that could impact state income taxes for businesses would:

• Allow 100% bonus depreciation on a permanent basis for property acquired and placed in service on or after January 19, 2025, as well as allow bonus depreciation for specified plants planted or grafted on or after that date
• Introduce additional changes to federal bonus depreciation
• Permanently reinstate the EBITDA-based (earnings before interest, taxes, depreciation, and amortization) limitation under IRC Section 163(j) for tax years beginning after December 31, 2024
• Introduce additional changes to the IRC Section 163(j) limitation calculation, including exclusion of for subpart F and GILTI, along with associated gross-up under IRC Section 78 from adjusted taxable income, and a new ordering rule for certain capitalized interest expense
• Allow taxpayers to choose between permanent expensing and five-year amortization of domestic research and experimental (R&E) expenditures under IRC Section 174 that are paid or incurred in tax years beginning after December 31, 2024, as well as coordinate permanent expensing with the federal research credit
• Allow taxpayers that incurred domestic R&E expenses after December 31, 2021, and before January 1, 2025, to elect to accelerate the remaining deductions for those expenditures over one or two years
• Add an aggregation rule to IRC Section 162(m), under which amounts paid by different members of a controlled group to a specified covered employee would be combined for purposes of the $1 million limit
• Limit corporate charitable deductions to the extent the aggregate of corporate charitable contributions exceeds 1% of the taxpayer's taxable income and does not exceed 10% of the taxpayer's taxable income, with certain carryforward rules applying to disallowed contributions, applicable after December 31, 2025
• Make permanent and reduce the IRC Section 250 deduction for GILTI from 50% to 40%, and reduce the GILTI foreign tax credit (FTC) haircut to 10%³
• Make permanent and reduce the IRC Section 250 deduction for foreign-derived intangible income (FDII) from 37.5% to 33.34%⁴
• Make permanent the IRC Section 199A deduction for certain pass-through income at 20% (without increase) and expand the phase-in range for the deduction limit
• Expand the small business stock exclusion under IRC Section 1202 (see Tax Alert 2025-1290)

Additional proposed changes to international tax provisions, including controlled foreign corporation and FTC rules, could amplify the complexity of state tax reporting given existing variations in state tax treatment of these items.

The Senate Bill, like the House-passed Bill, would also create a new IRC Section 899 aimed at increasing tax rates on "applicable persons" of "offending foreign countries," including individuals, foreign governments, foreign corporations, private foundations, certain trusts, and certain foreign partnerships of a foreign country that has an "unfair foreign tax"⁵ (see Tax Alert 2025-1330 discussing the provision approved by the Senate Finance Committee). To effectuate the policy, the Senate Bill would increase various taxes, including withholding taxes, on applicable persons, adding another tax to the negotiated treaty rate. US-international tax treaties, by their own terms, do not apply to subnational US taxing authorities, so an increase in levies described in those agreements would have limited direct effect on state income taxes for businesses.

The Senate Bill would retain the $10,000 cap on the state and local tax (SALT) deduction for individuals under the TCJA and would clarify and modify the list of "specified taxes" subject to the SALT cap. Thus, the Senate Bill specifically addresses pass-through entity tax (PTET) regimes enacted by state governments as a so-called workaround to the limitation by disallowing a deduction for PTET payments at the entity level and limiting PTET deductions at the owner level to the greater of $40,000 or half of the owner's allocable share of the entity's PTET payment. (See Tax Alert 2025-1350 discussing the Senate Bill's potential implications for high-income taxpayers.) If enacted, these provisions could affect the federal tax benefits of state PTET regimes, which may affect how state lawmakers view the efficacy and existence of these regimes in the future.

Industry-specific provisions

The Senate Bill includes provisions specific to certain industries. For example, manufacturers would be interested in provisions that would allow, under new IRC Section 168(n), a 100% depreciation allowance (i.e., full expensing) for certain US facilities (real property) used to produce tangible personal property. To qualify, construction must begin after January 19, 2025, and before January 1, 2029, and the facility/improvement must be placed in service before January 1, 2031. This new accelerated depreciation rule could add to existing questions around the constitutionality of state conformity to federal provisions encouraging domestic activity — specifically whether the resulting impact on state tax impermissibly discriminates against foreign commerce in violation of the Commerce Clause of the US Constitution.⁶

Other provisions affecting state income taxes for specific industries include expanding the special expensing rules for qualified film, television and live theatrical productions under IRC Section 181 to include aggregate qualified sound recording production costs of up to $150,000 per tax year.

Other notable developments

Although not included in the Senate Bill, it is noteworthy that the draft reconciliation bill released from the Senate Judiciary Committee on June 12, 2025, incorporates from the House-passed Bill certain changes to Public Law (P.L.) 86-272. P.L. 86-272 prohibits states from imposing state income tax on out-of-state sellers whose in-state activities do not exceed soliciting orders of tangible personal property, subject to additional requirements. Both the House-passed Bill and the draft Senate Judiciary Committee's bill would add new definitions that could expand public law protections to taxpayers whose business activities serve both solicitation and non-solicitation functions.

While the House-passed Bill would generally repeal transferability provisions for renewable energy credits two years after the date of its enactment, the Senate Finance Committee version leaves the transferability provisions largely intact but creates an additional prohibition on transferring credits to specified foreign entities. See Tax Alert 2025-1331 for a discussion of modifications to the energy credit phaseouts in the Senate Bill. Most states conform to the transferability provisions under IRC Section 6418, under which an eligible taxpayer can elect to transfer all (or any portion specified in the election) of an eligible credit to an unrelated transferee taxpayer. Some, however, do not adopt the federal tax-free treatment of those transfers.

Implications

The Senate Bill's effects would arise both from how the states currently conform to federal tax law and from how state lawmakers modify their tax laws in response to the IRC changes. In this respect, state legislatures would need to understand how these federal tax developments, if enacted, would affect their state budgets. As of today, many states have already concluded, or are near to concluding, their legislative sessions and may not be positioned to immediately respond to these federal provisions. Businesses, too, should monitor and assess the Senate Bill's potential effects on their state tax profile.