On November 12, 2025, Pennsylvania Governor Josh Shapiro signed into law Act 45 of 2025 (HB 416), which amends the state's Fiscal Code. Key tax related provisions in the law decouple from select federal tax law changes made by the "One Big Beautiful Bill Act" (OBBBA, PL 119-21).¹ The law also establishes an affordable housing tax credit and expands and extends select Keystone Opportunity Zones.

OBBBA decoupling

Act 45 decouples Pennsylvania's corporate net income tax (CNIT) from select provisions in the OBBBA, specifically those for research and experimental (R&E) expenditures, Internal Revenue Code (IRC) Section 168(n) qualified production property and the business interest expense limitation under IRC Section 163(j).

R&E expenditures: Applicable to tax years beginning after December 31, 2024, the law expands the definition of Pennsylvania "taxable income" to include:

• The amount of amortization deduction for R&E expenditures claimed under IRC Sections 174 or 59(e)
• The amount deducted for any R&E expenditures claimed under IRC Section 174A, and the amount of the amortization deduction for any R&E expenditures claimed under IRC Section 174A
• The amount of any deduction claimed under IRC Section 481 related to R&E expenditures originally made by the taxpayer in tax years beginning after December 31, 2021, and before tax years beginning after December 31, 2024.

When R&E expenditures are included in taxable income, an additional deduction for R&E expenditures is allowed until the total amount deductible under IRC Sections 174, 59(e) or 174A has been claimed, with the deduction limited to 20% of (1) the remaining unamortized qualified R&E expenditures (IRC Sections 174 or 59(e)) or (2) the qualified R&E expenditures (IRC Section 174A). If amounts related to a change in a taxpayer's accounting method for purposes of IRC Section 481 were included in taxable income (i.e., if a taxpayer makes a federal election under Section 70302(f)(2) of the OBBBA), an additional deduction is allowed until the total amount originally amortizable under IRC Section 174 has been claimed. The additional deduction is equal to 20% of the remaining unamortized qualified R&E expenditures originally subject to amortization.

The law makes clear that the total amount of the additional deductions under any of these provisions may not be more than the remaining unamortized qualified R&E expenditures under IRC Sections 174 and 59(e) or the qualified R&E expenditures allowable under IRC Section 174A or originally allowable under IRC Section 174.

EY observes: Act 45 does not decouple from Section 70302(f)(1) of the OBBBA, which permits certain "small businesses" to elect to file amended federal income tax returns to deduct capitalized domestic R&E expenditures paid or incurred in tax years beginning after December 31, 2021. Under Section 406 of the Tax Reform Code of 1971 (72 P.S. 7406), a corporate taxpayer is required to report a change of federal taxable income on an RCT-128C (Report of Change) and not an amended RCT-101 (PA Corporate Tax Report) within six months of filing the amended federal income tax return. Pennsylvania conformity with Section 70302(f)(1), which is limited to certain "small businesses" and domestic R&E expenditures, may present issues under the Commerce Clause of the US Constitution² and Pennsylvania's Uniformity Clause (PA. CONST. art. VIII, Section 1). The IRC Section 481 addback and additional deduction provisions also may present a Commerce Clause issue due to the difference in treatment of foreign and domestic R&E expenditures incurred during tax years beginning after December 31, 2021, and before tax years beginning after December 31, 2024. Section 216 of Act 45 was enacted as an amendment to the Fiscal Code and not the Tax Reform Act of 1971. The decoupling provisions will not appear in the definition of "taxable income" in Section 401(3) of the Tax Reform Act of 1971 (72 P.S. 7401(3)).

IRC Section 168(n) qualified production property: Effective immediately, the law expands the definition of "taxable income" to include the amount of the deduction for depreciation of qualified production property claimed under IRC Section 168(n). If such deduction was included in taxable income, an additional deduction for such property is allowed until the total amount included has been claimed. The additional deduction equals the depreciation on the qualified production property for the tax year, as determined under IRC Sections 167 and 168, without application of IRC Section 168(n). If the qualified production property is sold or disposed of during the tax year for which depreciation was included in taxable income, an additional deduction is allowed to the extent the depreciation has not been recovered.

IRC Section 163(j): Applicable retroactively to tax years beginning after December 31, 2024, the law requires taxpayers in calculating their Pennsylvania taxable income to apply the federal business interest expense limitation provisions under IRC Section 163(j) as they were in effect on December 31, 2024.

EY observes: It is our understanding, via discussions with the Pennsylvania Department of Revenue (Department), that the decoupling from IRC Section 163(j) is applied in determining federal taxable income, as opposed to a modification of federal taxable income. Corporation Tax Bulletin 2019-03 (issued April 29, 2019, and updated October 12, 2023) still will apply in determining the limitation for CNIT purposes. Under that guidance, if a corporate taxpayer files as part of a federal consolidated group, the IRC Section 163(j) only would apply on a separate company basis if an IRC Section 163(j) limitation was reported on the consolidated federal income tax return. For tax years beginning in 2025, whether a consolidated limitation exists will be determined under IRC Section 163(j) in effect prior to July 4, 2025. Section 217 of Act 45 was enacted as an amendment to the Fiscal Code and not the Tax Reform Act of 1971. The decoupling provisions will not appear in the definition of "taxable income" in Section 401(3) of the Tax Reform Act of 1971 (72 P.S. 7401(3)).

Department Report: Under the law, the Department has until December 31, 2026, to submit a report to select members of the General Assembly on the impact of decoupling from certain federal tax changes made by OBBBA, including the direct effect of decoupling from certain provisions, the estimated effect of conforming to the above provisions on revenue, and the estimated reduction in taxes resulting from the annual decrease in the allowable net operating loss deduction.

Other tax changes

HB 416 makes other tax related changes including the following:

• Extends the $1.95 9-1-1 surcharge through February 1, 2029 (from February 1, 2026)
• Establishes the affordable housing tax credit, with the amount of credit the Pennsylvania Housing Finance Agency may award per year capped at $10 million; the credit can be carried forward, sold or assigned
• Expands the Keystone Opportunity Zones (KOZ) to allow the Department of Community and Economic Development to designate one additional Keystone Opportunity Expansion Zone (KOEZ) that includes an area in a county with a population of at least 130,000 but less than 135,000 based on the 2020 census (per the law's analysis, this includes an area in Cambria County)
• Allows an additional 10-year extension period for certain KOZ, KOEZ, or Keystone Opportunity Improvement Zones that had already been granted an extension and are located in Philadelphia, among other requirements
• Extends abatements provided under the Local Economic Revitalization Tax in Allegheny County and Pittsburgh to 20 years (from 10 years); the extension also applies in Philadelphia but only for projects that convert deteriorated property to housing
• Establishes the Working Pennsylvanian's Tax Credit, which is a refundable state tax credit that is linked to the federal earned income tax credit; the amount of the credit equals 10% of the amount of the federal tax credit received

Implications

Taxpayers should consider the impact these legislative changes will have on their Pennsylvania state tax liabilities, including estimated tax payments for 2025. In addition, taxpayers will need to maintain separate records for CNIT purposes, as Pennsylvania's decoupling rules differ from those enacted in other states.

Pennsylvania joins other state and local jurisdictions, including Colorado, Delaware, District of Columbia, Michigan and Rhode Island, that have decoupled from federal tax changes enacted under the OBBBA. While additional state and local jurisdictions may consider OBBBA decoupling legislation this year — a bill is being considering in Illinois (SB 1911, bill sent to the governor) — most states are likely to wait until regular sessions in 2026 to consider substantive legislative responses.