IRC § 163(j) Archives

IRC § 163(j)

California SB 711: Closing the conformity gap with the IRC

by Charles Moll, III, Troy M. Van Dongen and Elle Kaiser | Oct 21, 2025 | California, Federal Tax, Franchise Tax, Incentives, Income Tax

After nearly a decade of lagging behind federal tax updates, California has finally hit “refresh.” Signed into law on October 1, 2025, Senate Bill (SB) 711 delivers the most sweeping overhaul of California’s tax conformity rules since 2015.

The legislation advances the state’s conformity to the Internal Revenue Code (IRC) from January 1, 2015, to January 1, 2025, for taxable years beginning on or after that date, thereby bringing California into line with hundreds of federal tax changes made over the past decade. This alignment is designed to simplify compliance and reduce costly inconsistencies between federal and state returns. But conformity also comes with caveats, and taxpayers will need to understand where California continues to chart its own course.

The major changes introduced by SB 711

Updating California’s IRC “conformity date” to January 1, 2025, the bill incorporates several federal amendments enacted during the last decade. For example, one major innovation in SB 711 is the overhaul of California’s research credit. Starting in 2025, taxpayers may use the Alternative Simplified Credit method under IRC § 41(c)(4), which was adjusted with lower state percentages for qualified research expenses (3% and 1.3% instead of 14% and 6%). Other notable modifications include conformity to federal limitations on IRC § 1031 exchanges to real property and the elimination of the deferral for exchanges of certain non-real property.

Of course, many instances of nonconformity to recent federal enactments remain, including:

Corporate alternative minimum tax (CAMT). SB 711 continues to exclude the new federal CAMT, created by the Inflation Reduction Act of 2022 (IRA), from conformity.
Renewable energy credits. SB 711 does not adopt the clean energy credits added under the IRA.
Net operating loss rules. California continues to diverge from federal carryback and carryforward limits.
IRC 163(j). SB 711 continues nonconformity to interest expense limitations under IRC § 163(j).
One Big Beautiful Bill Act (OBBBA) (P.L. 119-21). Because SB 711 conforms to the IRC as of January 1, 2025, it does not include changes made under the OBBBA, which was signed by US President Donald Trump earlier this year.

Preparing for the transition

SB 711 applies to both the personal income tax and corporation tax regimes for taxable years beginning on or after January 1, 2025. Taxpayers should begin modeling how the new conformity affects their liabilities and planning strategies. Key steps include:

Reviewing federal provisions now incorporated into state law.
Identifying exceptions and modified rules applicable to your business or filing type.
Consulting tax professionals to evaluate the impact on research and development incentives, loss carryovers, and credit eligibility, among others.
Monitoring California Franchise Tax Board guidance as the agency clarifies implementation details over the coming months.

Bottom line

SB 711 represents California’s latest move to more closely synchronize its tax code with the modern federal landscape. The reform promises greater clarity, fewer compliance headaches, and a more innovation-friendly framework. Yet, with selective decoupling and transitional complexities, taxpayers will need to remain vigilant. In short, California may finally be closer to being in sync – but [...]

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Decoupling from DC: How HB 4961 redefines Michigan’s tax base

by Elle Kaiser and Mary Kay McCalla Martire | Oct 20, 2025 | Federal Tax, Income Tax, Michigan, Nationwide Importance, Tax Base

At the tail end of the 2025 – 2026 legislative session, Michigan’s Legislature moved swiftly to enact House Bill (HB) 4961, which decouples from five federal tax benefits enacted earlier this year under the federal One Big Beautiful Bill Act (OBBBA).

Given that many of the OBBBA’s provisions – particularly those expanding tax deductions or credits – will reduce taxable income and state revenue, Michigan is one of many states assessing the impact of the OBBBA’s changes. Earlier this year, the Michigan Department of Treasury estimated that following the OBBBA’s changes to Internal Revenue Code (IRC) Sections 174A, 168(k), 168(n), 179, and 163(j), state revenues would be reduced by approximately $540 million in Fiscal Year (FY) 2025 – 2026 and by more than $2 billion through 2030. While the state’s decision to decouple comes as no surprise for businesses operating in Michigan, this move eliminates – or significantly reduces – the state-level benefit of the following five federal tax changes made in the OBBBA.

Key decoupling provisions

IRC § 174A: Domestic R&D amortization

OBBBA: Under the OBBBA, Section 174A allows full expensing of domestic research or experimental expenditures incurred in taxable years beginning after December 31, 2024. The OBBBA also permits taxpayers to alternatively elect to amortize such expenses over five years.

Michigan: For tax years beginning after December 31, 2024, HB 4961 requires taxpayers to compute their Michigan income as if Section 174A were not in effect. This means that Michigan taxpayers will not receive a state-level benefit from the new research and development (R&D) amortization option. Research intensive businesses will also have higher taxable income.

IRC § 168(k): Federal bonus depreciation

OBBBA: The OBBBA permanently restores 100% bonus depreciation at the federal level for qualified property acquired after January 19, 2025. Prior to the OBBBA, bonus depreciation phasedown rules enacted under the Tax Cuts and Jobs Act of 2017 would have reduced bonus depreciation to 60% for property placed in service in 2024 and eliminated it entirely by 2027.

Michigan: Michigan has historically instructed taxpayers to compute their Michigan income as if Section 168(k) was not in effect, meaning that under Michigan law, any bonus depreciation claimed on a taxpayer’s federal return was not allowed for corporate income tax purposes. Under HB 4961, Michigan continues to decouple from Section 168(k).

IRC § 168(n): Disaster-area bonus depreciation

OBBBA: The OBBBA also introduces a new deduction under Section 168(n) for investments in qualified domestic factory property.

Michigan: HB 4961 does not recognize the new deduction under Section 168(n). Property that qualifies for bonus depreciation federally must be depreciated under regular Modified Accelerated Cost Recovery System rules for Michigan, leading to slower cost recovery and higher near-term taxable income.

IRC § 179: Expensing for small business property

OBBBA: The OBBBA enhances Section 179, which permits immediate expensing of certain equipment and software purchases (subject to federal dollar limits), by significantly increasing the expensing limit and phase-out threshold beginning in tax years starting after December 31, 2024.

Michigan: HB 4961 freezes conformity to [...]

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Kansas Decouples from GILTI and 163j

by Stephen P. Kranz and McDermott Will & Emery | May 4, 2021 | Federal Tax, Income Tax, Kansas, Tax Base

Yesterday afternoon the Kansas legislature overrode Governor Laura Kelly’s veto of Senate Bill (SB) 50, effectively enacting the provisions of the bill into law. Among those are provisions decoupling from certain Tax Cuts and Jobs Act (TCJA) provisions that taxpayers have been advocating for since 2018.

Under the new law, for tax years beginning after December 31, 2020, taxpayers receive a 100% deduction for global intangible low-taxed income (GILTI) included in federal income. Furthermore, the new law is explicit that foreign earnings deemed repatriated and included in federal income under IRC § 965 are considered dividend income and eligible for the state’s 80% dividend-received deduction. The new law also decouples from the interest expense deduction limitation in IRC § 163(j), enacted as part of the TCJA for tax years beginning after December 31, 2020.

A Kansas decoupling bill was first proposed in 2019. Decoupling efforts faced an uphill battle because of the Kansas legislature’s reluctance to pass laws that could be perceived as tax cuts. The 2019 bill was vetoed by Governor Kelly, but that bill was not overridden by the legislature. The STARR Partnership and its members have worked closely with the Kansas Chamber of Commerce on the Kansas decoupling efforts and finally, in this legislative session, advocates were able to persuade the legislature that the decoupling provisions were not tax cuts but provisions designed to prevent a tax increase. This is a great result in Kansas and serves as a welcomed reminder that states that tax GILTI and 965 income (cough, cough, Nebraska) are outliers.

More States Respond to Federal Tax Reform

by Diann Smith and Stephen P. Kranz | Mar 19, 2018 | Federal Tax, Idaho, Income Tax, Iowa, Minnesota, Nationwide Importance, New York, Tax Base

It’s been nearly three months since the federal tax reform bill (commonly referred to as the Tax Cuts and Jobs Act, or “TCJA”) was enacted and states continue to respond to the various provisions of the TCJA. Recently, there have been notable legislative efforts in New York, Idaho, Iowa and Minnesota.

New York

Starting with the release of the Governor’s Budget Bill in January 2018, the 30-day amendments to that Bill on February 15, and the amendments to the Assembly Bill and Senate Bill this month, there has been much action this legislative session concerning the potential response to federal tax reform. The proposed response in the two latest bills—the Assembly Bill (AB 9509) and the Senate Bill (SB 7509)—is discussed below. (more…)

Southeast States Respond to Federal Tax Reform and NJ Senate Leader Talks Tax Surcharge to Limit Corporate “Windfall”

by Diann Smith and Stephen P. Kranz | Mar 9, 2018 | Federal Tax, Georgia, Income Tax, Nationwide Importance, New Jersey, Tax Base, Virginia

Virginia and Georgia are two of the latest states to pass laws responding to the federal tax reform passed in December 2017, known as the Tax Cuts and Jobs Act (TCJA). Both states updated their codes to conform to the current Internal Revenue Code (IRC) with some notable exceptions.

Virginia

On February 22, 2018, and February 23, 2018, the Virginia General Assembly enacted Chapter 14 (SB 230) and Chapter 15 (HB 154) of the 2018 Session Virginia Acts of Assembly, respectively. Before this legislation was enacted, the Virginia Code conformed to the IRC in effect as of December 31, 2016. While the new legislation conforms the Virginia Code to the IRC effective as of February 9, 2018, there are some very notable exceptions. The legislation explicitly provides that the Virginia Code does not conform to most provisions of the TCJA with an exception for “any… provision of the [TCJA] that affects the computation of federal adjusted gross income of individuals or federal taxable income of corporations for taxable years beginning after December 31, 2016 and before January 1, 2018…” Thus, despite Virginia’s update of its IRC conformity date, Virginia largely decouples from the TCJA. (more…)