OBBBA State Tax Conformity | What Businesses in Ohio, Indiana, and Kentucky Need to Know
Published on by Cheryl Ganim in State Local Tax
- Federal tax savings may not translate to state savings. States are adopting or rejecting OBBBA provisions, creating different tax outcomes for businesses.
- Indiana has significant differences. The state continues to decouple from federal bonus depreciation, qualified production property depreciation, and business interest deduction changes.
- Kentucky and Ohio have their own rules. Both maintain important differences from federal tax treatment, particularly for depreciation and business interest deductions.
- Multi-state businesses need to plan carefully. Separate state calculations, accurate recordkeeping, and proactive tax modeling can help avoid unexpected liabilities and maximize tax savings.
The enactment of the One Big Beautiful Bill Act (OBBBA) created several significant tax savings opportunities for businesses. While attention has focused on the federal benefits, states are adding complexity by passing legislation to either confirm or reject federal OBBBA provisions. Businesses may receive a valuable federal deduction under OBBBA while being required to add back the deduction or calculate it differently on various state tax returns.
Federal/state differences created by OBBBA conformity and decoupling can significantly affect both current tax expense and deferred tax expense, even when the underlying transactions are identical. Additionally, states may decouple from OBBBA rules in different years. Separate federal and state tax calculations and schedules for depreciation, amortization, § 163(j) interest carryover, and R&E deduction schedules will allow for clean provision and tax documentation and support for tax positions.
The following OBBBA provisions are among the most significant state conformity items affecting 2026 state tax returns:
What are the most significant state conformity items for businesses?
- 100% bonus depreciation for qualifying property
- Immediate deduction of domestic R&E expenditures
- Business interest deduction rules
- Enhanced depreciation for qualified production property
Indiana: The region’s most significant OBBBA decoupling state
Indiana’s Senate Bill 243 represents the most notable example of business tax decoupling among Ohio, Indiana, and Kentucky.
Indiana continues to decouple from:
- IRC §168(k) bonus depreciation – Taxpayers generally must compute Indiana depreciation as though bonus depreciation had not been claimed federally.
- IRC §168(n) qualified production property bonus depreciation.
- IRC § 163(j) Business Interest Expense – Indiana did not adopt OBBBA’s expanded business interest deduction treatment and continues to apply its existing state rules.
By contrast, Indiana currently requires no addback for domestic R&E expenses deducted federally under IRC § 174A for tax years 2025 and later.
Companies with significant capital expenditures, manufacturing operations, distribution assets, or large research programs should anticipate maintaining separate Indiana tax calculations and schedules.
What’s Kentucky’s take on OBBBA state tax conformity?
Kentucky HB 757 decoupled corporations from OBBBA’s business interest changes. Corporations must compute the IRC § 163(j) limitation under the Code as in effect on December 31, 2024.
For tax year 2025, Kentucky did not conform to the OBBBA § 163(j) changes for either individuals or corporations, because its conformity date was still December 31, 2024.
Starting with tax year 2026, personal income tax follows §163(j) as amended by OBBBA, while the corporate income tax stays decoupled. As a result, Kentucky corporations do not get to add depreciation, amortization, and depletion back into adjusted taxable income. Generally, the smaller limitation and smaller current-year interest deduction under the pre-OBBBA rules are a disadvantage for corporations subject to the limitation.
HB 757 preserved Kentucky’s existing nonconformity for:
- Federal bonus depreciation under IRC §168(k).
- Enhanced IRC §179 expensing limits.
Where does Ohio stand on OBBBA state tax conformity?
Ohio’s Commercial Activity Tax does not incorporate the IRC, so OBBBA changes do not apply. Ohio adopted Senate Bill 9, signed by Governor Mike DeWine on March 5, 2026. As a result, Ohio generally conforms to major OBBBA business provisions for individual/pass-through owners, including:
Ohio continues its longstanding decoupling from:
- Federal bonus depreciation under IRC §168(k).
- Enhanced IRC §179 expensing limits.
What are the 2026 key takeaways for state tax conformity in our region?
Focus on the big three. State conformity decisions can significantly alter the ultimate tax outcome. Businesses should pay particular attention to each state’s depreciation, R&E expenses, and interest deduction provisions.
Model the federal/state differences. State decoupling can create higher state taxable income than federal taxable income, so modeling the addbacks helps avoid underpayment penalties and year-end surprises.
Plan investments by state. Multi-state businesses can compare where asset deductions are immediate, delayed, or subject to addback before finalizing major equipment, production-property, or facility investments.
Location matters. State planning can affect the after-tax cost of where income, assets, payroll, and investment are located for multi-state businesses.
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