R&D Tax Credits Got Simpler at Federal Level. Not in the States

The tax and spending package signed into law July 4 unwound a complication from the 2017 Tax Cuts and Jobs Act. For tax years beginning after Dec. 31, 2024, the new law restores immediate expensing for domestic research and experimental expenditures under Section 174 of the federal tax code.

The TCJA’s forced amortization—five years for domestic research, 15 for foreign—never matched the rhythm of innovation. Now the policy recognizes reality: Research is an upfront cost, not a deferred promise.

But the simplification ends there. States have swiftly created a fragmented map of their own, with conformity rules that veer from straightforward to downright interpretive. The federal government made Section 174 simple again; the states made it interesting.

State Patchwork Conformity

The instinct for uniformity in state tax systems is more aspirational than real, and the new Section 174A has exposed that tension. Some states adopt federal law as it changes, others freeze their conformity on a particular date, and a third group treats the federal tax code as more of a literary reference than a binding authority.

The first group, the rolling-conformity states, don’t decouple from Section 174A. Their statutes update automatically, and the new federal expensing flows through without ceremony. These states will follow Section 174A as written, allowing immediate deduction for domestic research and amortization only for foreign. For these taxpayers, the federal and state classifications move in sync, which is as close to simplicity as state tax ever gets.

The second group consists of states that are frozen on an older version of the federal tax code or that paused conformity in the wake of federal lawmaking. Arizona, California, and Kentucky all fall into this camp. Their rules remain anchored in the language that existed before the 2025 tax package, which means the TCJA amortization rules continue to operate until the state legislatures intervene.

In practice, that gives taxpayers the peculiar experience of expensing research for federal purposes while watching it slowly amortize across much of their state footprint. Legislative sessions may resolve this eventually, but tax departments don’t prepare returns on legislative timetables.

A third group of states practices selective nonconformity, using federal taxable income as a starting point but rewriting particular provisions. Wisconsin and Tennessee follow this model. Both rejected the TCJA’s amortization requirement from the start and preserved a separate framework that includes immediate expensing under their own statutes.

Michigan represents another variant: It decouples from federal expensing entirely and offers a refundable state credit for in-state research costs based on Section 174A.

Mississippi falls into the same category for a different reason, as it gives taxpayers a choice between full expensing and amortization under the TCJA regime by irrevocable election. If a taxpayer previously elected amortization for Mississippi, but now expenses fully for federal, an unusual Mississippi set of modifications are required with separate tracking over amortization periods. The result of this is a separate incentive system that requires granular state-level substantiation.

A fourth category sits adjacent to the income tax world but still feels the impact. For example, Texas imposes a franchise tax rather than a traditional corporate income tax, and its research credit relies on Section 41 definitions (fixed to 2011). The research credit incorporates the Section 174 “trade or business” test, but not the rules added by the 2017 or 2025 tax laws.

Because Texas’ credit depends on Section 41 rather than Section 174 directly, the new Section 174A doesn’t change the state’s credit for 2025. That said, beginning with franchise tax reports originally due on or after Jan. 1, 2026, Texas will align its credit calculation with current Section 41 and adopt rolling conformity to federal R&D credit rules, making future federal changes more consequential.

Expensing or Amortizing?

Federal expensing no longer guarantees state expensing. The symmetry that taxpayers hoped the new tax law would restore exists only in the rolling-conformity jurisdictions that haven’t decoupled from Section 174A. Everywhere else, the state return will reflect a complex reconciliation between federal classification and the state’s preferred timing.

This matters for more than academic reasons. A taxpayer that expenses research at the federal level may still amortize it in multiple states, each with its own horizon. That requires a multi-year schedule, careful state tracing, and the patience to maintain a deduction trail that now runs in several directions at once.

With Section 174 tied to the Section 41 credit, taxpayers must coordinate documentation, so the state’s timing rules remain defensible. Research expenditures don’t simply exist—they must be narrated.

The effect on provision is equally real. Timing differences don’t wait for legislative updates, and companies will feel the volatility through quarterly forecasts. A deduction taken in one jurisdiction and deferred in another is the sort of asymmetry that earnings calls notice, even if quietly.

Where Clarity Begins

Despite this patchwork, disciplined optimism is warranted. The map is varied, not chaotic. The task now is to classify states correctly, track the amortization schedules where they persist, and coordinate research narratives so that federal and state definitions remain aligned. The complexity is manageable because it’s knowable.

The federal government has made Section 174 coherent again. The states have taken the opportunity to show their own individuality. For taxpayers, clarity begins with recognizing that conformity isn’t a promise but a spectrum. Those who understand where each state sits on that spectrum will avoid surprises and make better decisions.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Sanjay Keswani is a manager in Plante Moran’s state and local tax practice.

Nick Thomsen is a senior manager in Plante Moran’s tax solutions group.

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