In the final stretch of the year, most business decisions have already been set in motion, offering a clear view of a business’s State and Local Tax position. The final months present an opportunity to capture remaining credits and incentives, identify exposure from multistate activity, and confirm elections that will shape the 2026 tax picture.
With the changes introduced under the One Big Beautiful Bill Act (OBBBA) and state legislatures reconvening in 2026 to decide whether they will conform to or decouple from the new federal rules, the close of 2025 calls for a focused review of state tax bases, PTET mechanics and the treatment of key deductions. Now is the time for businesses to reassess their nexus footprints, evaluate whether itemizing or PTET offers a stronger 2025 position, and prepare for state decision-making in the coming year.
OBBBA Introduces Higher SALT Cap and New Itemization Decisions
One of the most significant changes introduced under OBBBA is the increase in the federal SALT deduction cap to $40,000 beginning in 2025. This higher cap reopens planning opportunities that have been closed since the $10,000 limit took effect in 2018.
Taxpayers who have taken the standard deduction for years should re-evaluate their position based on projected state taxes and other deductible expenses for 2025. For context, the 2025 standard deduction is expected to be $15,750 for single filers and $31,500 for MFJ (Married Filing Jointly) filers.
Those who may find itemizing more advantageous in 2025 include:
- Taxpayers with high property tax liabilities
- Owners of pass-through entities receiving PTET credits
- Taxpayers with significant mortgage interest
- Individuals with meaningful charitable contributions
- Residents of high-tax states
- Taxpayers whose income falls below the SALT cap phaseout range
Under OBBBA, the higher $40,000 cap begins to phase out once adjusted gross income reaches $500,000 for MFJ taxpayers in 2025 and is fully reduced to the $10,000 baseline at $600,000 (with these thresholds indexed for inflation in future years). For higher-income taxpayers, this phase-out makes the itemization analysis more nuanced and prompts a review of whether PTET may offer a stronger, more reliable benefit for eligible pass-through business owners.
PTET Elections: Still a Key Planning Tool in a High-Cap Environment
For eligible pass-through business owners, many states offer Pass-Through Entity Tax (PTET) regimes, allowing state income taxes to be paid at the entity level and deducted as a business expense for federal purposes. Even with a higher SALT cap, PTET often remains the more effective strategy for lowering federal income taxes. For taxpayers whose income exceeds the SALT cap phase-out range, PTET can provide a stronger benefit than itemizing.
PTET may also improve the federal outcome by reducing adjusted gross income (AGI) and modified AGI (MAGI). Lower AGI and MAGI can expand access to deductions and credits that phase out at higher income levels, including the permanent 20% Qualified Business Income (QBI) deduction. For 2025, the QBI income thresholds are $197,300 for single filers and $394,600 for married filing jointly, indexed for inflation.
PTET may also reduce exposure to the Alternative Minimum Tax, because entity-level taxes reduce income before AMT is calculated. For taxpayers with potential AMT exposure in 2025, modeling PTET alongside charitable strategies and above-the-line adjustments clarifies whether the election produces a stronger overall result.
As part of year-end planning, businesses should consider how each state’s PTET rules interact with owner residency, income sourcing and credit-matching provisions. Several states limit refundability or restrict credits for nonresident owners, making state-by-state modeling essential.
How States May Respond to OBBBA in 2026
As OBBBA’s federal changes take effect, states will reconvene in early 2026 to determine whether they will conform to the new rules, selectively adopt provisions or decouple. Their decisions will influence how taxable income is calculated and how state and federal outcomes diverge. Legislatures are also expected to revisit their PTET regimes, assessing whether to maintain them, adjust credit and refundability provisions or phase them out in a higher SALT-cap environment.
States will likely focus on several OBBBA provisions, including:
- R&D expensing (Section 174): OBBBA restores immediate expensing for domestic research beginning in 2025. Rolling-conformity states may adopt this automatically, while fixed-date states may continue to require amortization or choose to decouple.
- Bonus depreciation and manufacturing property: OBBBA reinstates 100 percent federal bonus depreciation and expands eligibility for certain manufacturing buildings. Many states already decouple from federal bonus depreciation and may continue to do so, requiring separate federal and state depreciation schedules.
- Interest expense limitations (Section 163(j)): States will decide whether to follow updated federal rules on interest capitalization and limitation thresholds or continue with pre-OBBBA treatments.
Reviewing depreciation schedules, R&D activity, sourcing positions, projected year-end interest expense, and modeling various scenarios can help businesses prepare for potential divergence.
Credits, Incentives, and Increased State Competition
As states compete more aggressively for investment, a number of credits and incentives may influence capital decisions made in the final weeks of the year. Manufacturing reshoring and expanded R&D activity are major areas of focus, with states deploying credits, exemptions and abatements to attract long-term projects.
A year-end review with an advisor can help determine whether planned spending, hiring or project milestones should be accelerated to secure available benefits and strengthen the organization’s position in ongoing or future discussions with state agencies.
Many states offer targeted incentives that can offset project costs, support expansion plans or help manage cash flow, including:
New York:
- Excelsior Jobs Program: Encourages businesses to expand in and relocate to New York by offering credits for job creation, investment, research and development, real property and child care services.
- Investment Tax Credit: Provides a percentage of the investment credit base for businesses placing qualified property into service, with a refundable credit for new businesses.
- Life Sciences R&D Credit: Supports biotechnology and life sciences research by offering a percentage of qualified research expenses, with added benefits for eligible start-ups.
Massachusetts:
- Research Credit: Provides a credit to cover wages paid to employees, a portion of wages to contractors, and amounts paid for supplies for research conducted in the state.
- Life Sciences Incentive Program: Offers credits to companies engaged in life sciences research and development, commercialization and manufacturing.
- Economic Development Incentive Program (EDIP): Provides credits for capital investment and job creation across the state.
New Jersey:
- R&D Credit: Provides a base credit for qualified research expenses plus incremental credit amounts tied to federal calculations.
- Angel Investor Credit: Offers credit for an investment in a New Jersey emerging technology business.
- Emerge Program Incentives: Provides job creation credits ranging from $500 to $8,000 per job per year for up to ten years, depending on industry and location.
- Refundable and Transferable Credits: Some programs allow refunding up to 85% of credit value, supporting cash flow for high-growth companies.
Evaluating how these incentives interact with planned projects, hiring strategies and capital timing can provide clarity on the most cost-effective path forward.
Key SALT Compliance Checks at Year-End
Year-end also calls for several best-practice compliance reviews to help reduce exposure, strengthen reporting, and confirm that 2025 operations are accurately reflected.
Nexus and Multistate Footprint
New hires, remote work arrangements, third-party logistics partners, digital sales channels and short-term projects can all create obligations in additional states. A year-end nexus review helps ensure these developments are reflected in the organization’s filing footprint and reduces the risk of penalties.
Business owners should evaluate:
- physical presence created by offices, warehouses, job sites or remote employees
- economic nexus triggered by state revenue thresholds
- trailing nexus obligations after business activity winds down
- inventory stored with third-party fulfillment centers
- temporary activity such as trade shows, missions or weeks-long project work
Understanding the full footprint helps determine where filings will be required.
Controversy and Audit Readiness
The end of the year serves as an important opportunity to ensure that a business’s documentation is up to date, thoroughly supported, and accurately represents its operations throughout 2025. A check of internal controls and recordkeeping practices at this stage can also strengthen audit readiness and improve the consistency of future reporting.
Public Law 86-272 and Digital Activity
Public Law 86-272 offers limited protection from state income tax for businesses whose in-state activity is restricted to soliciting orders for tangible goods. Several states, including Massachusetts and New York, adopted broader interpretations of online engagement in 2025 that narrowed the scope of this protection. Businesses that expanded digital engagement during 2025 should reassess their positions to confirm that 86-272 treatment remains appropriate ahead of 2025 filings.
Sales and Use Tax
Operational changes and supply-chain activity can quickly expand a business’s sales and use tax footprint. A focused year-end review of purchases, exemptions and marketplace activity helps clarify exposure and highlight savings opportunities. Accurate reporting going into 2026 supports a more predictable compliance environment.
Strengthen Your Year-End SALT Strategy
While preparing for 2026, coordinating federal changes, state conformity decisions and operational developments can help establish a more predictable SALT position for the year ahead. Grassi’s State and Local Tax advisors can assist with modeling these changes, identifying planning opportunities and strengthening compliance across all jurisdictions.
