State corporate income tax law changes for the first quarter of 2026
Executive summary: State tax ASC 740 Q1 2026 update
The following state tax developments were enacted during the first quarter of 2026 and should be considered in determining a company’s current and deferred tax provision pursuant to ASC 740, income taxes, for the quarter ended March 31, 2026. This information summarizes the listed developments and may not provide additional nuanced considerations that may be relevant for provision purposes. For questions about these quarterly updates or other recent legislative and regulatory developments, please reach out to your tax adviser for more information.
The United States Congress and President Trump reverse the District of Columbia’s decoupling from the OBBBA
On Feb. 18, 2026, President Donald Trump signed House Joint Resolution 142 (HJR 142), nullifying legislation enacted by the District of Columbia that had decoupled the District from significant provisions of the One Big Beautiful Bill Act (P.L. 119-21, the OBBBA). That action effectively returned the District to conformity with the OBBBA, except for Internal Revenue Code (IRC) provisions from which the District otherwise decouples (e.g., section 168(k)).
Recall that on Dec. 3, 2025, the District of Columbia enacted emergency legislation B26-0457 without the signature of Mayor Muriel Bowser. That legislation decoupled the District from sections 168(n) and 174A and required taxpayers to continue calculating ‘adjusted taxable income’ using earnings before interest and taxes (EBIT) when applying the business interest expense limitation under section 163(j).
The District subsequently enacted temporary legislation, B26-0458, also without the mayor’s signature. B26-0458 was transmitted to Congress on Dec. 30, 2025, triggering a 30-day congressional review period. During that period, Congress introduced HJR 142, which was signed by the president, nullifying B26-0458 and negating the District’s efforts to decouple from the OBBBA, restoring full conformity with most of the federal amendments. However, the District of Columbia City Council (the District Council) has raised questions as to whether the Congressional action occurred within the permitted 30-day review period during which District legislation may be disapproved.
The District Council continues to dispute the federal government’s actions related to HJR 142, and the District of Columbia Office of Tax and Revenue has issued filing instructions that advise taxpayers that the District remains decoupled from certain provisions of the OBBBA. Notwithstanding HJR 142, the District has taken no action to revise its 2025 tax forms, which were drafted to reflect the decoupling provisions enacted under B26-0458.
California court issues ruling on three-factor apportionment
On March 3, 2026, a California superior court held in Smithfield Packaged Meats Corp. v. California Franchise Board, No. 21STCV39637 (Cal. Sup. Ct. 2026), that a taxpayer was permitted to use a three-factor apportionment formula instead of California’s single-sales factor formula when calculating California corporate taxable income.
Smithfield Packaged Meats Corp., a Virginia-based company, operates three primary business segments related to the production of pork and the sale of pork products. The Hog Production segment raises hogs on farms owned by third-party contract farmers with significant oversight and instruction from Smithfield employees. The Fresh Pork segment processes meat into a variety of fresh pork products, such as bellies, hams and loins. Finally, the Packaged Meat segment further processes the fresh meat into a variety of packaged products, including bacon, hot dogs, deli meats and other ready-to-eat products. Essentially, all of the production and processing activities occurred outside of California.
Smithfield filed its original California tax returns using the single-sales factor apportionment formula. The company later filed a refund claim on amended returns using the three-factor apportionment formula that is required for taxpayers that derive more than 50% of gross receipts from agricultural activities.
The California Franchise Tax Board (FTB) denied the refund claims, finding that the company’s receipts primarily were derived from the sale of processed pork products. The FTB focused on the final packaged products and largely disregarded the company’s upstream agricultural production and harvesting activities. The court disagreed with the FTB, instead finding that Smithfield presented substantial evidence demonstrating that agricultural and harvesting activities comprised a majority of the company’s business activities.
Moreover, the court found that, even if Smithfield did not meet the requirements of an agricultural business required to use three-factor apportionment, the use of a single-sales factor resulted in a distortive and unfair result to the company’s business activities in California. Accordingly, the court left open the possibility that the taxpayer was eligible for an alternative apportionment method under California law.
For more information, please refer to our article, California court finds for taxpayer in industry apportionment formula case.
Georgia updates IRC conformity and decouples from provisions of the OBBBA
On March 20, 2026, Georgia Gov. Brian Kemp signed House Bill 1199, updating Georgia’s conformity to the IRC as enacted on or before Jan. 1, 2026 (previously Jan. 1, 2025). The conformity change applies to tax years beginning on or after Jan. 1, 2025. Georgia continues to decouple from major provisions amended by the OBBBA as the state decouples from section 168(k), and conforms to section 163(j) and section 174 of the IRC as they were in effect prior to the Tax Cuts and Jobs Act (TCJA, P.L. 115-97). House Bill 1199 also decouples Georgia from section 174A.
Georgia law previously had decoupled from an earlier version of section 168(n), which was unrelated to new section 168(n) addressing bonus depreciation on certain qualified production property. That prior law remains in place, effectively decoupling Georgia from the bonus depreciation provisions for certain qualified production property enacted under the OBBBA.
Idaho updates conformity to the IRC and decouples from certain OBBBA provisions
On Feb. 10, 2026, Idaho Gov. Brad Little signed House Bill 559, updating Idaho’s conformity to the IRC to Jan. 1, 2026, effective retroactively to Jan. 1, 2025. The bill brings Idaho into conformity with the OBBBA, with certain exceptions. Specifically, House Bill 559 decouples Idaho from section 168(n), and Idaho was already decoupled from section 168(k). The bill also provides that taxpayers are required to continue expensing domestic research and experimental (R&E) costs incurred on or after Jan. 1, 2022 and prior to Jan. 1, 2025 under section 174 of the IRC as in effect immediately prior to the enactment of the OBBBA. Idaho will otherwise conform to section 174A for domestic R&E expenses incurred on or after Jan. 1, 2025, but costs deductible under section 174A are not eligible for purposes of the Idaho research activities tax credit.
For more information on the Idaho House Bill 559, please refer to our article, Idaho conforms to the One Big Beautiful Bill.
Indiana clarifies treatment of OBBBA provisions and provides administrative updates
On March 5, 2026, Indiana Gov. Mike Braun signed Senate Bill 243, updating Indiana’s conformity to the IRC to Jan. 1, 2026 (previously Jan. 1, 2023). The bill generally brings Indiana into conformity with the OBBBA, with several exceptions for business tax provisions. Senate Bill 243 specifically decouples Indiana from section 168(n). Indiana previously decoupled from section 168(k).
Indiana law generally provides that taxpayers deduct domestic and foreign R&E costs that are charged to a capital account for tax years beginning after Dec. 31, 2021. Senate Bill 243 modifies the language of the Indiana code to address situations where a federal R&E cost must be added back to Indiana taxable income because the cost was deducted for Indiana purposes in a prior year.
Specifically, in situations where a small business taxpayer elects to amend prior-year federal returns under section 70302(f)(1) of the OBBBA, the taxpayer must amend Indiana tax returns to add back amounts deducted on the federal amended return. The bill provides additional guidance on the timing and manner in which such amended returns must be filed. Similarly, Senate Bill 243 requires an addition to Indiana taxable income for amounts deducted federally pursuant to section 70302(f)(2) (e.g., the acceleration of federal costs incurred in the 2022 through 2024 tax years).
In addition to the conformity provisions, Senate Bill 243 makes several administrative changes. The bill updates Indiana’s amnesty program to include tax liabilities due and payable for a tax period ending prior to Jan. 1, 2024 and extends the taxpayers’ deadline for filing RAR adjustments from 180 days to one year.
For more information on the Indiana Senate Bill 243, please refer to our article, Indiana keeps federal tax conformity at bay with latest tax bill.
Minnesota issues guidance on the treatment of foreign corporate filers
On Feb. 2, 2026, the Minnesota Department of Revenue issued Revenue Notice No. 26-01, addressing the Minnesota corporate income tax filing requirements applicable to foreign (non-U.S.) corporations. The notice is intended to clarify the state’s position on the starting point of federal taxable income for a foreign corporation that does not report federal taxable income because the foreign corporation either:
(i) Does not have effectively connected income (ECI) for federal income tax purposes as it is exempt under sections 864(c) and 882 (the ‘not effectively connected’ example), or
(ii) Has no federal taxable income because the income is exempt under a relevant treaty between the U.S. and the foreign country (the ‘foreign treaty’ example)
The notice explains that Minnesota asserts jurisdiction to tax all corporations, both domestic and foreign, that ‘engage in contacts with this state that produce gross income attributable to sources within this state…’ Minnesota law does not require that a foreign corporation be ‘effectively connected’ with the conduct of a trade or business in order to be subject to Minnesota corporate income tax.
In the ‘not effectively connected’ example, the notice describes a foreign corporation that has no ECI on Form 1120-F, and has no physical presence in the U.S., but has Minnesota-sourced sales. In this example, the taxpayer must use federal taxable income as defined by section 63 as the starting point for Minnesota purposes, instead of ECI reported on Form 1120-F. The taxpayer is also required to file Schedule REC, Reconciliation, with its Minnesota corporate income tax return to reconcile the differences between federal and Minnesota taxable income.
In the ‘foreign treaty’ example, a foreign corporation is exempt from federal corporate income tax due to a relevant treaty with the U.S. The Notice explains that, while the treaty applies for federal income tax purposes, it generally does not extend to state taxes. As a result, the department requires the foreign corporation to base its Minnesota corporate income off of federal taxable income using a pro forma Form 1120.
New Mexico decouples from major provisions of the OBBBA
On March 11, 2026, New Mexico Gov. Michelle Lujan Grisham signed Senate Bill 151, decoupling New Mexico from several significant provisions of the OBBBA beginning in 2027. Senate Bill 151 decouples the state from the federal bonus provisions under sections 168(k) and 168(n).
Additionally, the bill modifies New Mexico’s treatment of business interest expense under section 163(j), requiring taxpayers to use EBIT rather than earnings before interest, taxes, amortization and depreciation (EBITDA) in calculated ‘adjusted taxable income’.
Finally, Senate Bill 151 eliminates New Mexico’s deduction for net controlled foreign corporation tested income (NCTI) under section IRC 951A. Accordingly, NCTI will be included in the New Mexico corporate income tax base. The bill also provides that, to the extent a controlled foreign corporation’s income is included in the tax base, apportionment must include the relevant factors of the controlled foreign corporation (CFC) generating the income.
These provisions are effective for tax years beginning on or after Jan. 1, 2027. For more information on the New Mexico Senate Bill 151, please refer to our article, New Mexico addresses OBBBA in annual tax bill.
Oregon updates code language to refer to NCTI
On March 31, 2026, Oregon Gov. Tina Kotek signed Senate Bill 1510, updating relevant statutes and regulations to make reference to NCTI, as opposed to global low-taxed intangible income (GILTI) under section 951A. Senate Bill 1510 confirms that NCTI under section 951A will continue to be treated in the same manner as a dividend for purposes of determining Oregon corporate taxable income, which is eligible for Oregon’s dividends received deduction, based on the taxpayer’s ownership percentage of controlled foreign corporation (CFC) generating the NCTI.
South Dakota updates conformity to the IRC
On Feb. 13, 2026, South Dakota Gov. Larry Rhoden signed Senate Bill 18 and Senate Bill 19, both relating to South Dakota’s bank franchise tax. Senate Bill 18 repeals existing income tax modifications for bad debts from the franchise tax computation. Senate Bill 19 updates South Dakota’s conformity to the IRC as amended and in effect on Jan. 1, 2026.
Texas enacts amendments to regulations, updating conformity to the IRC
On Feb. 20, 2026, Texas formally adopted amended regulations updating the state’s conformity to the IRC. Beginning with the 2026 report year (2025 tax year), amended Title 34 Tex. Admin. Code section 3.587 reflects guidance previously issued by the Texas Comptroller of Public Accounts on Dec. 19, 2025 (original guidance superseded). The amendments are consistent with the Comptroller’s guidance that, beginning with the 2026 report year, taxpayers must determine the margin tax base under the federal law in effect for the federal tax year, rather than the IRC as in effect on Jan. 1, 2007, unless a Texas statute or rule specifically references an IRC section. To the extent a Texas statute or rule references the IRC, the taxpayer must continue to apply the relevant provisions of the IRC as in effect on Jan. 1, 2007.
Two areas with potentially significant implications for Texas margin taxpayers are the treatment of bonus depreciation on qualified assets and the deduction for foreign dividends.
Utah enacts corporate income tax rate reduction
On March 23, 2026, Utah Gov. Spencer Cox signed Senate Bill 60, reducing Utah’s corporate income tax rate to 4.45% from 4.5%, applicable for taxable years beginning on or after Jan. 1, 2026.
Virginia updates conformity to the IRC; enacts law changes related to OBBBA provisions
On Feb. 20, 2026, Virginia Gov. Abigail Spanberger signed House Bill 29, updating Virginia’s conformity to the IRC and decoupling the commonwealth from several provisions of the OBBBA. House Bill 29 updates Virginia’s conformity to the IRC as in effect on Dec. 31, 2025, including any amendment that extends the expiration date of a federal tax provision to which Virginia conforms or has previously conformed.
Previously, Virginia conformed to the IRC on a rolling basis, however, Virginia would not adopt any federal amendments enacted on or after Jan. 1, 2023 that were projected to exceed a certain fiscal threshold. House Bill 29 instead reestablishes a static conformity date to the IRC and eliminates Virginia’s ‘pause’ on conformity to IRC provisions that exceed a certain revenue impact to the state. House Bill 29 additionally decouples from or modifies several provisions of the OBBBA.
Virginia generally conforms to IRC section 163(j), including the amendments enacted by the OBBBA. However, Virginia provides an additional deduction of federally disallowed business interest expense. Under previous law, taxpayers were allowed a deduction equal to 50% of the federally disallowed business interest expense for tax years beginning on or after Jan. 1, 2024. House Bill 29 reduces the additional deduction to 20% for tax years beginning on or after Jan. 1, 2025.
Finally, House Bill 29 updates Virginia’s reference to NCTI, as opposed to GILTI, in allowing a subtraction from Virginia taxable income for income under section 951A.
West Virginia conforms to the OBBBA
On March 2, 2026, West Virginia Gov. Patrick Morrisey signed Senate Bill 393, updating West Virginia’s conformity to the IRC as in effect on Dec. 31, 2025, including all amendments made to the IRC after Dec. 31, 2024, but prior to Jan. 1, 2026. The provisions of Senate Bill 393 are retroactive to the same extent allowable under federal income tax law. Senate Bill 393 brings West Virginia into conformity with the major corporate income tax provisions enacted under the OBBBA.