Our next journey on the One Big Beautiful Bill Act (OB3) road trip starts as far northeast as possible in Maine. After a quick jaunt over to Vermont, we will make our way to I-95 and wind our way through the Mid-Atlantic. This week’s stops will also include Massachusetts, Rhode Island, and Connecticut. However, the trek down I-95 does not stop there. Future stops will include New York (State and City) and New Jersey, and we won’t stop until we make it to the District of Columbia.
Maine
Maine’s conformity to the provisions of OB3 is based on a state law that permits the Governor to make temporary changes in tax administration when there is a lag in the state’s conformity to the Internal Revenue Code. The Maine Department of Administration and Financial Services analyzed the impact of the federal changes on the Maine budget and provided its recommendations to the Governor.
The Governor followed those recommendations. For Maine corporate income tax purposes, the provisions of OB3 related to the determination of business interest deductions under IRC §163(j) and the increased limits and additional eligible property under IRC §179 are applicable. Additionally, small businesses can amend their prior year returns as allowed under OB3’s transition rules to claim additional R&E expenditures. The most significant provisions of OB3 Maine will not conform to relate to research and experimental (R&E) expenditures and bonus depreciation.
R&E Expenditures
Maine will continue to require taxpayers to amortize their domestic R&E expenditures in the same manner as required under the TCJA. Any unamortized amounts from tax years 2022 – 2024 must be deducted as they would have been under the TCJA. For 2025, taxpayers will continue to amortize domestic R&E over 5 years beginning with the midpoint of the taxable year in which the expenditure is paid or incurred.
In April 2026, Maine enacted a supplemental budget (HP 1491). The supplemental budget provides for the phase-in of the full expensing of domestic R&E under IRC §174A. The addback for full expensing of R&E for federal purposes will be reduced from 100% in 2025 to 70% in 2026, 50% in 2027, 30% in 2028, and 10% in 2029. While the 2025 and prior R&E amounts will be amortized under the TCJA rules, the addbacks in 2026 – 2029 will be deducted in four equal installments beginning in the year following the addback.
Bonus Depreciation
The supplemental budget also decoupled bonus depreciation of qualified production property under IRC §168(n). Additional legislation (HP 1469) in April decoupled Maine from bonus depreciation under IRC §168(k). Taxpayers must depreciate assets for state purposes as if IRC §168(k) and §168(n) were not enacted.
Vermont
Before we start our journey down I-95, we are going to take a quick side trip to the Green Mountain State of Vermont. At their closest point, Vermont and Maine are separated by about 30 miles of New Hampshire. Vermont is a fixed-date conformity state and recently updated its conformity (HB 933, signed by the Governor on June 18, 2026). VSA §5824 was amended to change the IRC conformity date to the version as amended through December 31, 2025 (from December 31, 2024). This would include the provisions of OB3 unless Vermont decouples.
Vermont will follow federal rules for foreign R&E expenditures and will conform to the current provisions for determining the business interest limitation under §163(j). However, Vermont has opted to decouple from several important provisions of OB3.
R&E Expenditures
Vermont will not conform to the federal transition adjustments available under P.L. 119-21, Sec. 70302(f). Instead, Vermont created a state-specific election for “eligible taxpayers” (generally the same as small businesses for the purposes of Sec. 70302(f)(1)). Eligible taxpayers that amend their federal returns to retroactively deduct 2022-2024 domestic R&E may elect to deduct their unamortized domestic R&E either entirely on their 2025 Vermont return or ratably over two years (2025 and 2026). This election allows Vermont to avoid adopting federal retroactivity while still providing relief to small businesses that choose to amend federally. Additionally, while Vermont generally requires an addition for full expensing of domestic R&E under §174A for tax years beginning on or after January 1, 2025, this requirement does not apply to “eligible taxpayers”. For tax years after 2024, eligible taxpayers will not be required to make any R&E modifications for Vermont purposes.
Vermont will require an addition for amounts deducted under Sec. 70302(f)(2) and §174A for taxpayers that are not an “eligible taxpayer”. Taxpayers that are not eligible must continue amortizing domestic R&E under IRC §174 as in effect on December 31, 2024. Although Vermont’s addback statute refers to §174A, state guidance clarifies that no adjustment is required when a taxpayer elects amortization under §174A(c)(1), which closely resembles TCJA amortization. This clarification is important because it prevents unnecessary addbacks for taxpayers choosing the §174A(c)(1) amortization method, which closely resembles TCJA amortization.
Bonus Depreciation
Vermont continues to decouple from IRC §168(k) and will also decouple from §168(n). Taxpayers will add back any bonus depreciation claimed under §168(k) and/or §168(n) for Vermont purposes. The Vermont depreciation subtraction is determined as if the taxpayer had elected not to claim bonus depreciation.
Massachusetts
As we head south on I-95 out of Maine and briefly through New Hampshire (again), our next stop is the Commonwealth of Massachusetts. With rolling conformity, combined filing, and a higher-than-average corporate income tax rate, Massachusetts is a significant tax-paying jurisdiction for many taxpayers. Unfortunately, Massachusetts kept taxpayers waiting for conformity updates until June 12th.
R&E Expenditures
Massachusetts will not conform to the federal transition rules under Sec. 70302(f), which are retroactive to tax years beginning on or after January 1, 2022. The bill does not provide instructions on how small businesses should handle prior years if such years are amended federally. Because Massachusetts disallows the retroactive federal deduction of 2022-2024 R&E for small businesses, any amended federal returns would require a Massachusetts addback. As a result, filing an amended Massachusetts return solely to report the federal retroactive deduction would not change Massachusetts tax liability. Absent other adjustments, filing an amended Massachusetts return would be unnecessary.
Massachusetts has also decoupled from the federal deductions allowed under IRC §174A. Taxpayers will continue to amortize domestic R&E under IRC §174 in effect on July 3, 2025 (i.e., under TCJA rules). Unlike many other states, Massachusetts applies its §174A adjustment to all amounts deducted federally, not just the full expensing. A taxpayer electing amortization under §174A(c) (the minimum 60-month method) will generally have a deduction comparable to TCJA amortization. Because Massachusetts has not issued guidance excepting amortization under §174A(c) from the addition modification, taxpayers must make both addition and subtraction adjustments to replicate TCJA amortization under §174. Fortunately, there are no adjustments required for foreign R&E expenditures.
Bonus Depreciation, and 163(j) Business Interest Limitation
For 2025 and 2026, Massachusetts will decouple from bonus depreciation under IRC §168(n), the increased limits under IRC §179, and OB3’s revised §163(j) calculation using EBITDA for ATI. Taxpayers will depreciate qualified production property as if §168(n) were not enacted. For §163(j) and §179, taxpayers must continue using the TCJA versions in effect prior to OB3. Under HB 5470, the continued disallowance of these OB3 provisions after 2026 was contingent upon the passing of a ballot initiative to reduce the personal income tax rate. Because the Massachusetts Supreme Judicial Court blocked the initiative from appearing on the November ballot, the treatment of these provisions after 2026 remains uncertain.
Rhode Island
Our next stop on the OB3 road trip is Rhode Island. The state issued emergency regulations in December 2025 to address OB3’s impact on Rhode Island income tax, and those regulations were made permanent in May 2026.
R&E Expenditures
Rhode Island has decoupled from OB3’s treatment of R&E expenditures. The accelerated deduction of unamortized R&E expenditures is not permitted. Taxpayers must continue amortizing pre-2025 R&E expenditures under TCJA rules, and small businesses cannot claim Rhode Island refunds for unamortized 2022 – 2024 R&E expenditures. If a small business amends its federal returns for 2022 – 2024 to claim additional R&E expenditures, it must amend its Rhode Island return to report the federal change and add back the additional R&E expenditures deducted.
Rhode Island has also decoupled from the immediate expensing of domestic R&E expenditures under IRC §174A for tax years 2025 and later. Domestic R&E expenditures must be amortized evenly over five years. Rhode Island will continue to conform to the federal treatment of foreign R&E expenditures under IRC §174 for tax years 2025 and later.
Bonus Depreciation
Pursuant to RI Section 44-61-1(a), Rhode Island disallows bonus depreciation under IRC §168. As a result, OB3’s bonus depreciation changes do not apply in Rhode Island. The emergency regulations specifically confirm that bonus depreciation is disallowed for qualified sound recording production assets under IRC §168(k) and IRC §181. This clarification does not affect the bonus disallowance of any other qualifying asset category.
163(j) Business Interest Limitation
The emergency regulation also decouples Rhode Island from OB3’s revised IRC §163(j) calculation. Any additional business interest expense deducted federally as a result of OB3 must be added back for Rhode Island purposes. Taxpayers must continue computing their Rhode Island §163(j) limitation using adjusted taxable income that includes depreciation, amortization, and depletion — consistent with the TCJA‑based calculation.
Connecticut
As we continue southwest along I-95, we enter Connecticut and pass through the many cities and towns that line its coastline. Connecticut is a rolling conformity state, meaning many OB3 provisions would ordinarily apply without legislative action. Senate Bill 1, signed into law on May 26, 2026, clarified where Connecticut will conform — and where it will decouple — from OB3.
Bonus Depreciation
Connecticut already decouples from bonus depreciation under IRC §168(k), and this decoupling applies to the new qualified property categories added by OB3. Any bonus depreciation claimed under IRC §168(k) for 2025 must be added back to federal taxable income, with a corresponding subtraction for depreciation computed without §168(k). Connecticut will also decouple from IRC §168(n), but only for tax years beginning on or after January 1, 2026. This creates a narrow window in 2025 where qualified production property eligible for 100% bonus depreciation federally does not require a Connecticut modification. If a taxpayer has “qualified production property” for which 100% bonus depreciation is claimed for federal income tax purposes on their 2025 income tax return, a Connecticut modification will not be required.
R&E Expenditures
While taxpayers have a brief window for §168(n), Connecticut has firmly closed the door on OB3’s R&E changes. Connecticut has decoupled from the federal transition rules under P.L. 119-21, Sec. 70302(f), retroactive to tax years beginning on or after January 1, 2022. Taxpayers must continue amortizing 2022 – 2024 R&E expenditures under §174 in effect on July 3, 2025 – the pre-OB3 version. For tax years beginning in 2025, Connecticut disallows full expensing under §174A. R&E expenditures must instead be amortized under pre-OB3 §174 rules. SB only addresses §174A for the 2025 tax year, leaving taxpayers uncertain about treatment in 2026. As currently enacted, Connecticut will conform to §174A beginning in the 2026 tax year.
163(j) Business Interest Limitation
Connecticut continues to decouple from the business interest expense limitations under IRC §163(j). Taxpayers may continue deducting business interest in Connecticut without applying the federal §163(j) limitation.
