We will now drive through the Appalachians on the One Big Beautiful Bill Act (OB3) road trip. Our journey begins in the Allegheny Mountains of West Virginia, winds through the Blue Ridge Mountains of Virginia, crosses into the Great Smoky Mountains of Tennessee, and finishes in the Cumberland Range of Kentucky.
West Virginia
In the mountains of West Virginia, you can find some of the most challenging whitewater rafting in the country. Adventure seekers may enjoy the turbulent rapids, but tax practitioners generally prefer “calmer” waters when it comes to compliance. Fortunately, corporate taxpayers have historically faced few compliance challenges in the state.
West Virginia’s conformity posture is unusually smooth. The state conforms to bonus depreciation under IRC §168(k), to R&E amortization under the TCJA, and to every version of the §163(j) business interest limitation in the TCJA. Few states conform to all three provisions; West Virginia’s alignment significantly reduces federal/state differences.
With the passage of OB3, West Virginia updated its conformity law to maintain that alignment. Legislation enacted in February 2026 updated the IRC conformity date for corporate and personal income tax purposes. Taxpayers must follow all federal income tax changes made between December 31, 2024, and January 1, 2026. The IRC conformity update is retroactive if allowable under federal income tax law. For tax years beginning before January 1, 2026, the federal law in effect for each year continues to apply.
As a result, OB3’s provisions are fully effective for West Virginia corporate and personal income tax purposes. This keeps West Virginia’s conformity streak alive and ensures that compliance remains a smooth, predictable journey.
Virginia
The Blue Ridge Mountains may be picturesque, but Virginia’s new IRC conformity law is far less scenic for taxpayers. Recent legislation replaces Virginia’s rolling conformity with a fixed conformity date of December 31, 2025, while still allowing automatic conformity to federal amendments that merely extend the expiration date of a provision Virginia already conforms to. Overall, Virginia will conform to most OB3 provisions, with several notable exceptions.
Bonus Depreciation
Virginia did not conform to bonus depreciation under IRC §168(k) when TCJA was enacted, and it will continue to decouple from IRC §168(k) under OB3. Additionally, Virginia has decoupled from OB3’s new 100% bonus depreciation allowance for qualified production property under IRC §168(n).
R&E Expenditures
The treatment of R&E expenditures requires careful navigation. Virginia’s legislation specifies that the provisions of OB3’s SS 70302 relating to the expensing and amortization of R&E expenditures will not apply. SS 70302 includes both the immediate expensing rules and the new amortization election under §174A, as well as the transition rules under paragraph (f).
As a result:
- Pre-2025 unamortized R&E must continue to be amortized under TCJA rules.
- Small businesses cannot amend prior-year returns to claim refunds under OB3’s transition rules.
- Large businesses cannot accelerate unamortized 2022-2024 R&E.
- Virginia will not conform to immediate expensing or the new amortization election under IRC §174A.
- Domestic R&E will continue to be amortized as it was under the TCJA for 2022-2024.
163(j) Business Expense Limitation
Virginia will conform to OB3’s changes to the §163(j) business interest expense limitation. Historically, Virginia has allowed a subtraction for a portion of the federally disallowed interest expense:
- 20% for tax years before 2022
- 30% for tax years 2022 and 2023
- 50% for tax year 2024
Beginning January 1, 2025, the subtraction will revert to 20% of the disallowed interest expense.
Tennessee
Tennessee does not conform to a fixed version of the IRC. Instead, it uses federal taxable income as the starting point for computing the excise tax, thereby creating de facto conformity with the IRC in effect for the tax year. Unless Tennessee law specifically decouples from a federal provision, that provision will be in effect for Tennessee purposes.
163(j) Business Expense Limitation
One federal provision that Tennessee does not conform to is §163(j) of the Internal Revenue Code. Tennessee applies the pre-TCJA version of IRC §163(j), meaning most taxpayers will generally be able to deduct all business interest expenses paid/accrued during the tax year. The changes made to IRC §163(j) by OB3 will have no effect in Tennessee.
Bonus Depreciation
Before 2023, Tennessee decoupled from federal bonus depreciation. In 2023, Tennessee enacted legislation conforming to the TCJA version of §168 for assets purchased on or after January 1, 2023. The statute explicitly references §168 “as it exists under the TCJA,” meaning Tennessee conforms to TCJA bonus depreciation only — not to OB3’s reinstated 100% bonus depreciation under §168(k) or the new 100% bonus depreciation for qualified production property under §168(n).
Beginning in the 2025 tax year, taxpayers must add back all federal 100% bonus depreciation and then subtract the bonus depreciation allowed under the TCJA. This creates a short-term tracking challenge:
- 40% bonus depreciation applies to assets acquired 1/1/2025–12/31/2025
- 20% bonus depreciation applies to assets acquired 1/1/2026–12/31/2026
Assets treated as qualified production property under IRC §168(n) will be treated as they would have been under IRC §168 in the TCJA, which means they are not eligible for bonus depreciation. This will require tracking federal and state differences in depreciation for up to 39 years.
R&E Expenditures
Tennessee decoupled from the TCJA version of IRC §174 R&E Amortization. For tax years beginning on or after January 1, 2022, Tennessee applies the pre-TCJA version of IRC §174. Taxpayers must add back any federal §174 deduction and subtract 100% of R&E expenditures allowed under pre-TCJA rules.
If a taxpayer has already expensed 100% of its 2022–2024 R&E expenditures for Tennessee purposes, OB3’s transition rules, such as those for small-business refund claims or large-business acceleration, do not apply. Any federal R&E deduction already allowed by Tennessee must be added back.
Beginning in 2025, for domestic R&E expenditures, federal and Tennessee treatments will align when the R&E is expensed immediately. If taxpayers elect the amortization under §174A(c), a state modification may be required. For foreign R&E expenditures, taxpayers will continue to add back federal amortization and deduct the full amount of foreign R&E expenditures incurred or accrued during the tax year.
Kentucky
Kentucky’s stretch of the OB3 road is full of twists and turns, and 2025 will bring a significant number of federal and state differences for taxpayers to navigate. Kentucky recently updated its IRC conformity date and will use the IRC in effect on December 31, 2025, for tax years beginning on or after January 1, 2026. For 2025, however, taxpayers must continue to apply the IRC in effect on December 31, 2024. Therefore, any OB3 provisions affecting 2025 federal taxable income must be reversed for Kentucky purposes.
R&E Expenses
Looking ahead to 2026, many of these differences will persist because Kentucky opted to decouple from several OB3 provisions. First, Kentucky will not conform to the full expensing of domestic R&E under IRC §174A. Taxpayers must add back the federal §174A deduction and subtract the amount allowed for domestic R&E under §174 as it existed on December 31, 2024. Kentucky’s decoupling language does not distinguish between §174A’s immediate expensing and the elective 60-month amortization under §174A(c). While adjusting for minor differences arising from a §174A(c) election may seem unnecessary, the statute as written would require it. Hopefully, the Department of Revenue will issue guidance to clarify this point.
163(j) Business Interest Expense Limitation
Kentucky will also continue to determine the IRC §163(j) business interest limitation using the version of §163(j) effective December 31, 2024. Taxpayers must recompute their limitation using adjusted taxable income without adding back depreciation, amortization, or depletion.
Bonus Depreciation
Finally, while not specifically addressed in the recent legislation, Kentucky will not conform to any of OB3’s depreciation changes. Kentucky has decoupled from IRC §168 since 2001. Under KRS §141.0101(16)(c), assets acquired after September 10, 2001 must be depreciated using IRC §168 in effect on December 31, 2001. Therefore, OB3’s bonus depreciation provisions, including §168(n), will not apply.
The roads through the mountains are full of twists and turns. With tax compliance, much like driving on mountain roads, you have to be prepared for whatever comes around the next bend.
