Navigating the One Big Beautiful Bill Act (OB3) conformity issues in Pennsylvania is like driving across the state on the Turnpike — you’ll get there eventually, but expect tolls.
In November 2025, Governor Josh Shapiro signed the 2025-2026 Pennsylvania budget (HB 416) into law. With many OB3 provisions reducing federal taxable income — and, by extension, Pennsylvania taxable income if the state conformed — lawmakers had to carefully evaluate the associated revenue implications. Pennsylvania is already in the middle of a multi-year corporate income tax rate reduction of 0.5% each year, until it reaches 4.99%. The combination of shrinking rates and a shrinking tax base made full conformity to OB3 a budget-breaker, so Pennsylvania opted to decouple from the most taxpayer-friendly provisions.
Bonus Depreciation
The journey through OB3 conformity in Pennsylvania starts with the least complicated stretch of road: bonus depreciation. Any asset eligible for 100% bonus depreciation under IRC §168(k) or IRC §168(n) must be depreciated as if bonus depreciation had never been enacted. Taxpayers will also compute gain/loss adjustments on asset dispositions. Aside from the new bonus-eligible property categories introduced by OB3, the Pennsylvania modifications beginning in 2025 mirror the adjustments required throughout the TCJA era.
Business Interest Expense Limitation
The first area of complexity arises with the business interest expense limitation under IRC §163(j), as Pennsylvania will not conform to the OB3 changes in determining the §163(j) limitation. Instead, taxpayers must continue to determine adjusted taxable income (ATI) using the TCJA method in effect for 2024 (without adding back depreciation, amortization, and depletion). Using a different §163(j) calculation for federal and Pennsylvania purposes raises the question of whether and/or how Corporation Tax Bulletin 2019-03 will be applied going forward. The Bulletin currently instructs taxpayers to calculate a Pennsylvania §163(j) limitation only when the consolidated federal group has a limitation. With two different ATI calculations now in play, this policy must be revisited. Based on the most recent information from the Department of Revenue, taxpayers should expect to compute a Pennsylvania §163(j) limitation on a pro forma basis regardless of whether a federal limitation exists. Formal guidance is expected before calendar-year taxpayers begin compliance, so they should be prepared for a potential policy shift.
R&E Expenditures
Understanding Pennsylvania’s treatment of research and experimental (R&E) expenditures is far from straightforward — and, at times, can feel more complex than navigating a blizzard on the Turnpike.
For large corporations, any subtraction claimed for R&E expenditures for federal income tax purposes is not permitted for Pennsylvania purposes. It does not matter if the deduction is full expensing, amortization under any applicable section, or the accelerated deduction of unamortized 2022–2024 R&E amounts allowed federally in 2025 (or 2025-2026 if the two-year election is made). If R&E expenditures are deducted for federal purposes, they must be added back for Pennsylvania purposes.
The addback modification for federally-allowed R&E expenditures is the “easy” part. The subtraction modification in the Pennsylvania budget bill is far less clear, and additional guidance from the Department of Revenue would be helpful. The Department has been addressing questions from the taxpayer community, and during a Q&A, uncertainty around several areas of the subtraction computations was discussed.1
For pre-2025 R&E expenditures amortized under TCJA rules, taxpayers will aggregate all unamortized R&E, domestic and foreign, as of the end of their 2024 tax year and deduct 20% of this amount in tax years 2025 through 2029. This applies regardless of how the taxpayer elects to treat its unamortized pre-2025 R&E expenditures for federal income tax purposes (except for small businesses). Pennsylvania’s approach effectively lengthens the recovery period for most pre-2025 domestic R&E while accelerating recovery for foreign R&E.
The treatment of domestic R&E expenditures under IRC §174A, beginning in 2025, is similar. While §174A allows full expensing (with an option to amortize), Pennsylvania requires an addback of the amount deducted federally. The Pennsylvania subtraction is then 20% per year for five years, based on the amount of R&E expenditures “allowable” under IRC §174A.
The Pennsylvania budget bill does not distinguish between “old” IRC §174 and “new” IRC §174, creating some ambiguity regarding the Pennsylvania subtraction modification for foreign R&E expenditures incurred in 2025 and later. The bill uses the same §174 framework to determine both the pre-2025 and post-2024 foreign R&E addition/subtraction modifications. As noted earlier, taxpayers must add back any federal deduction of foreign R&E, including amortization under OB3’s version of §174. For the Pennsylvania subtraction, the entire amount of foreign R&E (pre-2025 unamortized balance + post-2024) is considered “unamortized,” forming the basis for the 20% subtraction over five years.
Some good news: Pennsylvania did conform to OB3’s small business transition rules for R&E expenditures, so small businesses may amend their 2022-2024 Pennsylvania returns to claim refunds for unamortized R&E expenditures.
Next Steps on the OB3 Path: Planning for What’s Ahead
Pennsylvania’s approach to OB3 makes one thing abundantly clear: Proper planning is not optional. With significant differences between federal and state treatment — especially around R&E, §163(j), and bonus depreciation — taxpayers have real opportunities to evaluate their options and shape an optimal strategy. Understanding how each choice plays out at both federal and state levels can help manage cash flow, minimize surprises, and position businesses for smoother compliance as Pennsylvania continues its march toward lower corporate tax rates.
In our next stop along the OB3 highway, we’ll head down I‑95 to explore how its corridor states are responding — where conformity speeds up, slows down, or takes an unexpected exit. Stay tuned as the series continues its drive through the Mid‑Atlantic.
1 The Pennsylvania Institute of Certified Public Accountants (PICPA) submitted member questions to the Pennsylvania Department of Revenue (DOR) and shared the resulting responses. In addition, the Tax Executives Institute Philadelphia chapter hosted a December update meeting with DOR representatives; the referenced “Q&A” reflects that session, while the “addressing questions” portion derives from PICPA.
