States create ‘hodgepodge’ of R&E rules

Following the federal retroactive reinstatement of immediate expensing for domestic research and experimental (R&E) costs under new IRC § 174A via the OBBB, the focus has shifted to the states. And many states are not automatically following the federal government’s lead.

The result is a “hodgepodge of different approaches that the states have taken,” said former Congressman Rick Lazio, who is now a senior vice president at alliant. While some states like California and Illinois automatically conformed to the federal changes, Lazio told Checkpoint, others have opted out or created their own unique rules. This is creating a complex compliance map for businesses operating in multiple jurisdictions.

Lazio said this complexity disproportionately affects small and medium-sized businesses, which often lack the internal tax and legal teams to navigate the conflicting rules. “You’ve got smaller businesses that don’t have a team of accountants, lawyers, finance people in-house,” he explained. “When they start hearing that they’ve got different treatment at the state and federal level, many of them decide they’re just not going to take advantage of the federal credit, even though they’re eligible for it.”

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