With over 20 states taking different positions on Section 174 capitalization, filing season has become a minefield for tax professionals. TaxOps partners Jamie Overberg and Sean Espy break down which states have decoupled, why the guidance keeps shifting, and what it all means for your clients' returns. From Arizona's executive order tug-of-war to DC's federal lawsuit to California finally adopting the ASC, Jamie and Sean walk through the real-world chaos of 174 decoupling — conflicting research sources, states reversing course mid-session, and departments of revenue that can't confirm their own positions. They also cover major state credit changes in Michigan, Oklahoma, Texas, Iowa, and more, plus why international 174 capitalization is still very much in play.
Key Takeaways
● Roughly 20 to 30 states have decoupled from federal Section 174 provisions, but guidance remains inconsistent across research platforms, state websites, and even departments of revenue.
● States facing the largest budget shortfalls are most likely to decouple, forcing companies to add back previously deducted R&D expenses at the state level.
● Section 174 applies wherever technical uncertainty exists, and states are requiring companies to include activities performed outside their borders in 174 calculations.
● California adopted the Alternative Simplified Credit (ASC) for the first time, though at a lower rate (3% with a three-year base, 1.3% without), and eliminated the AIRC. Switching back from ASC to the regular credit method requires a formal methods change.
● Michigan restored its research credit with a $100 million annual budget and a calendar-year-only filing requirement, with an application deadline moving to March 15 next year.
● Texas increased its R&D credit rate from 5% to 8.6% and removed the outdated discovery test by updating its static conformity date to January 1, 2025.
● Section 174 capitalization for international R&D activities remains in effect, even as domestic capitalization requirements have been repealed.
About the Hosts
Jamie Overberg — Partner, TaxOps Minimization. Jamie has more than 20 years of Research & Development (R&D) tax credit experience, with deep expertise in R&D credit execution, tax minimization strategies, and ASC 730/740 and FIN 48 reporting. She also handles Section 263A and Section 382 work and has led numerous R&D tax controversy engagements across the automotive, engineering, manufacturing, software, biotech, and oil and gas sectors. Jamie previously spent 13 years at Ernst & Young, including a national role in E&Y's Washington, D.C. R&D practice, and holds a BBA in Accounting from Drake University.
Sean Espy — Partner, TaxOps Minimization. Sean brings more than 25 years of consulting experience across public accounting, legal, and industry to complex tax minimization engagements, specializing in Research Credit consulting. He has led R&D credit studies across software, manufacturing, financial services, aerospace, medical devices, oil and gas, and renewable energy, and has represented clients before the IRS and state tax authorities in nine states. Sean holds a BA from the University of Kentucky, a JD from Ohio Northern, an LL.M. in Taxation from Capital University Law School, and is admitted to the U.S. Tax Court and the Supreme Court of the United States.
Resources
● Blue J: www.bluej.com (tax research platform referenced for 174 decoupling guidance)
● OBBA (One Big Beautiful Bill Act): federal legislation driving state decoupling decisions
● Section 174 / 174A: IRS provisions governing R&D expense capitalization and software development costs
● RevProc 2000-50: IRS revenue procedure covering software development expenses (now folded into 174A)
● Section 59E: alternative amortization election for R&D expenditures
● TCJA (Tax Cuts and Jobs Act): prior federal tax reform from which several states remain decoupled
● IFRS (International Financial Reporting Standards): accounting framework referenced by some companies choosing to continue capitalizing
● Michigan Research Credit: calendar-year application, deadline April 1 (moving to March 15 in 2027), $100 million annual budget
● Oklahoma Research Rebate: new refundable credit, first-come-first-served, application window approximately March 21 through March 28
● Iowa Research Credit: reinstated supplies and lease computer costs with a pre-application certificate requirement
● Arkansas Research Credit: five-year pre-application window model
Connect
● TaxOps: www.taxops.com
● TaxOps on LinkedIn: www.linkedin.com/company/taxops-llc
TaxOps #TaxStrategy #StateAndLocalTax #SALT #RDTaxCredit #Section174 #MultiStateTax #TaxCompliance #CorporateTax #CPAs #174Capitalization #StateTaxDecoupling #OBBA #ResearchCredit #ASC
Mentioned in this episode:
Reach Out to Tax Ops
