As we move into 2026, the tax policy focus is increasingly shifting from Congress to other branches of government. The completion of the One, Big, Beautiful Bill Act (OBBB) last year resolved many tax priorities of the Republican majority, so there are few tax matters on the Congressional agenda. In the executive branch, the Treasury Department and the Internal Revenue Service face the significant task of implementing the OBBB. Thus, we expect this year will be punctuated by rounds of technical and procedural guidance. The courts are also expected to continue playing an important role in shaping tax policy this year as key cases work their way to the appellate courts. Finally, developments related to tariffs, global trade, and the economy are another factor to be monitored.
At the state and local level, the key for 2026 will be to see how states approach conformity. The OBBB was costly from a revenue perspective, and with states feeling the pressure of balanced budget requirements, many states will continue to consider decoupling from some of the OBBB’s most impactful business-side changes.
The new year means new planning opportunities and compliance requirements, and this month we identify several OBBB provisions that took delayed effect on the first of the year. Some of the most impactful changes for 2026 involve international tax rules. Others relate to nonprofits, which will face challenges in coming years because of changes to the suite of excise taxes that can apply to them, as well as to the rules that apply to charitable contributions.
Read on for a roundup on some of the most significant recent tax policy developments.
- Looking ahead to 2026
- State and local tax (SALT) conformity
- One, Big, Beautiful Bill Act (OBBB) rules that took effect January 1
Looking ahead to 2026
We’re monitoring three key tax policy storylines at the federal level for 2026.
Shifting focus to implementation
Last year at this time, all eyes were on Congress and the looming legislative cycle that resulted in enactment of the OBBB. This year is expected to be substantially quieter on the legislative front for reasons that are both pragmatic and cyclical. In the first case, Republican leadership achieved the vast majority of their tax policy goals through the OBBB, so there are limited changes yet to be pursued. 2026 is also a midterm election year, which reduces the days available for congressional deliberation and heightens the scrutiny of any legislation being pursued. Congressional developments will still be worth monitoring, but expectations about proposals converting into enacted legislation should be tempered.
Treasury’s focus this year, by contrast, will be on implementing key pieces of the OBBB. Treasury released the initial version of its Priority Guidance Plan just before the government shut down on October 1 of last year. The plan indicates the areas for which Treasury intends to provide guidance in the coming year. There are roughly 100 items in the initial version, and we can expect subsequent quarterly updates this year to somewhat tack on to this list. Not every change in the OBBB is complicated, but some statutory changes imply ambiguous answers to difficult questions, due to the lack of clarifying guidance from Treasury.
One area most in need of guidance is the tax treatment of research and experimentation (R&E) expenditures. Businesses were required to capitalize and amortize domestic R&E expenditures in the 2022 through 2024 tax years. The OBBB reinstated the current deduction for domestic R&E costs beginning Jan. 1, 2025, though foreign R&E costs must still be capitalized and amortized over 15 years. Treasury has so far released some administrative guidance as to the OBBB changes to R&E, but that guidance relates only to statutory transition rules which allow for retroactive relief to years ending before 2025.
Regulations were promised and previewed back in 2023 in the form of a longer notice that clarifies many questions about what qualifies as research expenditures, which provides some depth on special considerations related to software development and describes how contractors treat their costs after considering financial risks and use rights. But we still don’t have regulations, and that notice has already been slightly revised by another. Older regulations may be instructive on questions like how the elections at Section 59(b) and Section 174A(c), but Treasury has yet to make that clear.
Although R&E cost recovery has gone through some major changes in the last five or so years, it’s a well-established concept. An entirely new provision, Section 168(n), provides a 100% deduction for qualified production property (QPP), which refers to nonresidential real property used in manufacturing, production (chemical and agricultural only), or refining of tangible property. Property must be integral to a qualified production activity to qualify, and a qualified production activity includes only activities that result in substantial transformation of the property. The deduction is subject to recapture if property ceases to be used in an integral part of qualified production activity. The statutory text for this tax deduction is heavily definitional, so detailed guidance will go a long way for providing certainty to businesses seeking investments in new manufacturing facilities.
One of the more technical areas Treasury will need to tackle is the application of foreign entity of concern (FEOC) restrictions. FEOC rules existed before the OBBB, but they weren’t impactful to the vast majority of taxpayers. The OBBB placed far more sweeping restrictions on foreign taxpayers and foreign investors in the context of energy-related tax credits. The restrictions apply differently depending on the energy credit being claimed. We currently only have interim rules as to “effective control,” which is foundational to understanding whether an entity is foreign-influenced and therefore subject to FEOC restrictions. Similarly, there are as of now only interim safe harbors for purposes of determining whether FEOC restrictions apply as a result of material assistance from a specific kind of foreign entity.
Courts to play an outsized role in the coming year
Without much legislative activity expected this year, and with Treasury focused on OBBB implementation, the courts will play an important role in shaping the future of tax law. Part of the reason for the increase in decisive judicial activity has to do with the combination of an uptick in executive action and recent watershed decisions that make it more likely that challenges to executive action will be successful. The practical impact of forthcoming decisions will vary as individual cases may or may not immediately alter tax positions. However, the courts are a key player in the evolution of the Tax Code.
One lingering question in the fund and private equity contexts has been whether limited partners under state law may claim an exemption from self-employment tax where they are not, in a functional way, involved with partnership business activities. This question was answered for the first time by an appellate court in mid-January in the Sirius case. The favorable taxpayer result in that case is an important development, but several other legal proceedings will continue to shape this issue. Another major case to be decided for the first time by an appellate court will be Liberty Global, which is about whether the economic substance doctrine, as codified, has a threshold relevancy component. The case has long-term implications since it may define the way the IRS can utilize economic substance as a tax enforcement tool. Finally, there’s a critical tariff case now pending in the Supreme Court, Learning Resources, which concerns the executive’s ability to impose tariffs pursuant to emergency statutory powers.
Broader economic and market dynamics at play
The significance of the Learning Resources case goes well beyond tax and into questions about the nature of separation of powers and delegation of policymaking power from Congress to Treasury. More than any other case to be decided this year, it promises to impact the broader economic dynamics that shape and contextualize all tax policy questions. More specifically, businesses are carefully monitoring that case to see whether existing tariffs will be maintained or under what circumstances they might be altered moving forward. Tariffs have evolved significantly throughout the past year, and this is yet another dynamic to monitor.
The legislative certainty provided by the OBBB, and the regulatory certainty that Treasury will be working this year to complement it, can be contrasted with uncertainty about the overall economic outlook. Concerns related to inflation, tariffs, and global trade persist as 2026 begins to unfold. Numerous factors are at play, but whatever happens, tax policy is a ready tool available to both the White House and Congress should intervention be deemed necessary.
State and local tax (SALT) conformity
Now that federal tax law has changed, each state is faced with a decision about whether and to what extent it’ll conform to those federal changes. Conformity is a foundational concept for state income tax policy.
States have three basic ways of approaching conformity. One approach is rolling conformity, which means that a state’s law conforms to modifications to the Internal Revenue Code on a rolling basis. Another is static, or fixed, conformity, where a state conforms to federal law, but only as of a specific point in time. A third approach, partial or selective conformity, means a state only conforms to some, but not all, federal changes.
Conformity is a challenge for states because virtually every state — unlike the federal government — has a balanced budget requirement. The OBBB is projected to reduce federal tax revenues by several trillion dollars over the coming decade given the many taxpayer-favorable provisions. Full conformity to the OBBB would similarly impact state income tax revenues. On top of the sheer cost of the new law, changes the OBBB made to other programs, such as Medicaid, essentially represent a decrease in federal financing.
How will states deal with the knock-on effects of these changes to their budgets? In the second half of 2025, states took stock and assessed the impact of the OBBB’s provisions by weighing the cost of the new expensive OBBB provisions against their potential to spur state-level economic growth. There are numerous competing policy priorities at the state level, but because of balanced budget requirements, states have to act quickly.
Many states have in recent months called special legislative sessions to deal with potential revenue shortfalls because of conformity issues. Indeed, we have already seen some states beginning to carve out some of the more costly OBBB provisions.
Michigan, for example, updated its conformity date to Jan. 1, 2025, and changed its laws to selectively decouple. Thus, under Michigan law, it’s as though the new 100% deduction for qualified production property (Section 168(n)), and the restoration of an immediate deduction for domestic R&E (Section 174A) were never enacted. The state has returned to the pre-OBBB versions of the interest expense limitation under Section 163(j), bonus depreciation under Section 168(k), and first-year expensing under Section 179. Maine, to take another example, decided to conform to the OBBB changes made to Section 163(j) and Section 179, but not the changes to R&E, QPP, or bonus depreciation. California, a fixed conformity state that for years had famously set its conformity date to Jan. 1, 2015, reset that date to Jan. 1, 2025. California, therefore, swept in federal tax law changes made by the TCJA and the Inflation Reduction Act (IRA). But the state isn’t conforming to any OBBB changes.
In 2026, expect the selective decoupling to continue across states. One thing to watch for is some states to make their conformity decisions retroactive. Especially for taxpayers with heavy footprints in a limited number of key states, it can pay to monitor closely how those key states approach conformity in the coming months.
One, Big, Beautiful Bill Act (OBBB) rules that took effect January 1
From a planning and compliance perspective, one of the principal challenges of the OBBB is timing. The law was enacted in July 2025, but its effective dates are sprinkled across the calendar, depending on the change and the code sections involved. It can be especially challenging to track these dates because the OBBB meaningfully impacts a huge array of tax provisions.
When it comes to energy credits, timing is especially crucial. Beyond the differing effective dates for the various changes made by the OBBB are the multitude of beginning-of-construction and placed-in-service dates, which can be decisive as far as whether taxpayers can actually claim the credits they are seeking. Layered onto these three sets of dates are the FEOC restrictions noted above.
FEOC restrictions generally don’t apply to individual credits, most of which have been recently eliminated anyway. On the business side, the restrictions apply to three mainstay credits: the investment tax credit (ITC), production tax credit (PTC), and the advanced manufacturing production credit at Section 45X, among others. The rules denied the ITC and PTC to prohibited foreign entities beginning on July 5 of last year. But the material assistance rules didn’t apply until the beginning of the current month: no ITC or PTC is allowed to any projects that receive any material assistance from a prohibited foreign entity and that begin construction on or after Jan. 1, 2026. The material assistance rules as to Section 45X took effect in July 2025.
Understanding and complying with FEOC restrictions represents a huge adjustment for taxpayers because of FEOC’s novelty and intricacy. Many of the OBBB’s changes on the international side are hardly novel, but they’re incredibly intricate and tie to effective rate changes that only recently took effect.
Starting January 1, effective rates changed as to net CFC tested income (NCTI, formerly GILTI), foreign-derived deduction eligible income (FDDEI, formerly FDII), and the base erosion and anti-abuse tax (BEAT). The effective rates for NCTI and the BEAT, which are meant to curb price shifting, moved from 10.5% to 12.6%, and from 10% to 10.5%, respectively. FDDEI cuts in the other direction from a policy perspective, as it’s meant to incentivize holding IP in the United States. The FDDEI rate moved from 13.125% to 14% at the beginning of the month.
Modeling can be hugely helpful to help taxpayers come to exact terms with these changes. Considerations will vary across taxpayers, depending on their exposure to NCTI and the BEAT, and their ability to claim FDDEI — that’s a zoomed-in approach. Zooming out, the biggest-picture item to watch this year is whether the U.S. minimum tax regimes of NCTI (and CAMT, the corporate alternative minimum tax) can exist alongside the OECD’s global minimum tax framework. The United States has pushed for this, removing a proposed tax from one of the iterative versions of the OBBB in exchange for a promise from the G7 countries to agree to push for the two systems’ coexistence. This sort of safe harbor would mean that the existing, revised U.S. regimes are included in the global framework, and that U.S.-parented groups would be fully excluded from the income inclusion rule (IIR) and undertaxed profits rule (UPTR) which help define Pillar 2.
Many of the nonprofit related OBBB changes took effect this month. Among these are a set of changes to charitable contributions under Section 170. There’s now a floor on such contributions for both corporate and individual taxpayers. The floor — 1% as to corporations, and 0.5% as to individuals — operates as a limitation. This first 1% or 0.5% of a contribution isn’t deductible. On a more positive note, a charitable contribution deduction of up to $1,000 for nonitemizers ($2,000 for joint filers) also took effect at the beginning of this year. Other changes recently took effect that relate to the suite of excise taxes that may apply to nontaxpaying entities, including an excise tax based on excessive compensation such entities pay certain employees.
