Tax Intelligence · Episode 02
Section 174 Decoupling: What Tax Pros Need to Know State by State
About This Episode
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.
“We live in a wild, wild west era right now.”
Jamie Overberg
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- Texas increased its R&D credit rate from 5% to 8.6% and removed the outdated discovery test by updating its static conformity date to January 1, 2025.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for international R&D activities remains in effect, even as domestic capitalization requirements have been repealed.
Resources Mentioned
- Blue J: 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
- Rev. Proc. 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
- 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
Chapters
- 0:00Introduction and the Section 174 Decoupling Landscape
- 2:34The District of Columbia's Legal Battle Over OBBA
- 4:20Arizona's Executive Order Tug-of-War
- 8:16State-by-State 174 Impact: Arizona, California, and Colorado
- 21:27New State Credit Changes: Michigan, Oklahoma, Texas, and More
- 29:24Wrap-Up: Filing in the Wild West of State Tax
In This Episode
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