The One Big Beautiful Bill Act (OBBBA) made major changes to federal tax law, including an important update to the business interest expense limitation under Internal Revenue Code (IRC) Section 163(j). OBBBA restores the EBITDA-based calculation, allowing businesses to deduct interest based on earnings before interest, taxes, depreciation, and amortization—significantly expanding the amount many companies can deduct.
However, the impact on state taxes varies depending on how each state conforms to, or chooses not to conform to, the Internal Revenue Code (IRC). For multistate businesses, understanding how states treat Section 163(j) is essential for accurate forecasting and compliance.
Federal Background: Section 163(j) Under OBBBA
Under the Tax Cuts and Jobs Act (TCJA), the deduction for business interest expense was limited to 30% of adjusted taxable income (ATI) and changed from an EBITDA calculation to a stricter EBIT measure that excluded depreciation and amortization. OBBBA reversed this rule by reinstating the EBITDA method, allowing many businesses to deduct more interest. It also excludes certain types of foreign income—such as Subpart F and GILTI—from ATI starting in 2026 and adds new coordination rules for how the limitation interacts with interest capitalization provisions.
While these changes expand potential federal deductions, their impact at the state level depends on each state’s conformity with federal tax law. The following sections outline how Pennsylvania, New Jersey, New York, Maryland, Delaware, and Florida approach these rules.
Pennsylvania: Rolling Conformity and Ongoing Complexity
Pennsylvania conforms to the IRC on a rolling basis, meaning federal changes under OBBBA automatically flow through unless the state specifically decouples.
Pennsylvania follows the federal Section 163(j) limitation at the 30% of ATI threshold using the EBITDA calculation. This provides immediate relief to capital-intensive industries—including manufacturing, construction, and utilities—that benefit from depreciation and amortization adjustments restored under the EBITDA approach.
However, Pennsylvania’s Corporate Net Income Tax (CNIT) calculation may still require adjustments for affiliated group reporting and related-party addback provisions. These must be layered on after the federal interest limitation, requiring careful modeling for multistate taxpayers.
With Pennsylvania’s corporate tax rate continuing to phase down (to 7.99% in 2025 and ultimately 4.99% by 2031), conformity with the EBITDA standard may meaningfully increase the net benefit for affected businesses.
New Jersey: Selective Conformity and Separate-Company Complexity
New Jersey conforms to the IRC on a rolling basis but frequently decouples from federal provisions. For Section 163(j), New Jersey applies the limitation at the separate-entity level, not the federal consolidated group level. This alone can significantly restrict the deduction for taxpayers filing on a combined basis.
New Jersey conforms to the 30% ATI limitation using the EBITDA calculation reinstated by OBBBA. However, the state’s related-party interest addback rules apply after the Section 163(j) calculation and can further reduce the allowable deduction—even for businesses benefitting from the broader EBITDA base.
The state follows federal rules for indefinite carryforward of disallowed interest, but taxpayers must carefully track carryforwards at the entity level to avoid distortions in combined returns.
New York: Rolling Conformity and Alignment With Federal EBITDA
New York conforms to the IRC on a rolling basis and has adopted the OBBBA reinstatement of the EBITDA-based limitation. As of 2025, New York applies the 30% ATI limitation using EBITDA, matching federal treatment.
New York calculates the 163(j) limitation at the combined group level, which can soften or amplify the interest limitation depending on how debt is allocated across affiliated entities.
One complication: New York decoupled from federal bonus depreciation under Section 168(k). This mismatch may influence taxable income and affect how much ATI—and thus interest capacity—is available in a given year.
Maryland: Rolling Conformity With Targeted CARES Act Decoupling
Maryland generally conforms to the federal limitation on business interest expense under Section 163(j), including the use of adjusted taxable income—calculated as EBITDA for certain years—as the basis for the limitation. The state applies the federal 30% ATI threshold using the EBITDA method reinstated by OBBBA.
However, Maryland decoupled from specific CARES Act amendments for tax years beginning in 2020. While federal law temporarily increased the limitation to 50% of ATI and allowed taxpayers to substitute 2019 ATI when calculating their 2020 deduction, Maryland required taxpayers to apply the 30% limitation and to compute the deduction using only 2020 ATI.
Any taxpayer that used these federal relief provisions must adjust its Maryland return by adding back the difference between the Maryland-permitted deduction and the higher federal deduction. For corporations, partnerships, and S corporations, Maryland begins with federal taxable income and then applies state-specific modifications. Section 163(j) is applied at the entity level, and Maryland adopts the federal ATI and EBITDA definitions except for the targeted 2020 decoupling rules. Carryforwards generally follow federal treatment.
Delaware: Rolling Conformity and Straightforward Adoption
Delaware conforms fully to the federal business interest expense limitation under Section 163(j) and does not decouple from the EBITDA-based calculation restored by OBBBA. The state applies the same 30% limitation on adjusted taxable income used at the federal level and follows the federal definition of ATI, using EBITDA or EBIT, depending on which measure federal law requires for the applicable tax year.
Delaware does not impose any additional adjustments to ATI, EBITDA, or the interest limitation beyond those required by federal law. For corporations, Delaware taxable income is based on federal taxable income and is adjusted only for Delaware-specific additions and subtractions. Partnerships and S corporations likewise begin with federal distributive share calculations. With no special state modifications to Section 163(j), Delaware remains one of the most straightforward conformity jurisdictions.
Florida: Static Conformity and Temporary Disconnect
Unlike the rolling-conformity states above, Florida follows the IRC on a static basis, currently adopting the Code as of January 1, 2023. That means the state does not yet conform to the OBBBA changes that took effect for tax years beginning after December 31, 2024.
Florida continues to apply the EBIT-based limitation under Section 163(j) as enacted by the TCJA. Consequently, taxpayers will calculate a smaller allowable interest deduction for Florida corporate income tax purposes than for federal or rolling-conformity states.
If the Florida Legislature advances its conformity date in 2025 or 2026, it may incorporate the OBBBA’s EBITDA framework. Until then, businesses must track separate calculations for federal and state reporting.
Key Takeaways for Multistate Taxpayers
The OBBBA’s restoration of EBITDA treatment under Section 163(j) increases federal interest deduction capacity, but whether that benefit flows through to state taxable income depends entirely on state conformity.
- PA, NY, MD, and DE: Rolling conformity means general alignment with the federal EBITDA-based limitation. Maryland’s only divergence relates to CARES Act decoupling for 2020.
- NJ: Rolling conformity, but applied at the separate-entity level, combined with strict related-party addback rules.
- FL: Static conformity—still using the EBIT limitation until the Legislature updates the IRC conformity date.
Businesses operating across these states should model different state outcomes and track carryforwards carefully, particularly where entity-level rules diverge from combined reporting or federal treatment.
Given the fiscal pressures facing states, future legislative sessions may bring selective decoupling or adjustments to prevent revenue loss. Close monitoring of conformity updates will be critical for accurate planning and compliance. Contact your Stephano Slack tax manager or partner at 610-687-1600 or TaxInfo@StephanoSlack.com to discuss your situation.
Author Brooke Carroll, CPA, senior manager, oversees the individual tax practice at Stephano Slack’s Wilmington, Delaware office. She brings exceptional value to client relationships by translating complex tax laws into clear, actionable guidance, helping clients navigate their tax responsibilities with confidence. With over 20 years of public accounting experience, Brooke offers a personalized approach to managing complex tax issues, particularly those involving the IRS, ensuring clients feel informed and supported throughout the process. Brooke can be reached at 302-295-1025 or bcarroll@stephanoslack.com.
Disclaimer: This article is for informational purposes only and should not be construed as legal or tax advice. Businesses should consult their tax advisors regarding their specific state tax circumstances under IRC Section 163(j) and the One Big Beautiful Bill Act.
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