Massachusetts and Rhode Island Budget Updates

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Massachusetts and Rhode Island have enacted budget legislation that significantly affects state conformity with the federal One Big Beautiful Bill Act (OBBBA). Businesses claiming research and experimentation deductions, manufacturers investing in new facilities, pass-through entities and multistate taxpayers should review these changes now, as several provisions diverge from federal law and could affect 2025–2027 tax planning.

Massachusetts

Governor Maura Healey signed the supplemental budget on June 12, 2026.

Internal Revenue Code (IRC) Conformity

• Massachusetts delayed conformity to IRC §174A until tax years beginning on or after January 1, 2026. Taxpayers will continue to follow pre-OBBBA treatment, requiring capitalization and amortization of R&E costs in the current tax year over five (5) years (15 years for foreign), until immediate expensing begins in tax years beginning on or after January 1, 2026.
  
  
• Massachusetts decouples from the provision of OBBBA that permits taxpayers to deduct the remaining unamortized balance of domestic R&E costs incurred for tax years beginning after December 31, 2021 and before January 1, 2025.
  
  
• Effective January 1, 2027, Massachusetts will conform to IRC §168(n), allowing a 100% deduction for qualified production property.
  
  
• Effective January 1, 2027, Massachusetts will adopt the increased expense limitation under Code §179 (b), allowing a deduction up to $2.5 million and related phase-out increase to $4 million.
  
  
• The federal changes to IRC §163(j) business interest limitation are not recognized for Massachusetts purposes for tax years 2025 and 2026 but the addback of depreciation, amortization and depletion for the calculation of adjusted taxable income will become effective as of January 1, 2027.
  
  
• Starting in 2026, Massachusetts will no longer automatically conform to federal tax amendments that affect the income and corporate excise tax. Specifically, new IRC amendments will not apply for any taxable year that begins in the calendar year in which they are enacted or any prior taxable years. However, if the impact on state revenue is small – the deduction is expected to reduce revenue by less than $20 million (based on prior three-year average adjusted for inflation) – Massachusetts may still automatically adopt federal tax changes.
  
  
• Massachusetts delayed conformity to taxable years beginning on or after January 1, 2027, the changes enacted under Public Law 119-21 which permanently renewed and expanded the federal Qualified Opportunity Zones provisions under Code § 1400Z-2. Additionally, for Massachusetts purposes, beginning January 1, 2026, a “Qualified Opportunity Zone” includes only areas located entirely within the Commonwealth.
  
  
• Relief may be provided to taxpayers who filed a 2025 tax return in Massachusetts using federal OBBBA provisions before these provisions were enacted. Specifically, no penalties or interest will be imposed if an amended return is filed within 90 days of enactment.

New Business Incentives

• Effective for tax years beginning on or after January 1, 2026, an additional pass-through entity (PTE) excise tax 4% surtax election is available on income above the state’s millionaire-tax threshold.
  
  
• A refundable credit of up to $5,000 annually has been created for qualifying farm businesses donating food, meals or crops for tax years ending on or after December 31, 2026 through December 31, 2028.
  
  
• A credit of up to $2.00 per gallon has been created for qualifying Sustainable Aviation Fuel purchases for tax years beginning January 2, 2026 through December 31, 2030.
  
  
• Introduction of a new sales tax exemption beginning January 1, 2027, for the purchase of materials, tools and fuel which are exclusively consumed or used for construction of multifamily housing for affordable classified projects as approved by Executive Office of Housing and Livable Communities (EOHLC).

Rhode Island

Governor Dan McKee signed the Fiscal Year 2027 budget on June 12, 2026. which addressed the state’s conformity to OBBBA and enacted several tax credits and incentives.

IRC Conformity

• Rhode Island permanently decoupled from the provision of OBBBA regarding research and experimental (R&E) expensing beginning with tax year 2026 and decoupled from any tax year 2025 or earlier provisions that may be enacted after the budget was adopted. If the taxpayer fully expenses domestic section 174A R&E expenses, the taxpayer is required to add back the accelerated amount being deducted and may take a deduction following pre-OBBBA treatment of domestic costs.
  
  
• The interest expense deduction for Rhode Island income tax purposes will remain limited to the amount allowable prior to OBBBA, meaning taxpayers will deduct depreciation, amortization or depletion when calculating adjusted taxable income.

Personal Income Tax

• Beginning in tax year 2027, the tax rate on income over $1.0 million will be increased over a three-year period, with a top rate of 6.99% in 2027, 7.99% in 2028 and 8.99% in 2029.
  
  
• A Child Tax Credit has been created to provide a refundable $330 tax credit per child to qualifying families.
  
  
• The tax on social security benefits will be phased out starting in tax year 2027, with the tax eliminated as of tax year 2029.

General Tax Incentives

• Introduction of a 75-day tax amnesty program that will run from December 2026 through February 2027, during which the Division of Taxation will waive penalties and reduce interest by 25% for participating delinquent taxpayers.

Contact Us

If you have questions related to these changes or need assistance with state tax issues generally, contact your PKF O’Connor Davies client service team or:

Steven J. Eller, CPA, JD
Partner
seller@pkfod.com

Nicholas Rochedieu, JD
Partner
nrochedieu@pkfod.com

Denisse Moderski, CPA
Partner
dmoderski@pkfod.com