States Reject Federal Tax Breaks in 2025 Act
States are decoupling from federal tax provisions to preserve revenue, complicating planning for small business owners.
Updated on Oct. 28, 2026 in Taxes
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The 2025 One Big Beautiful Bill Act raised the federal qualified small business stock (QSBS) gain exclusion cap to $15 million. However, many states have chosen not to conform to these federal tax changes, forcing taxpayers to reconcile differences between state and federal obligations.
Why it matters
When states decline to mirror federal tax breaks, taxpayers may find themselves deferring gains at the federal level while facing immediate taxation on that same income at the state level. This disconnect drives tax planning complexity and influences relocation decisions for high-net-worth individuals.
The federal government increased the QSBS gain exclusion cap to $15 million, up from the previous $10 million threshold. Meanwhile, Rhode Island has enacted a 3% surtax on income exceeding $1 million, effective in 2027.
The players
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The details
States like Maine and Oregon have enacted specific legislation to decouple from federal tax provisions, while New York omitted a proposal to conform to QSBS gains. Consequently, states maintain control over their own revenue streams by rejecting federal tax breaks on a case-by-case basis.
Timeline
July 4, 2025: The new $15 million federal QSBS gain exclusion cap took effect.
November 3, 2026: California voters decide on Proposition 40.
2027: Rhode Island will implement a new 3% income surtax for earners over $1 million.
2028: Washington state plans to implement a 9.9% income tax.
Market Dynamics
This trend mirrors a broader divergence in tax policy where individual states reject federal tax breaks established under IRC section 1400Z-2. This shift highlights a departure from the historical reliance on federal conformity as states prioritize protecting local revenue levels.
Taxpayers must navigate conflicting federal and state rules, which often leads to immediate tax liability at the state level despite federal deferral. Investors should review their portfolios for potential QSBS gains and account for state-specific surtaxes in their tax planning.
The takeaway
Taxpayers should consult with financial advisors to determine if state-level decoupling impacts their specific holdings. Understanding the interplay between federal and state law remains crucial for effective long-term asset management.
Further reading
For a deeper look at federal and state tax compliance, visit the United States Taxes section.
Source note: This article includes information reported by Thomson Reuters.
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