State Tax Updates 2026 JAN: NY Decoupling, Penny Shortage, and More
Let’s be real, keeping up with state tax changes can feel like a full-time job on its own. Just when you think you’ve got a handle on the federal rules, the states throw a curveball! 😅 Whether you are managing a business in New York, dealing with the new “penny shortage” rules in the South, or wondering about Louisiana’s franchise tax repeal, this month has brought a ton of critical updates.
In this post, I’ve combed through the latest Deloitte “State Tax Matters” report from January 23, 2026, to bring you the highlights. We’re seeing a trend of states decoupling from federal provisions (hello, OBBBA) and some strict new enforcement policies. Grab your coffee, and let’s dive in! ☕️
Corporate Income & Franchise Tax Shake-ups 📉
First off, let’s talk about some major shifts in corporate taxation. If you do business in Louisiana or Michigan, pay close attention here.
Louisiana has repealed its corporate franchise tax as of January 1, 2026. While that sounds like great news, there is a catch regarding penalties.
Because the franchise tax is gone, the Louisiana Department of Revenue is getting stricter with underpayment penalties for estimated corporate income tax. In the past, they were lenient because income and franchise taxes were filed together. Now? If you expect to owe $1,000 or more in income taxes, you must make estimated payments, or you will face penalties starting with the 2026 Form CIT-620.
Meanwhile, in Michigan, the State Supreme Court denied reviewing a case involving insurance affiliates. Essentially, this affirms that a unitary business group of insurance companies must file a combined return. One judge noted that while this is the rule, the “unique scheme” of insurance taxes might cause workability problems that the Legislature needs to fix.
New York & Pennsylvania: Decoupling from Federal Rules 🏛️
You might have heard about the federal “One Big Beautiful Bill Act” (OBBBA). Well, not every state is jumping on the bandwagon. Both New York and Pennsylvania are making moves to decouple from certain provisions.
New York’s proposed FY 2027 budget isn’t just about rates (though they are proposing to extend the top corporate rate of 7.25% for three more years). They are also proposing to extend the Pass-Through Entity Tax (PTET) election deadline from March 15 to September 15. That is a huge relief for anyone needing more time!
State Decoupling Comparison
| State | Action | Key Provisions Impacted |
|---|---|---|
| New York | Proposed Budget | Decoupling from R&E expenditure treatment and immediate expensing of qualified production property. |
| Pennsylvania | Enacted (Act 45) | Decouples from R&D expensing (IRC §174A), Interest limitations (IRC §163(j)), and Depreciation (IRC §168(n)). |
The Penny Shortage: How to Round Sales Tax 🪙
This one is fascinating! Since the federal government decided to end penny production, retailers in Kentucky and Tennessee are facing some new challenges. If you are a retailer, you might be wondering: “Do I round the tax?”
Rounding happens only on the final cash payment, NOT on the tax calculation itself.
Both states have clarified that sales tax must be calculated to the exact penny (or third decimal place) on the invoice. You cannot round the tax amount just because pennies are scarce. The rounding only applies to the total amount collected in a cash transaction.
📝 Rounding Rule Example (Kentucky)
The Rule: Round to the nearest nickel for cash payments.
- Round Down: If the last digit is 1, 2, 6, or 7 cents.
- Round Up: If the last digit is 3, 4, 8, or 9 cents.
Note: Credit card and non-cash transactions should not be rounded!
Property Tax & Incentives: Important Deadlines 🗓️
Finally, let’s touch on some property tax updates and incentive deadlines that might save you some money.
In Colorado, there is an urgent deadline approaching. The state redesignated its Enterprise Zone (EZ) boundaries. If your facility was in an EZ in 2025 but isn’t in 2026, you can apply to be “grandfathered” in for up to 10 more years of credits. But you must act fast!
Action Item: The deadline to file this application has been extended to January 31, 2026. You need to jointly certify that you had plans for job creation or capital expansion before the zone change.
Over in Kentucky, a court ruled that machinery used for “palletizing” (wrapping and labeling) qualifies as manufacturing machinery. This is huge because it means favorable property tax treatment. If you’re in manufacturing, check if your packaging equipment qualifies!
January 2026 Tax Summary
Frequently Asked Questions ❓
These updates show just how dynamic state tax laws can be. From the “death of the penny” affecting your register settings to major legislative decoupling, staying informed is half the battle. If you have any questions about how these specific changes affect your business, feel free to drop a comment below or consult your tax advisor! 😊
