It will be critical for taxpayers and their professional advisors to examine each state’s conformity with respect to the specific provisions impacted and be prepared for future state legislative action. Now is the time to review the various levels of conformity, key provisions to watch, and what to consider. This article will provide CPAs with an overview of how state conformity may be determined and highlight a few key jurisdictions that CPAs need to be aware of.
State Conformity to IRC
Most states conform to the IRC, whether through statutory reference or simply by using federal taxable income as the starting point to calculate state taxable income. There are varying degrees of IRC conformity, which are generally fall into several categories:
- Rolling conformity. Such states conform to the IRC in effect for the tax year, and all amendments thereto in real time. They will generally conform to all provisions of the OBBBA, barring any state-specific statutory decoupling. Examples of states with rolling conformity (as of this writing) include: Colorado, Connecticut, Illinois, Massachusetts, New Jersey, and New York (and New York City). Examples of rolling conformity state-specific statutory decoupling include:
- Maryland: Maryland statute prevents any amendment to the IRC that will impact the state’s income tax revenue by more than $5 million from being automatically adopted. As such, any OBBBA provisions that hit this threshold are not automatically adopted in Maryland—they require the Maryland Legislature’s express enactment. The Maryland Comptroller is required to report the OBBBA’s projected impact within 60 days of its passage, after which the legislature will grapple with IRC conformity.
- Virginia: Similar to Maryland, if the OBBBA’s income tax amendments collectively impact Virginia’s general fund revenues in an amount greater than $15.9 million for the current or subsequent four fiscal years, none of the OBBBA’s income tax amendments will apply unless separately adopted under Virginia law. Virginia’s Secretary of Finance is asked to deliver a report on or before November 15, 2025, after which the legislature will address conformity.
- Static conformity. Such states conform to the IRC in effect for the tax year, but they only conform to amendments to the IRC as of a certain date. Static conformity states adopting a version of the IRC in effect on or after July 4, 2025, will generally conform to all provisions of the OBBBA, barring any state-specific statutory decoupling. As of this writing, select states with static conformity–and their effective dates–include: California (Jan. 1, 2015), Georgia (Jan. 1, 2025), North Carolina (Jan. 1, 2023), Texas (Jan. 1, 2007).
- Florida. As a static conformity state, Florida (Jan. 1, 2025) adopts IRC amendments made after the date of IRC conformity to the extent the amendments affect the calculation of Florida net income.
- Partial conformity. Such states only conform to certain provisions of the IRC, not the IRC in its entirety. The specifically adopted provisions may or may not include those amended by the OBBBA, so a review of each partial conformity state’s laws, regulations, and administrative guidance is recommended. As of this writing, sample jurisdictions with partial conformity include California and Washington, D.C. In the case of California, the state has adopted certain IRC provisions that were enacted after their statutory adoption date (Jan. 1, 2015) of the IRC, as noted above.
Federal Tax Changes
The following OBBBA provisions may drive material state income tax results for corporations, pass-through entities, and individuals, and should be evaluated for conformity.
- State and local tax (SALT) deduction cap increases for five years for select individual taxpayers—it is not uncommon for states that impose an individual income tax to not follow the federal IRC § 164(b) SALT deduction cap. If an individual income tax is levied, no deduction for state income taxes is allowed.
- Bonus depreciation permanent restoration at 100% for all assets placed in service on or after January 19, 2025—many states with rolling, static, or partial conformity currently decouple from IRC § 168(k) bonus depreciation.
- 100% depreciation for qualified production nonresidential real property placed in service—IRC § 168(n) is a new federal tax subsection, so no states will have expressly decoupled as of this writing, but CPAs should monitor closely for state legislative activity disallowing the favorable federal treatment.
- Full expensing of domestic research and experimental (R&E) expenditures—states expressly decoupling from IRC § 174 will require an addback of R&E amortization in certain instances.
- Increase of the business interest deduction limitation under IRC § 163(j)
- Increase of dollar limitations for expensing certain business assets under IRC § 179
- Small business stock gain exclusion changes under IRC §1202
- Extension and enhancement of qualified business income deduction—another provision where, as of this writing, many of the rolling, static, or partial conformity states do not conform to the federal IRC § 199A provisions.
- Excess business losses under IRC § 461(l).
With most state legislatures out of session until early 2026, taxpayers may be in limbo for many months until state officials respond to OBBBA.
Deeper Dive: State Pass-Through Entity Tax Regimes
The Tax Cuts and Jobs Act (TCJA) of 2017 capped the SALT deduction for federal individual income tax to $10,000 for itemized filers. In response, many states adopted a pass-through entity tax (PTET) regime, enabling a partnership or S corporation to pay state income tax at the entity level. In effect, this allowed an electing pass-through entity to fully deduct its state income taxes and pass this “deduction” to owners via reduced distributive income. Participating owners also received a pro-rata state PTET credit or deduction for their portion of the PTET paid at the entity level to prevent double-taxation of the passed-through income.
The Treasury Department ratified this approach in Treasury Notice 2020-75, allowing electing individual owners to deduct their share of state PTET paid on their behalf as a workaround to the TCJA’s $10,000 cap. The OBBBA fully preserves this PTET deduction—a noted non-change, given that the House version of the bill would have limited this deduction.
The following jurisdictions are among those that have (as of this writing) permanently adopted an elective PTET option:
- Connecticut, Georgia, Maryland, North Carolina, New Jersey, and New York State and City In contrast, the following states’ PTET regimes have fixed expiration dates:
- California (available tax years ending before Dec. 31, 2030)
- Illinois (available tax years ending before Jan. 1, 2026)
- Virginia (available tax years ending before Jan. 1, 2027).
PTET regimes in Colorado and Massachusetts remain in place, so long as there is a federal limitation on the individual income tax deduction for state taxes paid under IRC Section 164. The PTET is not applicable to pass-through entities operating within the jurisdictions of Washington, D.C., Florida, or Texas.
Understand Conformity, Monitor the Legislature
As jurisdictions respond to the federal changes in the coming fiscal year, taxpayers and CPAs will need to have a nuanced understanding of their state’s IRC conformity with respect to the specific provisions impacted and should be prepared for future state legislative action.
Particularly in rolling conformity states, it is uncertain which federal provisions are effective, and when. With most state legislatures out of session until early 2026, taxpayers may be in limbo for many months until state officials respond to OBBBA. CPAs need to continue to monitor these multi-state developments in order to properly advise clients.
