In theory, IRC conformity simplifies a state’s implementation of its own tax policy—and tax preparation for individuals—by using federal taxable income as a base point. Modifications are made from there to adapt to state policies and revenue needs. Here’s a 2020 example from The Arizona Department of Revenue, which publishes a yearly update on its website as to the state legislature’s decisions regarding IRC conformity:
How IRC Conformity Works
Because IRS tax codes change annually, state tax conformity statutes are typically updated each year as well. Normally, this is a fairly basic exercise to keep state and federal tax provisions as closely aligned as possible.
Rolling Date Conformity
Many states have their conformity set to automatically update whenever the federal IRC codes change. This is called a “rolling” or “moving” date conformity. If the state does not want to conform to a new federal law, it must pass specific legislation to decouple from it. Massachusetts is an example of a “rolling date” conformity state.
Fixed Date or Static Conformity
In the case of a “fixed” or “static” conformity, a state conforms to the federal tax code as it existed on a certain date. If a state’s conformity date was January 1, 2016, for instance, the state does not automatically incorporate changes to federal tax law that occur after that date. It must specifically update its IRC conformity to the new date. New Hampshire is an example of a “fixed date” conformity state. The most commonly omitted federal tax laws include those addressing bonus depreciation, expensing of depreciable business assets (IRC Section 179), accelerated depreciation of business assets (section 168(k)), and the qualified business income deduction (IRC section 199).
What It Means for Individual Taxpayers
The degree to which a given state conforms to federal tax rules impacts state tax compliance for both businesses and individuals. Whenever a new federal tax law goes into effect, it can affect your state tax return, depending on whether your state conforms to that particular law. Your tax liability on both your federal return and your state return could be affected if your state conforms to the new law.
