The One Big Beautiful Bill Act, enacted July 4, 2025, changed the federal tax landscape in ways that most states were not prepared to immediately adopt. The tip and overtime income exclusion, expanded bonus depreciation, permanent QBI deduction changes, and SALT cap modifications all have state-level implications that vary by state and depend on whether that state uses rolling or fixed-date conformity. For independent EROs preparing 2025 returns for clients in California, New York, Illinois, and other major nonconforming states, the federal return is only part of the job. The state return requires separate conformity analysis and, in many cases, additional adjustments that the federal return does not trigger.
This guide covers the conformity types that determine how states respond to federal law changes, the major OBBBA provisions with widespread state nonconformity, the tip and overtime income exclusion add-back calculation, bonus depreciation decoupling in New York and Illinois, California's fixed-date conformity framework and its practical implications, how to document state nonconformity positions, how to explain the state-federal difference to clients, and a three-step conformity check workflow for practitioners filing in the major nonconforming states.
ALL STATE-SPECIFIC CLAIMS REQUIRE VERIFICATION WITH THE STATE AGENCY
State conformity positions change with legislative action and are not always announced in advance. Do not characterize any state's conformity position as settled or final without verifying at the relevant state agency. Verify California's current IRC conformity date with the California Franchise Tax Board at ftb.ca.gov. Verify New York's current decoupling provisions at tax.ny.gov. Verify Illinois decoupling provisions at tax.illinois.gov. All other state-specific claims must hedge to the relevant state agency before being relied upon in return preparation.
Why State Conformity Matters More in 2026: The OBBBA's Scope and the Scale of State Nonconformity
The OBBBA (verify all OBBBA provisions at IRS.gov; recently enacted) was one of the largest federal tax changes since the Tax Cuts and Jobs Act of 2017. Its provisions affect income categories (tip and overtime income exclusion), depreciation timing (bonus depreciation expansion under IRC 168(k) and 168(n)), pass-through deductions (QBI deduction permanence and mechanics changes), and itemized deductions (SALT cap modifications). Each of these provisions creates a potential state adjustment opportunity for the states that do not adopt the federal change.
The 2025 filing season is the first with full conformity complexity
Because the OBBBA was enacted July 4, 2025, the 2025 tax year (with returns due in 2026) is the first full filing season affected by OBBBA provisions. States had limited time to respond legislatively, and many have not yet acted. The result is that for the 2025 filing season, the federal return and the state returns for clients in major nonconforming states may reflect materially different income and deduction amounts for the same client, for the same tax year. Practitioners who do not check conformity before finalizing the state return may produce incorrect returns.
Why the practitioner bears the conformity analysis burden
Tax preparation software, including TaxWise, automates many federal-to-state adjustments, but state conformity for newly enacted federal provisions takes time to be incorporated into software updates. A software update for a provision enacted in July 2025 may not reflect a state's March 2026 decoupling legislation in time for the filing season deadline. The practitioner who relies solely on software to identify state conformity adjustments without independently verifying the state's current position risks filing an incorrect state return. The conformity check must be part of the return preparation workflow, not an afterthought.
Conformity Types: Rolling vs. Fixed-Date vs. Selective Decoupling -- What Each Means for the Practitioner
Understanding the three conformity models is the foundation of the state conformity analysis for every affected client.
Rolling conformity
Rolling conformity states automatically adopt federal tax law changes as they are enacted by Congress. For these states, the starting point for state taxable income is generally the federal adjusted gross income or federal taxable income, incorporating all federal changes. However, rolling conformity does not mean the state always matches federal law: rolling conformity states regularly enact specific decoupling provisions for federal changes they do not want to adopt. New York is the primary example of a rolling conformity state that routinely decouples from specific federal provisions. Verify New York's current decoupling provisions at tax.ny.gov before assuming any OBBBA provision flows through to New York taxable income.
Fixed-date conformity
Fixed-date conformity states conform to the federal Internal Revenue Code as it existed on a specific date, without automatically adopting changes enacted after that date. California is the primary example. The practical result is that California uses a different version of the IRC than the federal return. Federal provisions enacted after California's conformity date do not apply to California returns unless California separately enacts legislation adopting them. Verify California's current IRC conformity date with the California Franchise Tax Board at ftb.ca.gov before filing 2025 state returns; the conformity date is subject to California legislative action and can change mid-filing-season.
Selective decoupling
Many states that use rolling or fixed-date conformity as their baseline also enact selective decoupling statutes that target specific provisions. Illinois is the primary example of a state that uses rolling conformity as its base but has enacted a comprehensive set of add-back requirements for federal deductions it does not want to pass through to Illinois taxpayers. The result is that Illinois's effective conformity is rolling for most provisions but selective-decoupling for specific high-value items (bonus depreciation, certain deductions). Verify current Illinois decoupling provisions at tax.illinois.gov.
The Major OBBBA Provisions with Widespread State Nonconformity: The Four Areas Requiring Conformity Analysis
Not every OBBBA provision creates a state conformity issue for every client. But four provisions generate the highest frequency of state adjustments for independent EROs preparing individual and small-business returns:
Tip and overtime income exclusion
The OBBBA created a federal exclusion for qualified tip income and qualified overtime pay for 2025 and subsequent tax years (verify current law at IRS.gov; recently enacted). At the federal level, qualifying amounts are excluded from gross income. States that do not conform to this exclusion require the practitioner to add the excluded amounts back to state taxable income. The add-back is the most common individual-return conformity adjustment for 2025, because tip and overtime income is widespread across the service industry and blue-collar workforce. Clients who work in restaurants, hotels, healthcare, manufacturing, and other industries with significant overtime may have substantial state add-back amounts.
Bonus depreciation under IRC 168(k) and 168(n)
The OBBBA modified bonus depreciation rules, including provisions under IRC 168(n) (verify current law at IRS.gov; recently enacted). Many states that have historically decoupled from federal bonus depreciation continue to do so for OBBBA-era bonus depreciation. The result for business clients is that the federal return may show a large first-year depreciation deduction that is not available at the state level, and the state return requires an add-back (with a corresponding subtraction in later years as the asset is depreciated under the state's allowed method).
QBI deduction changes
The OBBBA made the Section 199A QBI deduction permanent and changed its mechanics. Most states do not recognize the federal QBI deduction because it is a deduction from federal adjusted gross income that does not flow through to state taxable income in the same way. For practitioners filing in states that start computation from federal adjusted gross income (rather than federal taxable income), the QBI deduction already does not apply at the state level, and no additional adjustment is needed. For states that start from federal taxable income, the QBI deduction taken on the federal return may need to be added back for state purposes. Verify the state's starting-point basis at the relevant state agency. See the QBI deduction Section 199A practitioner calculation guide for the federal mechanics and documentation that form the basis of any state nonconformity adjustment.
SALT deduction cap changes
The OBBBA modified the SALT (state and local tax) deduction cap for federal Schedule A purposes (verify current law at IRS.gov; recently enacted). State-level treatment of the SALT cap modification is complex: for most individual filers, the state return starts from federal adjusted gross income, and the SALT cap is already incorporated in the federal return computation before reaching that starting point. However, for states that have enacted their own SALT cap workarounds (such as pass-through entity tax regimes that allow a deduction at the entity level), the OBBBA's SALT cap changes may interact differently. Verify the current state SALT cap position at the relevant state agency.
Tip and Overtime Income Exclusion: Which States Do Not Conform, How to Calculate the Add-Back, and Where It Appears on the State Return
The tip and overtime income exclusion is the highest-frequency individual-return OBBBA conformity issue. A client who earned $5,000 in qualified tips and $3,000 in qualified overtime in 2025 may have those amounts excluded on the federal return but subject to state income tax in a nonconforming state.
Identifying nonconforming states for tip and overtime income
The states that have the broadest impact on ATP's ERO audience for tip and overtime nonconformity are California, New York, Illinois, and several other major states. Verify each state's current position at the relevant state agency before preparing any state return for a client who received qualified tips or overtime pay. A state that was conforming at the start of the filing season may have enacted decoupling legislation mid-season; the practitioner must verify the position at the time of filing.
How to calculate the add-back
The add-back amount equals the qualifying tip and overtime income that was excluded on the federal return but is taxable at the state level. The source documents for this calculation are: (1) the client's W-2, which should separately identify qualifying tip income in Box 8 (allocated tips) or Box 12 (with the applicable code) and should identify overtime pay through payroll records; and (2) any federal Schedule 1 or deduction that reflects the exclusion. The practitioner must identify the excluded amount from the federal return and add it back to state income on the applicable state adjustment schedule.
Where the add-back appears on the state return
The location of the tip and overtime add-back varies by state. Most states provide a specific line or schedule for income add-backs that reflects nonconformity to federal exclusions. Verify the correct schedule and line at the relevant state agency before entering the adjustment. An add-back entered on the wrong line may not correctly flow to state taxable income.
Bonus Depreciation: New York Decoupling from IRC 168(k), Illinois Decoupling, and State-Level Depreciation Adjustments
Bonus depreciation decoupling is the most common business-return conformity adjustment for clients in New York and Illinois. Both states have histories of not allowing the federal first-year bonus depreciation deduction, requiring business clients to depreciate assets over their regular state recovery periods and then reconcile with the federal depreciation that was already taken.
New York bonus depreciation decoupling
Verify New York's current decoupling provisions with the New York Department of Taxation and Finance at tax.ny.gov. New York has decoupled from federal bonus depreciation under IRC 168(k) in prior years and requires businesses to add back the federal bonus depreciation amount on the New York return, replacing it with the allowable New York depreciation computed over the regular recovery period. The add-back creates a temporary difference: the New York return shows higher income in the year of the deduction and lower income in subsequent years as the asset depreciates under the state's schedule. Verify New York's current decoupling position for OBBBA-era bonus depreciation at tax.ny.gov.
Illinois bonus depreciation decoupling
Verify the current Illinois decoupling provisions at tax.illinois.gov. Illinois has historically required an add-back for bonus depreciation taken under IRC 168(k) on the Illinois Schedule M. The OBBBA's Section 168(n) bonus depreciation provision may also be subject to Illinois decoupling; verify the current Illinois decoupling provisions and the specific schedule and line for the adjustment at tax.illinois.gov before preparing the 2025 Illinois return. The state adjustment is not automatic in TaxWise for newly enacted provisions; the practitioner must verify and enter the adjustment on the applicable Illinois adjustment schedule.
The depreciation reconciliation in subsequent years
When a business client takes federal bonus depreciation in 2025 and the state requires an add-back, the practitioner must track the timing difference in subsequent years. In each year following the bonus depreciation year, the state will allow depreciation on the asset under the state's recovery period, which creates a subtraction from state income until the asset is fully depreciated at the state level. The practitioner should set up a depreciation reconciliation workpaper for each affected asset that tracks both the federal and state depreciation schedules. See the S-corp reasonable compensation practitioner guide for the related entity documentation practices that affect how bonus depreciation flows through to S-corp shareholders.
Pennsylvania: Act 45 of 2025 (H.B. 416)
Pennsylvania enacted Act 45 of 2025 (H.B. 416), signed November 12, 2025, establishing rolling conformity for most taxpayers while selectively decoupling C corporations from three OBBBA provisions. Pass-through entities and individual taxpayers are not affected by Act 45's decoupling; they follow federal OBBBA rules by default through Pennsylvania's rolling conformity. Verify current Pennsylvania tax law at revenue.pa.gov before filing any Pennsylvania return.
What Pennsylvania decouples from (C corporations only)
Act 45's decoupling provisions apply exclusively to C corporations for tax years beginning in 2025 and thereafter:
- IRC Section 174/174A (R&E expensing): C corporations must add back federally deducted research and experimental costs and amortize those costs over 5 years for Pennsylvania purposes. The catch-up deduction for 2022 through 2024 previously capitalized amounts that was permitted federally under the OBBBA transition rules is disallowed for Pennsylvania C corporations.
- IRC Section 168(n) (Qualified Production Property immediate expensing): C corporations must add back the QPP deduction taken on the federal return and depreciate the property over 39 years for Pennsylvania purposes.
- IRC Section 163(j) (business interest expense): C corporations must continue using the TCJA Adjusted Taxable Income methodology for the business interest expense limitation. The OBBBA's loosened Section 163(j) limits do not apply to Pennsylvania C corporations. See the IRC 163(j) business interest limitation guide for the OBBBA EBITDA-based ATI method that Pennsylvania C corporations decouple from.
What Pennsylvania conforms to (pass-throughs and individuals)
Partnerships, S corporations, and individual taxpayers are not subject to Act 45's decoupling provisions. For these taxpayers, Pennsylvania's rolling conformity means OBBBA provisions flow through by default, including the OBBBA's R&E expensing rules, QPP immediate expensing, and the loosened Section 163(j) limits. Verify the current Pennsylvania position for each provision at revenue.pa.gov, as rolling conformity positions can be modified by subsequent Pennsylvania legislation.
KEY PRACTITIONER NOTE: ENTITY TYPE DETERMINES PENNSYLVANIA DECOUPLING
The single most important Pennsylvania conformity determination is the entity type. Act 45's decoupling from Sections 174/174A, 168(n), and 163(j) applies only to C corporations. Partners, S corporation shareholders, and individual taxpayers are not subject to these add-backs. A practitioner preparing a Pennsylvania C corporation return for 2025 must apply the Act 45 add-backs. A practitioner preparing a Pennsylvania partnership or S corporation return for 2025 is not subject to Act 45's decoupling for those provisions. Document the entity-type determination in the client file before applying or omitting any Pennsylvania add-back.
Effective date: Tax years beginning in 2025 and thereafter. The R&E transition rules reach back to 2022 through 2024 previously capitalized amounts for C corporations. Source: PA General Assembly, H.B. 416 / Act 45 of 2025 (signed November 12, 2025). Verify current law at revenue.pa.gov.
Michigan: Public Act 24 of 2025 (H.B. 4961)
Michigan updated its IRC conformity date to January 1, 2025, via Public Act 24 (H.B. 4961), signed October 7, 2025. Because the OBBBA was signed July 4, 2025 (after the new Michigan conformity date), Michigan does not conform to any OBBBA provision unless it acts separately. This decoupling applies to both the Corporate Income Tax and the Individual Income Tax, distinguishing Michigan from Pennsylvania, which limited its Act 45 decoupling to C corporations. Verify current Michigan tax positions at michigan.gov/treasury before filing any Michigan return.
What Michigan does not conform to
The following OBBBA provisions are not adopted by Michigan as a result of Public Act 24's January 1, 2025 conformity date:
- IRC Section 174A (domestic R&E immediate expensing): Michigan does not conform. The TCJA 5-year amortization framework continues for Michigan purposes, with transition rules for 2022 and later tax years.
- IRC Section 168(k) (bonus depreciation): Michigan has not allowed federal bonus depreciation historically, and that decoupling continues. OBBBA modifications to 168(k) are not adopted.
- IRC Section 168(n) (Qualified Production Property immediate expensing): Michigan does not conform to the OBBBA's QPP immediate expensing provision.
- IRC Section 163(j) (business interest expense): Michigan does not conform to the OBBBA's loosened business interest expense limits.
- IRC Section 179 (small business expensing): Michigan decouples from the OBBBA's expanded Section 179 limits.
KEY PRACTITIONER NOTE: MICHIGAN DECOUPLING APPLIES TO BOTH CORPORATE AND INDIVIDUAL RETURNS
Unlike Pennsylvania's Act 45, which limited its OBBBA decoupling to C corporations, Michigan's nonconformity under Public Act 24 applies to both corporate income tax filers and individual income tax filers. A Michigan individual taxpayer with business assets subject to OBBBA bonus depreciation or R&E costs must apply Michigan's separate depreciation and amortization rules, not the OBBBA rules. Practitioners should note the Michigan Department of Treasury's taxpayer notice dated February 25, 2026, as the primary guidance document. Verify current Michigan guidance at michigan.gov/treasury before preparing any Michigan return.
Effective dates: Tax years beginning after December 31, 2024. R&E transition rules apply to tax years beginning in 2022 and thereafter. Source: Michigan Department of Treasury taxpayer notice (February 25, 2026); H.B. 4961 / Public Act 24 (signed October 7, 2025). Verify current law at michigan.gov/treasury.
California: S.B. 711 (Signed October 1, 2025)
California uses fixed-date (static) conformity. S.B. 711, signed October 1, 2025, advanced California's IRC conformity date from January 1, 2015 to January 1, 2025, for taxable years beginning on or after January 1, 2025. Because the OBBBA was signed July 4, 2025 (after California's new January 1, 2025 conformity date), California does not conform to any OBBBA provision. Verify California's current IRC conformity date and any subsequent California conformity legislation with the California Franchise Tax Board at ftb.ca.gov before filing any 2025 California return.
What California does not conform to
As a result of S.B. 711's January 1, 2025 conformity date, California does not adopt any of the following OBBBA provisions:
- IRC Section 174A (immediate R&E expensing): California does not conform. Verify current California treatment at ftb.ca.gov.
- IRC Section 168(n) (Qualified Production Property immediate expensing): California does not conform to the OBBBA's QPP provision.
- IRC Section 168(k) modifications: California has historically decoupled from federal bonus depreciation; the OBBBA's modifications to 168(k) are also excluded under S.B. 711.
- IRC Section 1202 (QSBS exclusion changes): California does not conform to the OBBBA's modifications to the qualified small business stock exclusion.
- NCTI/GILTI transition: California does not conform to the OBBBA's Net Controlled Foreign Corporation Tested Income provisions.
- Tip and overtime income exclusion: California does not conform to the federal exclusion for qualified tip income or qualified overtime pay. These amounts remain taxable for California purposes and require a California Schedule CA (540) addition for affected clients.
California Schedule CA (540) and the practical impact
California Schedule CA (540) remains the primary vehicle for reconciling federal and California income. Column B reflects California additions (income or deductions that differ from the federal return because California does not adopt the applicable federal provision). For a client who excludes qualified tip income on the federal return, California does not recognize that exclusion; the practitioner must enter the excluded amount as a California addition on Schedule CA. For a client who takes OBBBA-era bonus depreciation or QPP immediate expensing on the federal return, California requires an add-back with a corresponding California depreciation schedule maintained separately. Verify the applicable Schedule CA lines and current California instructions at ftb.ca.gov.
KEY PRACTITIONER NOTE: WATCH FOR 2026 CALIFORNIA CONFORMITY LEGISLATION
The January 1, 2025 conformity date established by S.B. 711 is the current operative rule. However, the California Legislature's 2025 through 2026 session may produce additional conformity legislation that selectively adopts specific OBBBA provisions or advances the conformity date further. Monitor ftb.ca.gov for any California conformity updates issued during the 2025 filing season. A conformity date change enacted mid-season can affect returns already prepared; verify the current California conformity date at the time of filing, not only at the start of the filing season.
Effective date: Tax years beginning on or after January 1, 2025. Source: S.B. 711 (signed October 1, 2025); Grant Thornton Inside SALT; FTB.ca.gov. Verify current law at ftb.ca.gov.
New York: S.9009 / A.10009, FY 2026-2027 Budget (Signed May 28, 2026)
New York enacted OBBBA-specific decoupling as part of the FY 2026-2027 Budget (S.9009 / A.10009), signed May 28, 2026. The budget uses a hybrid approach: selective decoupling from designated OBBBA provisions, with separate decoupling provisions for New York City taxes under a distinct part of the budget bill. Practitioners preparing returns for clients with both New York State and New York City tax obligations must apply two separate sets of decoupling rules. Verify current New York and New York City positions at tax.ny.gov before filing any New York return.
What New York State decouples from
The following decoupling provisions apply to New York State corporate income tax, personal income tax, and the franchise tax on insurance corporations:
- IRC Section 168(n) (Qualified Production Property immediate expensing): New York State decouples. Pre-OBBBA depreciation rules apply at the state level. Effective for tax years beginning on or after January 1, 2025 (retroactive). The add-back is reported on Form IT-225 or the applicable New York modification schedule; verify the current modification code at tax.ny.gov.
- IRC Sections 174 and 174A (R&E expenditures): New York State decouples. Research and experimental costs must be amortized over 5 years for New York State purposes rather than immediately expensed. Effective for tax years beginning on or after January 1, 2025 (retroactive). Verify the current modification code and applicable adjustment schedule at tax.ny.gov.
What New York City separately decouples from (Part G of the budget bill)
New York City's decoupling provisions are enacted under a separate part of the FY 2026-2027 budget and apply only to New York City taxes. NYC taxpayers must apply different adjustments at the city level than at the New York State level:
- IRC Section 163(j) (business interest expense): NYC decouples from the OBBBA's modified business interest expense limits. Pre-OBBBA Section 163(j) rules continue for New York City tax purposes. Effective for tax years beginning after December 31, 2024.
- IRC Section 174A (R&E expensing): NYC also decouples from Section 174A independently of the New York State provision. Effective for tax years beginning after December 31, 2024.
- IRC Section 179 (small business expensing): NYC decouples from the OBBBA's expanded Section 179 limits for New York City tax purposes. Effective for tax years beginning after December 31, 2024.
Form IT-225 and New York adjustment mechanics
New York addition and subtraction modifications are reported on Form IT-225 (New York State Modifications). The FY 2026-2027 budget's decoupling provisions will carry assigned modification codes; verify the current codes in the Form IT-225 instructions at tax.ny.gov before entering any OBBBA-related modification. The retroactive effective date for the NYS 168(n) and 174/174A decoupling (tax years beginning on or after January 1, 2025) means that returns for the full 2025 tax year are affected even though the budget was not signed until May 2026.
KEY PRACTITIONER NOTE: NEW YORK STATE AND NEW YORK CITY ARE SEPARATE DECOUPLING REGIMES
For clients with New York City tax obligations, the decoupling analysis must be done twice: once for New York State taxes and once for New York City taxes. The provisions are not identical. For example, Section 163(j) and Section 179 are decoupled at the NYC level but are not listed among the New York State decoupling provisions in the FY 2026-2027 budget; verify the current NYS position on those provisions at tax.ny.gov. The retroactive effective date for the NYS provisions (tax years beginning on or after January 1, 2025) may affect returns that were prepared earlier in the filing season before the budget was signed; practitioners who filed New York returns before May 28, 2026 should evaluate whether amended returns are required for clients with 168(n) or 174/174A adjustments.
Effective dates: NYS: tax years beginning on or after January 1, 2025 (retroactive). NYC: tax years beginning after December 31, 2024. Source: S.9009 / A.10009 (signed May 28, 2026); RSM US; PwC; Grassi Advisors. Verify current law at tax.ny.gov.
Illinois: S.B. 1911 (Signed December 12, 2025)
Illinois enacted S.B. 1911, signed December 12, 2025, using rolling conformity as its base but selectively decoupling from two OBBBA depreciation provisions while allowing other OBBBA changes to flow through. S.B. 1911 also made the Illinois Pass-Through Entity Tax (PTET) permanent by removing its January 1, 2026 sunset. Verify current Illinois decoupling provisions and PTET rules at tax.illinois.gov before filing any Illinois return.
What Illinois decouples from (S.B. 1911 specific provisions)
- IRC Section 168(n) (Qualified Production Property immediate expensing): Illinois decouples. An add-back is required on the Illinois return for the QPP deduction taken on the federal return. This decoupling applies to tax years 2026 and thereafter.
- IRC Section 168(k) (bonus depreciation): Illinois's pre-existing bonus depreciation add-back is confirmed and extended to qualified property acquired and placed in service after January 19, 2025. The add-back for federal bonus depreciation taken under 168(k) continues on Form IL-4562 (Illinois Special Depreciation). Verify the applicable form and line instructions at tax.illinois.gov.
What Illinois conforms to (by rolling conformity)
S.B. 1911 did not decouple Illinois from the following OBBBA provisions, meaning they flow through by default under Illinois's rolling conformity:
- NCTI (Net Controlled Foreign Corporation Tested Income, replacing GILTI): Illinois conforms. Fifty percent of NCTI is subject to Illinois tax. Effective for tax years ending December 31, 2025 and thereafter. Verify current Illinois NCTI treatment at tax.illinois.gov.
- IRC Section 174A (domestic R&E immediate expensing): Illinois conforms by default. S.B. 1911 did not decouple from Section 174A. Verify at tax.illinois.gov for any subsequent decoupling legislation before filing.
- IRC Section 163(j) (business interest expense): Illinois conforms to the OBBBA's modified business interest expense limits. See the IRC 163(j) business interest limitation guide for the federal EBITDA-based ATI restoration that flows through to Illinois.
- IRC Section 461(l) (excess business loss limitation): Illinois conforms to the OBBBA's permanent excess business loss limitation. See the IRC 461(l) excess business loss guide for the federal computation that flows through to Illinois.
Illinois PTET made permanent by S.B. 1911
S.B. 1911 removed the January 1, 2026 sunset that had been scheduled for the Illinois Pass-Through Entity Tax, making the PTET a permanent feature of the Illinois tax code. The PTET rate remains at the Illinois personal income tax rate; confirm the current rate at tax.illinois.gov. Practitioners advising pass-through entity clients on Illinois elections should reflect this permanence in any multi-year planning.
KEY PRACTITIONER NOTE: CONFIRM 174A CONFORMITY AND VERIFY IL-4562 MECHANICS BEFORE FILING
Illinois's rolling conformity to Section 174A is the current position based on S.B. 1911, but rolling conformity positions can be altered by subsequent legislation. Verify at tax.illinois.gov that no post-S.B. 1911 Illinois decoupling legislation has been enacted before treating 174A as conforming on the Illinois return. For the 168(k) and 168(n) add-backs, the mechanics flow through Form IL-4562 to Schedule M; verify the current form version and instructions at tax.illinois.gov, as form numbers and line references for newly enacted provisions may change during the filing season.
Effective dates: Enactment December 12, 2025. Section 168(n) decoupling applies to tax years 2026 and thereafter. NCTI conformity applies to tax years ending December 31, 2025 and thereafter. Source: S.B. 1911 (signed December 12, 2025); BDO; Aprio; Capitol News Illinois; DHJJ. Verify current law at tax.illinois.gov.
Five-State OBBBA Conformity Summary: Pennsylvania, Michigan, California, Illinois, and New York
The table below summarizes each state's enacted 2025 through 2026 OBBBA conformity position. All positions must be verified at the relevant state agency before applying to any return; state legislation may be enacted or amended after this guide's publication date.
| State | Conformity Framework | Key 2025-2026 Legislation | Decoupled From | Conforms To | Effective Date |
|---|---|---|---|---|---|
| Pennsylvania | Rolling conformity; C corporation selective decoupling via Act 45 | H.B. 416 / Act 45 of 2025 (signed November 12, 2025) | C corporations only: Sec. 174/174A (R&E, 5-yr amortization; no catch-up for 2022-2024); Sec. 168(n) QPP (39-yr depreciation); Sec. 163(j) (TCJA ATI method continues) | Pass-through entities and individuals conform to OBBBA by default through rolling conformity (Act 45 does not apply to them). Verify at revenue.pa.gov. | Tax years beginning in 2025 and thereafter |
| Michigan | Conformity date updated to January 1, 2025; OBBBA (signed July 4, 2025) falls outside conformity date; no OBBBA provisions adopted for CIT or IIT | H.B. 4961 / Public Act 24 (signed October 7, 2025); Michigan Dept. of Treasury notice (February 25, 2026) | Sec. 174A (R&E; TCJA 5-yr amortization continues); Sec. 168(k) (historical bonus depreciation decoupling continues); Sec. 168(n) QPP; Sec. 163(j) OBBBA loosening; Sec. 179 expanded limits | No OBBBA provisions conform; applies to both Corporate Income Tax and Individual Income Tax. Verify at michigan.gov/treasury. | Tax years beginning after December 31, 2024 |
| California | Fixed-date (static) conformity; IRC conformity date advanced to January 1, 2025 by S.B. 711; OBBBA (signed July 4, 2025) falls outside conformity date | S.B. 711 (signed October 1, 2025) | All OBBBA provisions: Sec. 174A (R&E); Sec. 168(n) QPP; Sec. 168(k) modifications; Sec. 1202 QSBS changes; NCTI/GILTI transition; tip and overtime income exclusion | No OBBBA provisions conform. Monitor ftb.ca.gov for 2025-2026 session conformity legislation. | Tax years beginning on or after January 1, 2025 |
| Illinois | Rolling conformity base with selective S.B. 1911 decoupling; PTET made permanent | S.B. 1911 (signed December 12, 2025) | Sec. 168(n) QPP (add-back required; 2026 and thereafter); Sec. 168(k) bonus depreciation (pre-existing add-back confirmed and extended to property placed in service after January 19, 2025) | NCTI (50% subject to IL tax; effective tax years ending December 31, 2025+); Sec. 174A (rolling conformity; S.B. 1911 did not decouple; verify subsequent legislation at tax.illinois.gov); Sec. 163(j); Sec. 461(l) permanent excess business loss limitation | Enactment December 12, 2025; 168(n) decoupling 2026+; NCTI conformity tax years ending December 31, 2025+ |
| New York | Hybrid/selective conformity; rolling conformity base with OBBBA-specific decoupling at both NYS and NYC levels (separate provisions) | S.9009 / A.10009, FY 2026-2027 Budget (signed May 28, 2026) |
NYS (CIT, PIT, insurance franchise tax): Sec. 168(n) QPP (retroactive to 1/1/2025); Sec. 174/174A R&E (5-yr amortization; retroactive to 1/1/2025).
NYC only (separate Part G): Sec. 163(j) OBBBA loosening; Sec. 174A R&E; Sec. 179 expanded limits |
NYS conformity position for Sec. 163(j) and Sec. 179 is not specified in the decoupling provisions; verify at tax.ny.gov. NYC conformity for Sec. 168(n) is not separately addressed; verify with NYC Dept. of Finance. | NYS: tax years beginning on or after January 1, 2025 (retroactive). NYC: tax years beginning after December 31, 2024. |
| All positions must be verified at the relevant state agency before relying on any conformity characterization. Verify Pennsylvania at revenue.pa.gov. Verify Michigan at michigan.gov/treasury. Verify California at ftb.ca.gov. Verify Illinois at tax.illinois.gov. Verify New York at tax.ny.gov. This table is informational and does not constitute tax advice for any specific client situation. State legislation may change during the filing season. | |||||
Other Significant Nonconforming States: Where the Conformity Gap Has the Highest Dollar Impact
Beyond the five states covered in the deep dives above (Pennsylvania, Michigan, California, Illinois, and New York), several other states have either enacted or are expected to enact decoupling provisions for OBBBA provisions. Practitioners with clients in these states should verify the current conformity position at the relevant state agency before filing. All state-specific claims in this section must be verified at the applicable state agency; verify current law before relying on any specific conformity position.
Massachusetts
Massachusetts uses its own income tax structure that starts from federal gross income with specific Massachusetts modifications. Verify the current Massachusetts position on OBBBA provisions at mass.gov/dor. Massachusetts has historically decoupled from some federal deductions and exclusions, and its position on the OBBBA tip and overtime exclusion and bonus depreciation must be confirmed before filing.
New Jersey
New Jersey does not conform to federal bonus depreciation under IRC 168(k) and requires its own depreciation calculation. Verify New Jersey's current decoupling provisions and treatment of OBBBA provisions at njtaxation.org. New Jersey's depreciation rules are among the most complex of any state.
How to Document State Nonconformity Positions: The Rationale File Requirement and Disclosure Best Practices
A state nonconformity adjustment that cannot be supported by documentation in the practitioner's file is a return position waiting for a state audit challenge. The following items should be in the client file for every state nonconformity adjustment:
State conformity determination memorandum
For each OBBBA provision that affects the client's return, document: (a) the federal provision and its OBBBA enactment authority; (b) the state's conformity position as of the filing date, with the source of the determination (state agency URL, guidance document, or legislation citation); (c) whether the state conforms, decouples, or is undetermined; and (d) the adjustment made on the state return as a result. A one-page conformity memo for each affected state takes ten minutes to prepare and is the difference between a defensible state return and an arbitrary-looking one.
Source documents for each adjustment amount
The adjustment amount should be traced to its source. For a tip income add-back, trace the amount to the W-2 Box 8 or payroll records. For a bonus depreciation add-back, trace the amount to the federal Form 4562 (the federal depreciation schedule). For a QBI-related adjustment, trace the amount to the federal Form 8995-A.
State return workpapers showing the adjustment
Retain a copy of the state adjustment schedule (California Schedule CA, New York Form IT-225, Illinois Schedule M or Form IL-4562, or the applicable state form) showing both the pre-adjustment and post-adjustment amounts. This is the primary documentation if the state issues a notice questioning the adjustment.
Explaining the Difference to Clients: How to Communicate That the State Tax Bill Differs From the Expected Federal-Based Calculation
Client confusion about the state-federal difference is one of the most common communication challenges in the 2025 filing season. A client who excluded $8,000 in tip income on the federal return may be surprised and unhappy to learn that California, New York, or Illinois is still taxing that amount.
Proactive explanation at intake
The most effective client communication happens before the return is finished, not after the client sees the balance due. At the intake stage, when you identify that the client lives or works in a nonconforming state and has tip income, overtime pay, or business assets subject to bonus depreciation, raise the state conformity issue directly: "The new federal law excludes your overtime income from federal tax, but [state] has not adopted that change, so your state return may show a higher taxable income than you might expect from the federal exclusion. I'll walk you through both calculations when the return is complete."
The two-column comparison at delivery
At return delivery, a simple two-column table comparing the federal taxable income to the state taxable income, with a line-by-line explanation of the adjustments, is the most effective communication tool. Most clients understand the concept of "the state has different rules" once they can see exactly which line differs and why. The explanation also demonstrates the value of the practitioner's conformity analysis: this is a level of care that software alone does not provide.
Practice Workflow: The Three-Step Conformity Check for Clients in Major Nonconforming States
The conformity check should be a defined step in the return preparation workflow, not an after-the-fact review. Building it into the process for every client with state nexus in a major nonconforming state prevents errors before the return is filed.
Step 1: Identify which OBBBA provisions affect the return
From the completed federal return, identify the OBBBA provisions that appear on the return: Is there a tip or overtime exclusion amount? Is there a bonus depreciation deduction on Form 4562? Is there a QBI deduction on Form 8995 or 8995-A? Is there a modified SALT deduction on Schedule A? Each provision that appears on the federal return is a potential state adjustment for a nonconforming state. Note the amount of each provision; that is the maximum possible state adjustment if the state fully decouples from the provision.
Step 2: Check the state's conformity status for each provision
For each affected provision, go to the relevant state agency's website and verify the state's current position: ftb.ca.gov for California, tax.ny.gov for New York, tax.illinois.gov for Illinois, and the applicable state agency for other states. Look for conformity guidance, technical bulletins, or instructions to the state adjustment schedule that address the specific OBBBA provision. If no state guidance exists yet for a specific OBBBA provision, note that in the client file and consider whether a conservative or disclosure-based approach is warranted for that provision.
Step 3: Calculate and enter the adjustment, document the authority
For each provision where the state has decoupled, calculate the state adjustment amount and enter it on the correct state schedule (California Schedule CA, New York Form IT-225, Illinois Schedule M or Form IL-4562). Document the state agency source, the provision involved, and the adjustment amount in the client file conformity memo. Inform the client of the adjustment and its dollar impact before filing. Confirm this step as complete before transmitting the state return.
IMPORTANT: ALL STATE CONFORMITY POSITIONS REQUIRE AGENCY VERIFICATION
This guide does not characterize any state's conformity position as settled or final. Verify California's current IRC conformity date with the California Franchise Tax Board at ftb.ca.gov. Verify New York's current decoupling provisions at tax.ny.gov. Verify Illinois decoupling provisions at tax.illinois.gov. All other state-specific conformity positions must be verified at the relevant state agency before being relied upon in return preparation. This guide is informational and does not constitute tax advice for any specific client situation. All OBBBA references: verify current law at IRS.gov; recently enacted.
Regulated Claims and Verification Requirements
The following state-specific claims require verification before applying to any return: (1) California conformity date: verify California's current IRC conformity date with the California Franchise Tax Board at ftb.ca.gov before filing 2025 state returns; the conformity date is subject to California legislative action. (2) New York decoupling: verify New York's current decoupling provisions with the New York Department of Taxation and Finance at tax.ny.gov. (3) Illinois bonus depreciation add-back: verify the current Illinois decoupling provisions at tax.illinois.gov. (4) All OBBBA references: verify current law at IRS.gov; recently enacted. (5) All other state-specific conformity positions: verify at the relevant state agency before relying on any conformity characterization in this guide.
Related Guides for OBBBA and State Compliance
State OBBBA nonconformity intersects with the QBI deduction calculation, S-corp entity structure decisions, and continuing education on OBBBA changes. These guides cover the adjacent practitioner workflows:
- QBI Deduction Section 199A Practitioner Calculation Guide: the federal QBI deduction mechanics that form the basis of state nonconformity adjustments for pass-through clients
- S-Corp Reasonable Compensation Practitioner Guide: S-corp compensation decisions and how they interact with state depreciation and entity-level tax provisions in nonconforming states
- Annual Filing Season Program (AFSP) Guide: continuing education requirements and OBBBA state conformity CE content for practitioners maintaining their AFSP record of completion
- NCTI (formerly GILTI) and FDDEI (formerly FDII) OBBBA international tax guide: the OBBBA international provisions whose NCTI and FDDEI definitions may flow into state taxable income depending on each state's conformity position
- Clean energy credits OBBBA Section 45Y 48E transferability guide: the OBBBA clean energy credit phase-out, transferability, and direct pay rules that states may treat differently under their own conformity statutes
- State income tax residency and domicile 183-day rule New York statutory residency guide: the residency, domicile, and statutory residency rules that determine which state's conformity position applies to high-income clients relocating between states
The federal Schedule 1-A deductions for qualified tips, overtime, car loan interest, and the enhanced senior deduction are subject to state conformity analysis before claiming any state benefit. The Schedule 1-A OBBBA deductions practitioner guide covers the federal computation workflow, documentation requirements, and the W-2 transition-year issues for 2025 returns.
Frequently Asked Questions
What is state conformity to federal tax law and why does it matter for 2025 returns?
State conformity to federal tax law refers to whether a state's income tax code adopts federal tax law changes automatically (rolling conformity) or only as of a specific date (fixed-date conformity). For 2025 returns, the OBBBA's provisions may not apply at the state level in nonconforming states, requiring practitioners to make add-back adjustments on the state return. Rolling conformity states like New York generally adopt federal changes but often decouple from specific provisions through separate legislation. Fixed-date conformity states like California conform only to the IRC as of a specific date (verify at ftb.ca.gov). The practitioner must identify which OBBBA provisions affect the return and verify each state's current conformity position before filing.
Does California conform to the OBBBA tip and overtime income exclusion for 2025 returns?
Verify California's current IRC conformity date with the California Franchise Tax Board at ftb.ca.gov before filing 2025 state returns; the conformity date is subject to California legislative action. California uses fixed-date conformity, and its conformity to any OBBBA provision depends on whether California's current conformity date falls before or after July 4, 2025 (the OBBBA enactment date), and on any specific California legislation. Do not assume California conforms to any OBBBA provision without verifying the current conformity date and any specific California legislative action at ftb.ca.gov.
Does New York conform to the OBBBA for the 2025 tax year?
Verify New York's current decoupling provisions with the New York Department of Taxation and Finance at tax.ny.gov. New York uses rolling conformity but has a history of enacting specific decoupling legislation for bonus depreciation and other provisions. New York's conformity position for each OBBBA provision must be verified at tax.ny.gov before preparing 2025 New York returns; do not assume rolling conformity means New York has adopted all OBBBA provisions.
What is the three-step conformity check workflow for clients in major nonconforming states?
Step 1: From the completed federal return, identify which OBBBA provisions appear (tip/overtime exclusion, bonus depreciation on Form 4562, QBI deduction on Form 8995/8995-A, SALT deduction changes). Step 2: Verify each state's current conformity status for each applicable provision at the relevant state agency (ftb.ca.gov for California, tax.ny.gov for New York, tax.illinois.gov for Illinois). Step 3: Calculate the state adjustment for each nonconforming provision, enter it on the correct state adjustment schedule, and document the state agency source and adjustment amount in the client file. Inform the client of the adjustment and its dollar impact before filing.
Where on the Illinois return does the bonus depreciation add-back go?
Verify the current Illinois decoupling provisions at tax.illinois.gov. Historically, the Illinois bonus depreciation add-back has been reported on Form IL-4562 and carried to Illinois Schedule M. Verify the current form and line location at tax.illinois.gov before preparing the 2025 Illinois return, as form instructions for newly enacted provisions may have changed. The adjustment is not automatic in software for newly enacted provisions; the practitioner must verify and enter it on the applicable Illinois adjustment form.