AI Summary: State tax outcomes after the OBBB depend heavily on each state’s conformity approach, often creating significant differences from federal results. Variations can increase state taxable income, complicate compliance, and create risk for underpaid estimates. As state rules continue to evolve, proactive modeling, monitoring, and coordination with a tax advisor are critical to avoid surprises and manage multistate tax exposure.

The next few tax filing seasons will reward taxpayers who treat “state” as its own moving target, not as a downstream copy of the federal return. More clearly put: Taxpayers preparing state income tax returns in the wake of the One Big Beautiful Bill (OBBB) should not assume that federal changes will translate cleanly to the state level. While federal reform often dominates the headlines, the practical impact on overall tax liability frequently depends on how and when each state conforms to the Internal Revenue Code (IRC).

Rolling vs. Static Conformity: How States Adopt (or Reject) Federal Tax Changes

Some states adopt federal changes automatically under rolling conformity; others conform only to a fixed date; and many selectively decouple from specific provisions. As a result, the same transaction or deduction may produce materially different outcomes depending on the jurisdiction. In certain cases, state taxable income may exceed federal taxable income in ways that are neither intuitive nor reflected in early planning models.

Real-World Examples of State Tax Uncertainty

Recent developments illustrate how unsettled this environment can be. Arizona, for example, issued 2025 individual income tax forms reflecting proposed legislative standards that were not yet enacted into law. When administrative guidance and statutory authority are not aligned, taxpayers face the risk of filing based on assumptions that later change. Early filers may find themselves amending returns, while others may discover that estimated payments or extension payments were computed using a base that ultimately does not control. Reliance on form instructions alone is not a substitute for confirming enacted law.

The District of Columbia has presented a different kind of instability. As a rolling conformity jurisdiction, it initially responded to federal changes in one direction, only to see subsequent political and congressional developments create uncertainty around whether that decoupling would stand. When conformity status changes midstream or is subject to challenge, taxpayers are left in a position where filing positions, estimated tax calculations, and deferred tax accounting may need to be revisited. One would hope jurisdictions’ tax administrators would grant leniency around penalties and interest if a significant tax underpayment resulted from such volatility; however, jurisdictions may not grant such leniency. That volatility and uncertainty increases the value of conservative payment strategies and careful documentation, particularly where significant dollars are involved.

How State Decoupling Can Increase Taxable Income Beyond Federal Levels

Rolling conformity states also retain the ability to selectively decouple from other federal provisions, and that authority can materially alter projected liabilities. If a state decouples from a federal deduction that accelerates expense recognition, state taxable income may remain elevated while federal taxable income declines. In that circumstance, a taxpayer could find that state income tax liability is significantly higher than federal income tax for the same year. That dynamic creates exposure for underpaid quarterly estimates and insufficient extension payments, especially if projections were built primarily on federal modeling.

Bonus Depreciation Differences by State: What Taxpayers Need To Know for 2025-2027

For a significant number of taxpayers, bonus depreciation continues to represent one of the largest state modifications. Rolling conformity states that decouple from federal bonus rules, as well as static conformity states that remain tied to prior federal law, can create meaningful divergence between federal and state depreciation schedules.

Michigan provides a clear illustration. Under Michigan Public Act 24 of 2025 for tax years beginning after Dec. 31, 2024, certain Michigan taxpayers must compute bonus depreciation as though IRC Section 168(k) were in effect on Dec. 31, 2024. As a result, bonus depreciation continues under the TCJA phase-down schedule, generally permitting 40% in 2025, 20% in 2026, and 0% in 2027 and later years.

Where federal law allows more immediate cost recovery under the revised framework, taxpayers may face an increasingly complex state depreciation adjustment, including multi-year addbacks and subtractions that must be tracked asset by asset. The compliance burden and cash tax impact can be significant, particularly for capital-intensive businesses.

Section 174 and R&D Expensing: Why State Treatment May Still Lag Federal Changes

Section 174 is a prime pressure point for taxpayers. The OBBB restored immediate expensing of domestic R&D under new Section 174A for certain post-2024 years, but state conformity to that fix is not uniform, and some states may effectively preserve capitalization timing differences absent legislative alignment or guidance. If your projections assume federal expensing while your state remains on a capitalization track (or adopts transition rules differently), you can wind up underpaying estimates even when the federal projections look stable.

How To Model State Tax Liability When Conformity Rules Are Uncertain

Given the pace of legislative activity and the fact that many state sessions remain open, this landscape remains fluid. Taxpayers should avoid assuming that current administrative positions will remain unchanged through filing deadlines, nor should taxpayers assume that tax administrators will grant leniency around penalties and interest for underpayments resulting from legislative changes occurring after extension and estimated payments are made. Coordination with a qualified tax advisor is essential to evaluate conformity status, identify potential state modifications, and model estimated payment exposure.

As legislatures adjourn and guidance is issued, further developments are likely. Monitoring those changes in real time will be critical to managing risk and avoiding preventable surprises. KSM’s tax professionals are closely monitoring these developments and can help you evaluate your exposure, model potential outcomes, and adjust your strategy accordingly. Connect with your KSM advisor or complete the form below to start a conversation.

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