IRC conformity refers to the degree to which the state tax code conforms to the federal tax code (known as the Internal Revenue Code or IRC). Most states conform to the federal tax code in some respect, with certain federal provisions being left out. The most common federal tax laws that are left out, or decoupled from, are bonus depreciation, expensing of depreciable business assets (IRC section 179), and the domestic production activities deduction (IRC section 199).
There are two main ways that states conform to the federal tax code:
- Moving date conformity: changes in federal tax law automatically apply to the state tax code as they occur. If the state does not want to conform to a new federal law, they will pass specific legislation to decouple from it. New York is an example of a “moving date” conformity state.
- Fixed date or static conformity: a state conforms to the federal tax code as it existed on a certain date. For example, if a state conformity date was January 1, 2009 that would mean that the state does not automatically incorporate changes to the federal tax law that occur after that date. California is an example of a “fixed date” conformity state.
What Does This Mean for Me?
The degree to which a given state conforms to federal tax rules impacts state tax compliance for both businesses and individuals. Anytime there is a new federal tax law, it will affect your state tax return depending on whether or not your state conforms to that particular law. If your state does conform to the new law, your tax liability on both your federal return and your state return could be affected. If your state does not conform, your state income tax return will likely include more calculations to reconcile the differences between your federal taxable income and your state taxable income.