The sunset of the Tax Cuts and Jobs Act (TCJA) at the end of 2025 promises to redefine federal tax compliance while simultaneously complicating the already intricate state tax landscape. For CPA firms serving multistate clients or managing small- to mid-sized business portfolios, the challenges presented by divergent state conformity are more urgent than ever. What was once a straightforward model—where states closely mirrored federal laws—is fracturing into a complex mosaic of rolling, static, and selective conformity models.

Recognizing this, CPA firms must understand how state-level discrepancies will affect Schedule C filings, pass-through entity K-1 allocations, and 1099 reporting. Equally critical is proactively adapting firm workflows, client communications, and technology tools to prevent compliance breakdowns, rework, and, ultimately, damage to firm reputation in a post-TCJA sunset world.

Drawing on over 25 years of experience in the tax industry and 15 years of professional CPA experience, this guide provides an in-depth, practical roadmap. It combines technical insights with concrete strategies designed to help firms safeguard accuracy and efficiency amid growing divergence between state and federal levels.

Decoding State Conformity: Rolling, Static, and Selective Models

The concept of state conformity revolves around how each state aligns its income tax code with federal tax law. As the TCJA sunsets, this alignment can no longer be taken for granted.

• Rolling Conformity States: Examples include New York and Illinois. These states automatically update their tax codes to mirror federal changes, often by referencing the Internal Revenue Code as amended through a specified update date or “rolling date.” Once TCJA provisions sunset federally, these states typically follow suit without requiring new legislation—unless they intentionally decouple specific provisions.

• Static Conformity States: California and Massachusetts fit this model. These states fix their tax codes to federal law as of a specified prior date and do not automatically update unless there’s legislative intervention. This frozen conformity means TCJA provisions could persist indefinitely at the state level, creating material federal-state divergence.

• Selective Conformity States: Florida and Texas, among others, selectively adopt certain federal rules but omit others, either on a provision-by-provision basis or through legislative discretion. This creates unpredictability and necessitates frequent monitoring of legislative sessions.

This three-way approach sets the stage for complexity post-2025, with far-reaching implications for tax preparers, compliance software, and client planning.

The TCJA Sunset’s High-Impact Provisions for States

Understanding which TCJA provisions sunset and how states respond is key to managing risks effectively.

Qualified Business Income (QBI) Deduction

The headline sunset provision, QBI under Section 199A, will disappear after 2025 at the federal level. While rolling conformity states will swiftly remove this deduction from state returns, static conformity states anchored to earlier federal versions may still allow it, preserving a valuable deduction for taxpayers on their state tax bills even though it no longer exists federally.

Bonus Depreciation and Section 179

The 100% bonus depreciation allowance begins phasing down in 2026 and further through 2027. But states vary dramatically in their stance. Many historically did not conform to federal bonus depreciation fully—or at all. Others will retain earlier, more generous forms due to static conformity. Section 179 expensing thresholds also diverge, complicating asset expensing strategies at the state level.

Net Operating Loss (NOL) Carryforwards

TCJA limited NOL carrybacks and capped deductibility at 80% of taxable income. Post-sunset, some states may continue to allow more generous NOL treatment, creating timing and amount variances that must be managed carefully—particularly with partnerships and S corporations.

Credits and Individual Adjustments

TCJA enhanced or created credits such as the Child Tax Credit and modified various phase-out thresholds. These provisions may sunset federally at different times, with selective or static conformity states maintaining certain versions of these credits. Firms must track each state’s legislative posture to determine impact.

Partnership Multistate Profit Split: Navigating Conflicting Rules

Consider a professional services partnership with 12 partners operating in New York, California, and Iowa—each with distinct conformity postures.

In 2026, they report $3 million net income and $500,000 of new equipment purchases, while the federal QBI deduction has expired.

• New York (rolling conformity) disallows QBI and phases bonus depreciation down in line with federal sunset rules.

• California (static conformity fixed to 2015) continues to allow QBI but disallows bonus depreciation, reflecting a frozen conformity date.

• Iowa (static with bonus depreciation decoupling) disallows QBI and requires manual addbacks of bonus depreciation on state returns.

If the firm simply applies federal results uniformly, partner K-1s for California residents could overstate income due to lingering QBI allowances not recognized federally. Iowa partners risk misstatements if depreciation adjustments are missed.

Solution: Implement a dedicated, state-level conformity worksheet that segregates income, deductions, and credits on a partner-by-partner basis. Flagging items for state-specific adjustments before K-1 issuance is critical to minimize audit exposure, avoid client disputes, and preserve goodwill.

Schedule C Dual-State Filing Trap: Divergent Rules for Small Businesses

Now consider an individual operating a logistics business filing Schedule C, with operations in Massachusetts (static conformity) and New York (rolling conformity).

In 2026, this taxpayer reports $400,000 net business income and $75,000 in equipment purchases, split between both states.

• Massachusetts continues to allow the QBI deduction due to static conformity but disallows bonus depreciation.

• New York disallows QBI post-sunset and phases down bonus depreciation in line with federal changes.

If the preparer applies federal rules uniformly, the Massachusetts return will miss the available QBI deduction, while depreciation calculations will fail to comply with the state’s disallowance of bonus depreciation. The taxpayer risks overpaying or facing notices later.

Preventive Strategy: Begin at data intake. Require disaggregated asset purchase data by state, then apply a firmwide conformity matrix to tailor each state’s deduction rules before preparation. This reduces errors, increases client trust, and streamlines review cycles.

Data Intake Overhaul: The Critical First Step

Data intake, often ignored in the chaos of tax season, becomes one of the most strategic levers post-TCJA sunset.

• Update client questionnaires: Include state-specific prompts for equipment purchases, business income location, and other items flagged for divergences.

• Use digital forms with logic and flags: Tax software or portals can dynamically highlight items needing state-level review.

• Train staff and use review checklists: Add a quality-control step requiring cross-check of intake data against conformity issues before preparation. Early detection prevents costly corrections later.

Anticipating 1099 and K-1 Reporting Complexities

Divergence extends beyond income and deductions—information reporting is equally affected.

• 1099 Reporting: Varying NEC and MISC thresholds by state require firms to maintain up-to-date, state-specific filing criteria. Unique state codes and e-filing portals add complexity. Errors risk penalties and administrative burdens.

• K-1 Handling: States decoupled from Section 179 or QBI affect allocation on partner K-1s. Many states require variant K-1 formats or supplemental schedules. Meticulous reconciliation of federal and state allocations is a must.

Workflow steps verifying each line on multi-state K-1s for conformity can prevent costly mistakes before issuance.

Automating the Unwieldy: Tools to Reduce Errors

Manual adjustments are time-consuming and error-prone. Automation is non-negotiable.

• Configure state adjustment modules in tax preparation software (e.g., Drake Tax, UltraTax CS).

• Develop macros or scripts for routine addbacks and subtractions.

• Create “sunset cheat sheets” per state, summarizing provision dates, conformity types, and adjustments.

• Use Excel templates with color coding for visual engagement.

• Leverage low-code tools (e.g., Power Automate) to trigger reminders or update checklists dynamically.

Layered automation reduces unbillable hours and ensures consistent delivery.

Staying Current: Institutionalizing State Law Monitoring

Given shifting state landscapes, ongoing conformity tracking is critical.

• Subscribe to state tax authority alerts and RSS feeds.

• Maintain a centralized live conformity tracker, updated monthly.

• Store trackers in cloud repositories accessible firmwide.

• Conduct periodic training on legislative changes in major states.

Centralized, visible data empowers preparers to find answers quickly and reduces the risk of oversight.

Educating Clients: The Overlooked Force Multiplier

Much of the complexity arises from client assumptions that federal and state rules always align.

• Add clear, jargon-free “What Changed in Your State?” boxes to client organizers.

• Host short client webinars on state impacts of the TCJA sunset.

• Encourage early reporting of large purchases, expansions, or other material transactions.

Proactive education smooths communication, reduces surprises, and prevents last-minute amendments.

Workflow Best Practices to Manage Complexity

Smooth compliance in this fractured environment requires internal discipline.

• Color-code clients by conformity type to flag complexity.

• Start tax season with firmwide conformity workshops.

• Update annual checklists with sunset-related questions.

• Store tools and trackers in shared cloud folders.

• Automate recurring review reminders with workflow software.

Deliberate, repeatable workflows minimize errors and prepare firms for future complexity.

Final Thoughts: From Risk to Opportunity

The TCJA sunset ushers in an era where federal and state tax conformity will no longer be seamless. CPA firms that assume federal rules apply universally will face errors, client friction, and compliance risk.

But those who confront the complexity—building compliance matrices, automated workflows, rigorous intake and review processes, continuous monitoring, and client education—will not only survive but thrive. These firms will develop resilient, scalable systems that reduce rework and cement their role as trusted advisors.

This transition is more than a compliance challenge—it’s an opportunity to elevate operational excellence and client service. Preparation today is your safeguard against chaos in 2026 and beyond.