Executive Summary for CPA Partners: The Omnibus Balanced Budget Act (OBBBA) has created a historic divergence between Federal tax benefits (100% Bonus Depreciation and Section 174A) and State compliance. This guide explores the "Decoupling Sprint" and how firm owners can mitigate risk.

Why State Conformity is the #1 Risk Priority in 2026

For decades, state tax conformity was a back-office administrative task. In 2026, it has become a high-stakes risk management priority. While the federal government has incentivized investment through the OBBBA (Omnibus Balanced Budget Act), states are in open revolt to protect their own revenue streams.

For a founder or senior partner at a CPA firm, the federal "gift" of permanent 100% Bonus Depreciation and Section 174A R&E expensing is actually a multi-state liability trap.

The "Decoupling Sprint": States Protecting Their Budgets

We are currently witnessing a "Decoupling Sprint." High-population states are slamming the door on federal rules to prevent massive budget shortfalls.

• Decoupled States: PA, MI, and RI have already moved to reject the new federal expensing rules.

• The Impact: Clients expecting a federal windfall may face unexpected six-figure tax bills at the state level if their nexus includes these jurisdictions.

The Two Most Dangerous Traps: Rolling vs. Fixed-Date Conformity

To provide authoritative advice, your team must distinguish between the two primary ways states adopt the Internal Revenue Code (IRC).

1. The Rolling Conformity Trap (e.g., Illinois)

In rolling conformity states like Illinois, changes to the IRC are adopted automatically. While this sounds simpler, it creates an immediate impact on SALT caps and R&E changes. Your team must track federal shifts in real-time; there is no "lag time" to adjust your strategy.

2. The Fixed-Date Quagmire (e.g., California)

Fixed-date states (most notably California) conform to the IRC as it existed on a specific date. Currently, many are stuck in 2025. Unless the state legislature acts by the March deadline, you are effectively running two different sets of books for every multi-state client.

CPA Strategy Note: If your team relies on "memory" rather than an automated State Matrix, you are one audit away from a major malpractice claim.

The 174A Software Gap: A Warning to Firm Owners

A significant risk in 2026 is the Software Gap. Most mid-market tax software has not yet fully mapped the Section 174A domestic vs. foreign bifurcated rules to state-level adjustments.

Real-World Example: A client with $2M in R&D spend may have a $1.5M domestic and $500k foreign split. If your software fails to bridge this gap for a decoupled state, the resulting tax adjustment will be incorrect. This requires a manual override that most junior staff are not trained to identify.

How to Protect Your CPA Firm: A 3-Step Action Plan

1. Eliminate "Memory-Based" Compliance: Implement an automated State Matrix that updates in real-time. Human memory is the most expensive - and fallible - tool in your firm.

2. Track Legislative Sessions: Don't just track the law; track the calendar. For fixed-conformity states, your team needs to know the legislative session end dates (specifically the March window) to advise on estimated payments.

3. Proactive Client Communication: Move from "Compliance" to "Advisory." Reach out to multi-state clients now to explain why their federal refund doesn't mean a state-level zero-balance.

2026 State Conformity Survival Guide: Navigating the OBBBA Fallout

The passage of the Omnibus Balanced Budget Act (OBBBA) has fundamentally reset the federal tax landscape. For CPA firm partners, the challenge isn't the new federal benefits—it’s the chaotic, state-by-state "revolt" against them.

This guide provides a strategic framework for managing state tax conformity in the 2026 filing season.

I. The "Big Three" Federal Shifts & State Responses

The OBBBA introduced three massive cost-recovery levers. States are treating them as three distinct "revenue leaks" to be plugged.

II. State Archetypes: Where the Risk Lives

To manage your team's workflow, categorize your client nexus footprint into these three risk profiles:

1. The "Decoupling Sprint" (High Risk: PA, MI, RI, DC)

These states have actively legislated to ignore OBBBA.

• Michigan: Specifically decoupled from Section 174A domestic expensing. Your team must maintain separate amortization schedules for MI that do not match federal.

• District of Columbia: Enacted emergency legislation in late 2025 to decouple from nearly all OBBBA business provisions (163(j), 168(k), and 174).

2. The "Rolling Trap" (Medium Risk: IL, IA, MN)

These states conform automatically. The risk here is speed.

• Illinois: While it follows federal SALT cap increases and R&E changes, it recently extended its bonus depreciation add-back to cover the new 168(n) property.

• Strategy: Your software might default to "Conform," but you must manually trigger the 168(n) add-back.

3. The "Fixed-Date Quagmire" (High Risk: CA, GA, NH)

These states are "frozen" in time (e.g., California is largely stuck in a pre-OBBBA IRC).

• The Deadline: If the state legislature does not pass a "Conformity Bill" by March 2026, your clients' 2025/2026 returns will be based on 10-year-old federal rules.

• New Hampshire: Tied to the 2018 IRC. It adopts almost zero OBBBA provisions, creating massive book-to-tax differences.

III. Partner Strategy: The 174A "Software Gap"

The most significant technical trap for 2026 is the Section 174A bifurcation.

• The Rule: Federal law now differentiates between domestic (100% expense) and foreign (15-year amort) R&E.

• The Problem: Most tax software modules were built for the "all-or-nothing" amortization rules of 2022-2024. They are struggling to map the "Domestic vs. Foreign" split into state-specific add-backs for decoupled states.

• Partner Action: Mandate a "174A Reconciliation Memo" for every multi-state client. Do not rely on the software's automated state-adjustment diagnostic.

IV. Immediate Action Checklist for Firm Owners

• [ ] Identify "Hybrid" States: Flag states like Maine that have adopted "Partial Conformity"—creating a dual system for depreciation but not for R&D.

• [ ] Monitor the "March Window": Assign a staff member to track the legislative session end-dates for CA, GA, and VA. If sessions close without a conformity update, your extension strategy must change.

• [ ] Client Advisory: Send a 2-paragraph update to clients in PA, MI, and DC explaining that their federal 100% deduction will likely be "added back" at the state level, impacting their Q1 2026 estimates.

• [ ] Tech Audit: Confirm with your tax software provider how they handle the 168(n) factory expensing election at the state level.

FAQ: Navigating 2026 State Tax Conformity & OBBBA

What is the major challenge with Section 174A state conformity in 2026?

The primary challenge is the domestic vs. foreign bifurcation. While OBBBA allows immediate expensing for domestic R&E, several states (like Michigan and Pennsylvania) have decoupled, requiring taxpayers to continue amortizing these costs. Most tax software currently lacks the specific mapping to automate these multi-state adjustments correctly.

Which states have already decoupled from the OBBBA business provisions?

As of early 2026, Pennsylvania, Michigan, Rhode Island, and the District of Columbia have officially decoupled from major OBBBA provisions, including Section 174A expensing and 100% bonus depreciation, to protect their state budgets from revenue shortfalls.

How does "Fixed-Date" conformity impact California tax filings in 2026?

California is a fixed-date conformity state, meaning it follows the Internal Revenue Code (IRC) as of a specific past date (currently early 2025). Unless the California legislature passes an update by the March legislative window, the state will not recognize OBBBA benefits, requiring a significant add-back on state returns.

What is the "Rolling Conformity Trap" for CPA firms?

Rolling conformity states (e.g., Illinois) adopt federal changes automatically. The "trap" is that while they follow the new SALT cap and R&E benefits, they often pass emergency "carve-outs" for specific provisions like the new Section 168(n) factory expensing. Firms must monitor these legislative shifts in real-time.

Why is relying on tax software a risk for OBBBA compliance?

Most tax software packages are designed for the previous 5-year amortization regime. They often fail to accurately separate domestic R&E (expensed) from foreign R&E (amortized over 15 years) at the state level. This "Software Gap" requires senior-level manual overrides to avoid audit triggers.

Related reading - State Tax Deadlines