2025 Tax Conformity Changes

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Types of State Conformity

There are three main ways states conform to the federal tax code:

• Rolling Conformity: States automatically adopt federal changes as they occur. States that will complete rolling conformity are highly sensitive to federal changes since they immediately affect state revenues through the downstream impacts of deductions and adjusted gross income, which serve as a basis for state tax calculations.
• Static Conformity: States adhere to the IRC as of a specific date. If the federal government passes new tax legislation after that date, the state can decide whether to update its conformity date.
• Selective Conformity: States choose which federal provisions to follow, such as certain corporate or personal income provisions, while rejecting others. A state can combine selective conformity with a static date as well.

Key Tax Changes Impacting State Revenue

The impact of conformity and potential decoupling is relevant in the context of several major HR1 IRC changes:

Corporate Tax Changes in HR1

• Research and Experimental (R&E): HR1 allows for the immediate expensing of U.S. research costs and amortization for foreign costs, reducing taxable income and state revenue.
• Bonus Depreciation: Bonus depreciation under HR1 allows businesses to deduct 100% of certain assets upfront, potentially reducing revenue for states that allow the state deduction.
• Interest Deductibility: HR1 establishes interest deductibility with a more generous Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) based limit, enabling larger deductions.
• International Provisions: GILTI (global intangible low-taxed income) and Foreign-Derived Intangible Income lower tax rates for export income. HR1 prevented the rates from rising as much as they would have without action. Most states currently exclude or partially include these.

Key Individual Tax Changes in HR1

Many of the below significantly alter adjusted gross income, particularly affecting states reliant on income and those with higher tax rates. For example, a state with a 5% flat income tax will lose $50 for every $1,000 reduction in AGI pass-through to the state return.

• Tips and Overtime: Tip and overtime deduction exempts tips and overtime pay from taxable income directly reducing AGI.
• Car Loan Interest: For the first time, HR1 introduces a new car loan interest deduction, which does not need to be itemized, therefore directly impacting AGI.
• Dependent Care: Flexible spending accounts for dependent care increased from $5,000 to $7,500, directly lowering AGI for those individuals claiming it.
• Senior deduction: HR1 adds a $6,000 bonus deduction for seniors, but it is below the line and would not impact AGI.
• Higher Standard Deduction: The Standard Deduction is raised by $350 for individuals and $750 for those filing jointly, directly lowering AGI.
• State and Local Income Tax Deduction: The new SALT deduction cap raises the limit for state and local tax deductions to $40,000 for those within certain modified AGI limits. This impacts AGI for those itemizing their taxes.
• Qualified Small Business Stock (QSBS) exclusion: The QSBS, which allows investors to exclude capital gains from the sale of stock in certain small businesses has been significantly expanded.
• Opportunity Zones: These were created to encourage investment in economically distressed communities and offer tax breaks on capital gains. These were set to expire, but are now permanent under HR1.

State Actions

States have taken a wide range of actions in 2025 by:

• Decoupling: States have selectively decoupled from numerous HR1 provisions, most often focusing on corporate tax deductions, which often have a large-scale revenue impact. These changes typically either revert to the pre HR1 landscape or find a balance somewhere in the middle of previous and new deductions.
• Changing static dates: Several states changed the dates for their statis conformity to a set date before the passage of HR1. These changes were largely passed prior to the passage of HR1, allowing states to, at least temporarily, maintain the status quo without revenue risk while considering future alignment more carefully in the next session.

2025 State Conformity and Decoupling Actions

Many states took action both in anticipation of, and in response to, HR1 tax impacts:

• Alabama: Enacted HB 163 on May 14, 2025, with a retroactive application to Jan. 1, 2024. The bill decouples the State from provisions related to the deduction of research and experimental expenses, allowing taxpayers to choose whether to immediately deduct or defer or amortize.
• California: SB711 was passed on October 1, 2025 updated the conformity date to January 1, 2025, decoupling from a range of both corporate and individual IRC provisions including research expensing and bonus depreciation.
• Colorado: In August, Colorado became the first state to directly address an HR1 related revenue shortfall through a special session. Lawmakers added an indefinite requirement that the Qualified Business Deduction be added back to Colorado taxable income. Colorado additionally decoupled from the federal deduction for foreign-derived deduction-eligible income. (Note: Colorado also passed additional emergency revenue-producing measures in its special session responding to HR1's financial impact, but these measures did not address conformity to the IRC.)
• Delaware: Passed HB 255 on November 19, 2025, decoupling from HR1's research and development deductions. The bill also limits bonus depreciation for 2025 and beyond. The law expires in 2030 and restores conformity with the IRC in 2031.
• District of Columbia: The D.C. Bill B26-0457 went into effect on December 3, 2025 creating a temporary decoupling from HR1 for bonus depreciation, full expensing of research and experimental expenses, and interest. Additionally, the bill decouples the district for individual taxes on overtime/tip tax exemptions, the increased standard deduction, and personal interest on car loans. The bill would make the changes permanent pending review by the mayor and Congress. The emergency bill is set to expire without additional action 90 days after it goes into effect.
• Hawaii: Hawaii Senate Bill 1464 was passed on May 29, 2025 and updated Hawaii's IRC conformity date to Dec. 31, 2024, for tax years beginning in 2025 or later. The Hawaii bill effectively ensured that any future tax-impacting components of a reconciliation bill would not have any immediate impact.
• Illinois: Illinois enacted Senate Bill 1911 on December 12,2025. The key provisions include blocking the federal bonus depreciation for a manufacturer's new assets and enabling Illinois to collect taxes on overseas business profits. Illinois will tax 50% of income regardless of whether it was GILTI (global intangible low-taxed income) or NCTI (Net CFC Tested Income).
• Maine: Passed P.L. 2025, c.336, providing discretion to the state tax assessor to make temporary tax adjustments for the current filing season in response to the then anticipated federal tax code changes. These measures include decoupling on research and development expenses, accelerated depreciation for production property, the increased standard deduction, bonus depreciation, and several others, while conforming on business interest deductions, research and development expenses for small business, and others. Maine's commissioner for the Department of Administrative and Financial Services subsequently outlined a range of recommendations for conforming and non-conforming tax items, while outlining the challenges of mid-year and retroactive alignment between the Maine and federal tax code.
• Michigan: Passed HB 4961 on October 8, 2025, making December 31, 2024, the static conformity date for most of Michigan's adherence to the IRC. The legislation prevents the expensing or amortization of research and development, continues to disallow federal bonus depreciation, does not allow for the deduction of qualified factor property, freezes small business expensing limits and reduces deductible interest when compared to HR1. On the individual side, Michigan is allowing for the deduction of qualified tips and overtime from Dec. 31, 2025, through Jan. 1, 2029.
• Pennsylvania: Passed Act 45 on Nov 12, 2025,decoupling from several HR1 provisions requiring the addback of research and experimental deductions and amortizing these over five years, conforming to the pre-HR1 status of Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA), and the requirement that qualified production property deductions are added back to income and depreciated over decades.
• Rhode Island: In September, Rhode Island's Division of Taxation issued an advisory notice,decoupling from HR1's domestic research and experimental (R&E) expenditures, business interest deduction, and other deductions with carve outs to allow small businesses to accelerate expensing for some previous years. Rhode Island also stipulated numerous below-the-line items that they will not adopt including no tax on overtime, car loan interest, and the SALT deduction cap increase.
• Vermont: Passed H493 in May 2025, changing the state's conformity date to April 1, 2025, and applies it retroactively to Jan. 1, 2025. It conforms to estate and gift tax laws in effect on Dec 31, 2024.
• Virginia: Passed passed HB1600 in May 2025, preemptively pausing its conformity, and provided that the state will not conform to any IRC changes passed between Jan 1, 2025, and Jan. 1, 2027, if the amendment increases or decreases revenue by any amount in either the fiscal year passed or it the four years preceding it. It exempts extension to IRC components that Virginia already conforms to.