What Is Internal Revenue Code Conformity?

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DEFINITION

"Internal Revenue Code (IRC) conformity" refers to the degree to which state tax codes conform to the federal tax code.

Definition and Example of Internal Revenue Code Conformity

As separate legal entities, each state has its own tax code. This code is also distinct from the federal tax code. However, most states adopt federal tax provisions—known as "IRC conformity"—at least to some degree. Many adopt specific sections of the federal code while "decoupling" from it in other areas.

In theory, IRC conformity simplifies a state's implementation of its own tax policy—and tax preparation for individuals—by using federal taxable income as a base point. Modifications are made from there to adapt to state policies and revenue needs.

Here's a 2020 example from The Arizona Department of Revenue, which publishes a yearly update on its website as to the state legislature's decisions regarding IRC conformity: 

Each year the Arizona legislature considers whether to amend Arizona Revised Statutes § 43-105 to conform to changes made to the Internal Revenue Code during the prior year. On April 14, 2021, Governor Ducey signed Senate Bill 1752, which conformed to the definition of federal adjusted gross income (federal taxable income, for corporations), including federal changes made during 2020 as well as through the 2021 American Rescue Plan. The bill does not add any new non-conformity additions or subtractions. However, additions and subtractions created for prior non-conformity adjustments for issues such as bonus depreciation are still in place.
The instructions issued with the 2020 Arizona tax returns are correct. For a complete list of the additions and subtractions that apply to 2020, see the 2020 instructions for Arizona Form 140 (individuals) or Arizona Form 120 (corporations). The statutory additions can be found in A.R.S. § 43-1021 (A.R.S. § 43-1121 for corporations) and the subtractions in A.R.S. § 43-1022 (A.R.S. § 43-1122 for corporations).

Your own state probably publishes similar updates. Check your state tax agency's website for information about IRC conformity and how it might impact your taxes in any given year.

How IRC Conformity Works

Because IRS tax codes change annually, state tax conformity statutes are typically updated each year as well. Normally, this is a fairly basic exercise to keep state and federal tax provisions as closely aligned as possible.

When there are major changes to the federal tax code, states can fall behind in IRC conformity. Several states are still catching up in adopting Covid-19 relief and other changes that went into effect in early 2020 under the CARES act.

Rolling Date Conformity

Many states have their conformity set to automatically update whenever the federal IRC codes change. This is called a "rolling" or "moving" date conformity. If the state does not want to conform to a new federal law, it must pass specific legislation to decouple from it. Massachusetts is an example of a “rolling date” conformity state.

Fixed Date or Static Conformity

In the case of a "fixed" or "static" conformity, a state conforms to the federal tax code as it existed on a certain date. If a state's conformity date was January 1, 2016, for instance, the state does not automatically incorporate changes to federal tax law that occur after that date. It must specifically update its IRC conformity to the new date. New Hampshire is an example of a “fixed date” conformity state.

The most commonly omitted federal tax laws include those addressing bonus depreciation, expensing of depreciable business assets (IRC Section 179), accelerated depreciation of business assets (section 168(k)), and the qualified business income deduction (IRC section 199).

What It Means for Individual Taxpayers

The degree to which a given state conforms to federal tax rules impacts state tax compliance for both businesses and individuals. Whenever a new federal tax law goes into effect, it can affect your state tax return, depending on whether your state conforms to that particular law. Your tax liability on both your federal return and your state return could be affected if your state conforms to the new law.

Your state income tax return will likely include more calculations to reconcile the differences between your federal taxable income and your state taxable income if your state does not conform to IRC changes.

Key Takeaways

  • IRC conformity is the degree to which a state's tax code matches the federal tax code.
  • Some states adopt the entire federal tax code, while others adopt only portions of it. Conformity can be set to occur automatically, or manually when the federal laws change.
  • To be compliant with the most recent tax regulations, check with a tax professional to make sure you're following current federal and state codes when you file.

Article Sources

  1. Tax Foundation. "State Conformity to Federal Pandemic-Related Tax Provisions in CARES and ARPA." Accessed Jan. 12, 2022.

  2. Arizona Department of Revenue. "Conformity to IRC." Accessed Jan. 12, 2022.

  3. Commonwealth of Massachusetts. "General Laws, Part I, Title IX, Chapter 63." Accessed Jan. 12, 2022.

  4. Deloitte. "State Conformity to Federal Provisions: Exploring the Variances," Page 146. Accessed Jan. 12, 2022.

  5. New Hampshire General Courts. "Title V Taxation, Chapter 77-A, Business Profits Tax, Section 77-A:1." Accessed Jan. 12, 2022.

  6. Deloitte. "State Conformity to Federal Provisions: Exploring the Variances," Pages 146-147. Accessed Jan. 12, 2022.

  7. Tax Foundation. "Federal Tax Reform: The Impact on States." Accessed Jan. 12, 2022.