What is IRC Conformity?
IRC Conformity Links States With Federal Tax Law
IRC stands for the Internal Revenue Code, and IRC conformity refers to the degree to which state tax codes conform to this federal tax code. Most states conform in some respects, but they "decouple" from other federal provisions, leaving them out of their own tax codes.
The most commonly omitted federal tax laws include those addressing bonus depreciation, expensing of depreciable business assets (IRC Section 179), and the domestic production activities deduction (IRC section 199).
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.
How States Conform to the Federal Tax Code
States conform to the federal tax code in one of two ways:
- 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, it must 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. If a state's conformity date was January 1, 2016, the state does not automatically incorporate changes to 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. 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.
The Arizona Department of Revenue publishes a yearly update on its website as to the state legislature's decisions regarding IRC conformity. Here's an example from 2014:
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 09, 2015, the Governor signed Senate Bill 1188 which conformed to the definition of federal adjusted gross income (federal taxable income for corporations) including federal changes made during 2014 and did 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 2014 Arizona tax returns are correct. For a complete list of the additions and subtractions that apply to 2014 see the 2014 instructions for Arizona Form 140 (individuals) or Arizona Form 120 (corporations). The statutory additions are in A.R.S. § 43-1021 (A.R.S. § 43-1121 for corporations) and the subtractions are in A.R.S. § 43-1022 (A.R.S. § 43-1122 for corporations).
Armed with this information, a taxpayer can seek professional help in preparing his return, or at the very least get up-to-date advice from a professional before attempting to prepare his own return. Most states provide similar updates.
NOTE: State and federal tax laws change frequently and the above information may not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not tax advice and is not a substitute for tax advice.