Business owners across the country spent the last year planning around the One Big Beautiful Bill Act. Full bonus depreciation is back. Tips and overtime got new deductions. The SALT cap jumped. Those changes are real on your federal return. Whether they reach your state return is an entirely separate question, and in many states the answer is no.

State conformity is the mechanism that determines this, and it is one of the most under-discussed issues in tax planning. Some states adopt federal law automatically as it changes. Others freeze the Internal Revenue Code at a fixed date and decide, provision by provision, whether to follow. A handful decouple from specific provisions permanently regardless of conformity date. If your 2026 projections were built on federal numbers alone, you may have modeled half the picture.

The Law Office of Pietro Canestrelli, A.P.C. advises businesses and high-income individuals on federal and multistate tax planning from offices in Temecula and San Diego, with clients throughout California and across the United States. This article explains how conformity works, which OBBBA provisions most commonly diverge at the state level, and where the planning opportunities remain. To have your position modeled in every state where you file, schedule a consultation with our tax attorneys.

How State Conformity Works

Three models exist, and knowing which applies to you is the starting point for any planning conversation.

• Rolling conformity. The state adopts the current Internal Revenue Code as amended. Federal changes flow through automatically unless the legislature acts to decouple. Most states use this model.
• Static or fixed-date conformity. The state adopts the Code as of a specified date. Congress cannot change state tax law by amending federal law after that date — the legislature must affirmatively update the conformity date.
• Selective conformity. The state adopts only enumerated federal provisions, building its own tax base largely independently.

California is the clearest example of static conformity in practice. Under Revenue and Taxation Code Section 17024.5, the state incorporates the Code as of a specified date. SB 711, signed in October 2025, advanced that date to January 1, 2025 — landing just short of OBBBA and specifically excluding it. Several other fixed-date states face the same lag while their legislatures decide whether to catch up.

The practical result in any non-conforming state is an adjustment schedule reconciling your federal return to the state’s version of taxable income. When federal law moves aggressively and a state stays put, that schedule gets long, and the risk of a mismatch that draws a state notice goes up.

The Provisions Where Divergence Is Most Common

1. Bonus depreciation — the largest and most widespread gap

OBBBA permanently restored 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Bonus depreciation is also the single most commonly decoupled provision in the country. A substantial number of states disallow it in whole or in part, requiring an add-back of the federal bonus amount and recovery over standard MACRS lives instead.

California has never conformed to Section 168(k) at any percentage, and it caps Section 179 expensing at $25,000 with a $200,000 investment phaseout — far below the federal limit. Several other states impose their own reduced 179 caps or partial bonus add-backs with multi-year recovery of the difference.

For a contractor buying $600,000 of equipment, this produces a full federal deduction against a state deduction stretched across years. The first-year cash difference is substantial, and it is the most common surprise we see in multistate planning. Our page on the Section 179 deduction covers the federal expensing rules that interact with these limits.

2. No tax on tips and no tax on overtime

OBBBA created above-the-line deductions for qualified tips (capped at $25,000) and qualified overtime (capped at $12,500 single, $25,000 joint), both phasing out above $150,000 of modified AGI and both expiring after 2028. Final regulations under Section 224 published in April 2026 defined qualifying occupations.

Whether your state follows depends entirely on its conformity posture. California does not — tips and overtime remain fully taxable on the state return. Employers in hospitality, healthcare, and construction face two consequences. First, employees who read headlines about tax-free tips will be confused when state withholding does not change. Second, beginning with the 2026 tax year, employers must separately report qualified tips and overtime on Form W-2 using new Box 12 codes, which means payroll systems need configuration now for W-2s issued in early 2027. That reporting obligation is federal and applies regardless of your state’s position.

3. Qualified small business stock

Section 1202 lets qualifying founders and early investors exclude a large portion of gain on the sale of qualified small business stock. Not every state follows. California does not conform to Section 1202 at all, so gain excluded federally is fully taxable at rates reaching 13.3 percent. Other states conform fully, and some fall in between.

For founders approaching an exit, this is not a footnote. It is often the largest single line on the state return in the year of sale, and it drives serious conversations about timing, residency, and structure well before a term sheet exists. Our page on capital gains taxation in the United States covers the federal framework.

4. The SALT cap and pass-through entity elections

The federal SALT deduction cap rose to $40,000 for 2025 and $40,400 for 2026, indexed one percent annually through 2029, with a phasedown of 30 percent of modified AGI above roughly $505,000 and a $10,000 floor. It reverts to $10,000 in 2030.

More than thirty states now offer a pass-through entity elective tax as a workaround, letting the entity pay state tax deductibly at the federal level. California’s election, extended through 2030 by SB 132, runs at a flat 9.3 percent, and for 2026 forward a missed June 15 prepayment reduces the owner’s credit by 12.5 percent of the shortfall rather than voiding the election. Whether any state’s election still pays depends on where your income sits relative to the higher federal cap and its phasedown — the answer changed for many taxpayers this year.

5. Net operating losses

State NOL rules frequently depart from federal treatment through suspensions, deduction caps, and different carryforward periods. California continues to suspend NOL deductions for taxpayers with net business income of $1 million or more through the 2026 tax year, with carryover periods extended in compensation. A business with a genuine federal loss carryforward may still owe state tax on income the federal system treats as offset.

What This Means for Your Planning

The strategic point is not that any particular state is stingy. It is that a plan optimized for one system can be actively harmful in the other, and most planning conversations still start federally and stop there.

• Fixed asset timing. Accelerating purchases for federal bonus depreciation delivers no benefit in a decoupled state. If state liability is your binding constraint, the timing calculus changes.
• Entity selection. The interaction of a PTE election, the QBI deduction, and state conformity affects whether an S corporation still beats an LLC for your facts.
• Compensation planning. Overtime-heavy payrolls now carry a federal-state reporting mismatch requiring employee communication, not just payroll configuration.
• Multistate operations. If you file in several states, you may be applying three or four different depreciation regimes to the same asset. Apportionment magnifies every conformity difference.
• Exit planning. QSBS non-conformity should enter the conversation years before a sale.

The Audit Risk Nobody Talks About

Conformity adjustment errors are among the cleanest assessments a state revenue agency can make. States receive federal return data, compare it against the state filing, and identify missing add-backs computationally. Depreciation add-backs in particular follow a predictable pattern across years, which makes an inconsistency easy to flag.

These typically start as notices rather than field audits, but an unanswered notice becomes an assessment, and an assessment becomes collection. In California, our Franchise Tax Board representation practice handles the response; we represent clients before revenue departments in other states as well, and before the Office of Tax Appeals when a California matter proceeds to appeal.

Frequently Asked Questions

Do states conform to the One Big Beautiful Bill Act?

It depends on the state. Rolling conformity states generally adopt federal changes automatically unless they decouple. Fixed-date states follow only after the legislature updates the conformity date. California, for example, advanced its conformity date to January 1, 2025 while specifically excluding OBBBA.

Are tips and overtime taxable at the state level in 2026?

In non-conforming states, yes. The federal deductions for qualified tips and qualified overtime reduce federal taxable income only. California does not conform, so both remain fully taxable there and state withholding is unaffected.

Which states disallow bonus depreciation?

A substantial number decouple in whole or in part, requiring an add-back and standard recovery. California disallows it entirely and has never conformed to Section 168(k). Because state legislatures revisit this regularly, verify current treatment in each state where you file before relying on a prior year’s approach.

Is a pass-through entity tax election still worth making?

Often, but it depends on your income level and state. The higher federal SALT cap and its phasedown above roughly $505,000 of modified AGI changed the benefit calculation for many taxpayers in 2025 and 2026. The election should be re-modeled rather than renewed by habit.

Does my state tax QSBS gain excluded federally under Section 1202?

Some do. California does not conform to Section 1202, so gain excluded on the federal return is fully taxable there at rates up to 13.3 percent. Other states conform. This deserves attention long before a liquidity event.

What triggers a state notice on conformity adjustments?

State agencies compare federal return data against your state filing. Missing depreciation add-backs, inconsistent adjustments across years, and unreconciled adjustment schedules are among the most computationally detectable discrepancies, which is why they generate notices reliably.

Your Next Step

Federal-to-state divergence is not a filing-season problem. It is a planning problem that has to be solved before December 31, and it now touches nearly every business decision — equipment purchases, payroll, entity structure, and exit timing.

Pietro Canestrelli holds an LL.M. in Taxation and has built his practice around federal and state tax controversy and planning. The firm serves clients throughout Southern California and nationwide, including businesses filing in multiple states. Contact The Law Office of Pietro Canestrelli to have your 2026 plan modeled in every system that applies to you, not just one. Learn more about our business tax and business law services and our work as corporate tax counsel.