Recent federal tax legislation has prompted varied responses at the state level, adding complexity for businesses operating across multiple jurisdictions. Differences in approaches to conformity and enforcement priorities are creating new compliance considerations as companies prepare for 2026.
Federal Changes and Divergent State Responses
A central issue is state conformity to federal tax law changes. Because most states must maintain balanced budgets, federal legislation that reduces taxable income can directly affect state revenue. In response, some states have enacted legislation to decouple from specific federal provisions, while others continue to evaluate conformity positions or issue administrative guidance.
For businesses, this can mean differences between federal taxable income and state tax bases, even when starting from the same federal return. Those differences require separate tracking and may increase taxpayers’ compliance burdens.
Rolling vs. Static Conformity
One of the primary drivers of variation is whether a state employs rolling or static conformity. In rolling conformity states, changes to the Internal Revenue Code (IRC) are automatically adopted unless the legislature affirmatively decouples from a provision.
Static conformity states adopt the IRC as of a fixed date and must enact legislation to incorporate later federal changes. The result for multistate taxpayers is often a patchwork of effective dates and required adjustments. In some cases, legislative timing creates mid-year changes that affect estimated payments or previously filed returns.
Focus Areas: IRC Sections 174 and 163(j)
Two provisions continue to draw attention at the state level.
Section 174, under the Tax Cuts and Jobs Act of 2017, required capitalization and amortization of research and experimental expenditures. New Section 174A under P.L. 119-21, also called the “One Big Beautiful Bill Act” of 2025, reinstates immediate expensing of domestic research and experimental expenditures. Both capitalization and expensing can materially alter a company’s taxable income. Some states have enacted or proposed decoupling legislation, while others remain aligned with the new federal treatment.
Section 163(j), which limits the deductibility of business interest expense, presents similar challenges. States adopted earlier versions of the limitation at different times and have responded inconsistently to subsequent federal modifications. That inconsistency can require separate state-level calculations and additional tracking. Multi-state businesses may need to model impacts by jurisdiction rather than relying solely on federal figures.
Timing Considerations and Amended Return Risk
Conformity decisions are not always resolved before filing deadlines. States sometimes enact changes after a tax year has closed or after returns have been filed, which may require amended returns, refund claims or additional payments. Uncertainty around pending legislation can also complicate estimated tax planning and financial reporting.
Public Law 86-272 and Digital Activity
Increased digital activity has raised questions about the scope of Public Law 86-272. The law limits a state’s authority to impose income tax when in-state activity is confined to the solicitation of orders for tangible personal property.
As online operations expand, questions arise regarding whether certain digital activities exceed those protections. Although federal legislation was introduced to address the statute’s application in a digital context, no changes were enacted. Interpretation, therefore, continues to depend largely on state guidance and enforcement practices.
Businesses operating in multiple jurisdictions should periodically reassess nexus conclusions in light of current activities and evolving state positions.
Enforcement Trends and Technology
States continue investing in data analytics and audit technology to identify potential noncompliance. Fiscal pressures may increase scrutiny of multistate taxpayers in certain jurisdictions. At the same time, policy approaches vary: some states are reducing corporate income tax rates, while others are broadening tax bases or pursuing alternative revenue-raising measures. These differences add further complexity to multistate compliance planning.
Practical Considerations for Multi-state Businesses
In this environment, businesses may consider:
- Reviewing current conformity positions and required state adjustments
- Modeling the impact of Sections 174, 174A and 163(j) in key jurisdictions
- Reassessing nexus and sourcing positions, including digital activity
- Monitoring legislative developments affecting estimated payments or filing positions
Early analysis may help reduce administrative burden and minimize exposure as state responses continue to diverge.
Your Guide Forward
As states respond differently to federal changes, multi-state businesses should anticipate continued variation and enforcement focus heading into 2026. Evaluating state-specific impacts in advance can reduce the likelihood of unexpected adjustments.
Cherry Bekaert’s State & Local Tax (SALT) team advises middle-market businesses on state conformity issues, multi-state compliance obligations and audit considerations. To discuss how these developments may affect your organization, contact your advisor or a member of the SALT practice.
