State conformity and cost segregation

Federal rules, state choices

Most state income tax returns start from federal taxable income, then add and subtract adjustments wherever the state has chosen a different rule. Depreciation is one of the most common areas of difference.

States also differ in how they adopt the Internal Revenue Code in the first place. Some follow the Code as it stands from year to year. Some adopt it as of a fixed date and update that date by legislation. Some adopt it broadly but decouple from specific provisions. A change in federal law does not automatically change a state's rules, so the federal result of a study and the state result can differ, sometimes for years.

Bonus depreciation is where states most often depart

Many states decouple from §168(k) bonus depreciation. In those states, the federal bonus deduction is added back on the state return, and the property is depreciated under a separate state schedule instead. The federal benefit of the study is unchanged; the state benefit arrives more slowly.

The reclassification itself usually still matters at the state level. Even where bonus depreciation is disallowed, moving a component out of a 39-year or 27.5-year life and into a 5-, 7- or 15-year life generally accelerates the state deduction as well, unless the state also departs from the federal recovery periods. Your CPA can confirm how your state treats both.

The federal position is now settled: 100% bonus depreciation is back and permanent for qualifying property acquired after January 19, 2025. Whether and how your state follows it is a separate question. Bonus depreciation advice.

Qualified production property is new territory

Qualified production property under §168(n) is newer still, and states are deciding one by one whether to follow it. Because QPP can allow the production portion of a nonresidential building to be deducted in the year it is placed in service, the gap between the federal and state treatment can be significant for a manufacturer. Your CPA should confirm your state's position for the year the property is placed in service. Qualified production property studies.

Other differences to watch

• Expensing limits. Some states set their own limits for §179 expensing rather than following the federal amounts.
• Catch-up adjustments. How a §481(a) adjustment from a look-back study on Form 3115 flows through to the state return depends on the state's conformity rules for the year of change.
• Pass-through and entity-level taxes. Elections at the entity level can change where and how a depreciation deduction is used, and they vary by state.
• Multistate owners. An owner with property in several states may face several sets of rules at once, one for each state that taxes the income.

What the study gives your CPA

Our study classifies every component into its federal recovery class, with the component-level detail behind each classification. That same detail is what a CPA needs to keep a separate state depreciation schedule, apply a state add-back, or adjust for a state that does not follow a federal provision. We work directly with your CPA, and the state return and its adjustments are theirs to prepare.

That is also why the study should be engineered rather than modeled. A state add-back or a separate state schedule is only as accurate as the component list behind it. When every component carries its own cost, recovery class and placed-in-service date, your CPA can rebuild the state picture from the same record the federal return relies on, rather than estimating it a second time.

For owners with property in several states, our portfolio and fund programs keep the deliverables consistent across properties with one coordinator. For existing books that may already carry state and federal differences, a fixed asset and depreciation schedule review, coordinated with your CPA, is a good place to start.

Look-back studies and the state return

A look-back study claims missed depreciation as a §481(a) adjustment on Form 3115 in the current year. At the federal level that catch-up is taken without amending prior returns. At the state level, how the adjustment flows through depends on whether the state followed the relevant federal rules in the years being caught up and in the year of change. Your CPA files and signs Form 3115 and handles the state treatment; we prepare the narrative, the form, the calculations and the supporting schedules, and work directly with your CPA throughout.

Questions to ask your CPA

• Does our state follow federal bonus depreciation for the year this property is placed in service, and if not, how is the add-back recovered?
• Does our state follow the federal recovery periods the study applies?
• For a production facility, does our state follow §168(n) for this year?
• On a look-back study, how does the §481(a) adjustment flow to the state return?
• If we own property in more than one state, which state rules apply to which deductions?

None of these questions changes the engineering. The components are the same and the federal classes are the same. What changes is how quickly each state lets you recover the cost, which is why the component detail behind the study matters as much as the federal total.