State Section 174 conformity determines whether your business can deduct domestic research costs on your state return the same way you now deduct them federally, and the answer changes from one state to the next. New federal Section 174A restored immediate expensing of domestic research and experimental costs for tax years beginning after December 31, 2024, but states set their own rules. Some follow the federal changes automatically, some are frozen at an earlier version of the tax code, and a handful have decoupled outright. For companies claiming the research credit across multiple states, that patchwork shapes taxable income, cash flow, and filing decisions.
Why State Section 174 Conformity Matters to Credit Filers
Your federal deduction and your state deduction do not have to match. A company operating in a rolling conformity state may expense its domestic research costs immediately for both federal and state purposes. The same company filing in a state that still ties to the pre-OBBBA version of Section 174 could be required to capitalize and amortize those costs at the state level, adding back part of the deduction it just took federally. The result is a higher state tax base than many filers expect, along with return adjustments that carry forward for years. Knowing where each state stands is the difference between an accurate provision and a surprise on the state return.
How States Are Handling Section 174A
States generally fall into three categories when it comes to adopting new federal provisions, and each treats Section 174A differently. The Tax Foundation’s analysis of the OBBBA’s state tax implications maps how each state handles the research expensing change, and it shows how much the treatment diverges from one state to the next.
Rolling Conformity
Rolling conformity states adopt the federal tax code as it changes, in real time, unless the legislature passes a law to decouple from a specific provision. These states generally pick up Section 174A automatically, so domestic research costs are deductible at the state level the same year they are deductible federally. Colorado, Connecticut, Illinois, Massachusetts, and New York conform on a rolling basis for corporate income tax, though several rolling states have carved out exceptions to individual OBBBA provisions.
Fixed-Date Conformity
Fixed-date, or static, conformity states tie to the tax code as it read on a specific date and updates only when lawmakers pass new conformity legislation. The date is what matters. A state anchored to the pre-July 2025 version of the code generally does not incorporate Section 174A yet, so domestic research costs can still face amortization at the state level even when they are immediately deductible federally. Several fixed-date states have not yet moved to a post-OBBBA version, though many revisit their conformity dates each legislative session, so the specifics shift from year to year.
One wrinkle is worth watching. A handful of fixed-date states already allow immediate domestic R&E expensing under their own rules. California, for one, reaches the same outcome as Section 174A because its conformity date predates the 2017 Tax Cuts and Jobs Act (TCJA), the law that first required research costs to be amortized, so the state never adopted that amortization rule and still allows immediate expensing.
Decoupling
Some states have chosen not to follow Section 174A even where they otherwise track federal law. Michigan, for instance, decoupled from the domestic research expensing option while continuing to follow earlier versions of related provisions. Decoupling can mean an addback of the research deduction on the state return, which raises state taxable income relative to the federal result.
How Section 174A Connects to the R&D Credit
The deduction and the credit are separate benefits, but they interact. Under Section 280C, a business claiming the full research credit generally reduces its Section 174A deduction by the credit amount, or it can elect a reduced credit and keep the larger deduction. The IRS procedural guidance in Rev. Proc. 2025-28 spells out the elections and accounting method changes that put Section 174A into effect. That choice plays out at the state level, too. A state that conforms to Section 174A but computes its own credit differently can produce a mismatch between your federal and state positions. Getting the deduction, the credit, and the Section 280C election to work together across jurisdictions takes coordinated modeling rather than separate calculations done in isolation.
Planning Across Multiple States
Multistate filers benefit from mapping conformity before filing rather than reacting to it afterward. Start by identifying the states where you have research activity and filing obligations, then confirm each one’s current treatment of Section 174A, since rolling states can decouple and fixed-date states can update their conformity year to year. Because state rules and conformity dates continue to shift, an annual R&D credit study keeps your documentation and calculations aligned with where each state actually stands. Well-supported documentation that connects qualifying activities to the credit claimed makes state adjustments far easier to prepare and explain.
How Navatus Supports Federal and State R&D Credit Studies
Research credit work gets complicated the moment a company crosses state lines. At Navatus, we identify qualifying activities, gather the technical and financial details, and prepare federal and state R&D credit studies that reflect how each jurisdiction treats Section 174A and the research credit. We coordinate with your CPA firm, tax advisor, or internal team so the deduction, the credit, and the state adjustments line up in one clear picture. Our documentation is designed to substantiate the credit claimed and to hold up if a state or the IRS takes a closer look.
Schedule a consultation with our team to review your federal and state R&D credit position.