Under recent legislation enacted by the 2022 General Assembly, Virginia’s conformity date to the Internal Revenue Code will advance from December 31, 2020, to December 31, 2021. As a result, Virginia will be able to conform to the American Rescue Plan Act of 2021 and supply benefits to recipients of some Covid-related programs during the 2019 and 2021 tax years. It’s important to note that recipients of the Economic Injury Disaster Loan (EIDL) for tax years 2019 and 2020 will not be affected.
American Rescue Plan Act Provisions That Have an Impact on 2021 Tax Returns
ARPA was signed into law on March 31, 2021, to provide emergency economic assistance to businesses and individuals affected by COVID-19.
- Enhancing the Child and Dependent Care Tax Credit for Taxable Year 2021
- Increasing contributions to Child and Dependent Care Flexible Spending Accounts
- Earned Income Tax Credit eligibility expansion
- Exclusion of student loan forgiveness from gross income tax for 2021 through 2025
- Restaurant Revitalization and Targeted Economic Injury Disaster Loan Advance grant program assistance
Impact of Covid Related Business Assistance Programs on 2021 and 2019 Tax Returns
In 2021, the General Assembly enacted legislation that generally deconformed from the federal deductibility of business expenses funded by forgiven Paycheck Protection Program (“PPP”) loan proceeds and EIDL program funding. Virginia’s 2022 conformity legislation modified how Virginia treats certain COVID-19 business assistance programs for income tax purposes for Taxable Years 2021 and 2019.
- Taxable Year 2021
- For taxpayers that have business expenses funded by forgiven PPP loan proceeds, EIDL program funding, and Restaurant Revitalization grants, there will be no adjustment required.
- Taxable Year 2020
- No changes to how Virginia treated PPP loan forgiveness and the deductibility of related expenses. Therefore, there is no relief for taxpayers whose loans were forgiven in 2020.
- Taxable Year 2019
- Due to the extension of business expenses funded by forgiven PPP loan proceeds and Rebuild Virginia grant recipients, fiscal year filers will benefit from the deduction and subtraction for such expenses and income received during 2020. For more information, read Tax Bulletin 21-4. There is a chance taxpayers would need to file amended Taxable Year 2019 Virginia returns to report changes.
Existing Conformity Exceptions – Tax Year 2021
Virginia will continue to deconform from the following provisions of federal tax law:
- Bonus depreciation allowed for certain assets under federal income taxation
- Five-year carry back of certain net operating losses (NOLs)
- Tax exclusions related to cancellation of debt income
- Tax deductions related to the application of the applicable high yield debt obligation rules
- Suspension of overall federal limitation on itemized deductions
- Reduction of medical expense deduction floor
Taxpayers who have already filed a 2021 Virginia income tax return and need to make an adjustment should consult the instructions on the Department’s website for further information about filing an amended return.
As always, if you have any questions or would like to speak with one of our team members, please do not hesitate to reach out to the SC&H tax team.