Virginia Income Tax Conformity Update

SC&H’s Key Takeaways 

  • While Virginia is conforming to most of the changes to the Internal Revenue Code as of December 31, 2020there are some notable exceptions 
  • PPP loan forgiveness income will not be taxable in Virginia
  • PPP related expenses, however, will only be deductible up to $100,000
  • Various other taxpayer favorable changes in the CARES Act and Consolidated Appropriations Act of 2021 will not be followed
  • Bonus depreciation and similar issues will remain decoupled in the state

Early in March of 2021, the Virginia General Assembly passed legislation that will go into effect once signed by the Governor. This emergency legislation was developed to provide certainty around the tax treatment of several issues in Virginia and is expected to be signed soon. 

The legislation is timely, as tax preparers and their clients needed to know how to handle several issues that affected 2020 returns, as well as potential opportunities for loss carrybacks. 

Virginia Conformity 

Virginia’s income tax conformity is fixed at a date in time and is updated annually, generally, as federal tax laws are enacted, revoked, and revised. Prior to this legislation, Virginia’s tax rules had conformed through December 31, 2019with some items being decoupled from federal laws such as deprecation.

2020 Tax Provisions – Where Virginia Will Conform 

  • Covid-19 retirement plan distributions 
  • Charitable tax deductions for non-itemizers and enhanced limitations for itemizers 
  • Employer payment of student loan income exclusion
  • Full deduction for certain business meals incurred after December 31, 2020 
  • Exclusion of educational payments from income 
  • Exclusion of PPP loan forgiveness from taxation 

2020 Tax Provisions – Where Virginia Will Not Conform 

  • Net operating loss (NOL) limitations and carryback allowance under the CARES Act
  • Business interest deduction limitation relaxation 
  • Deductibility of expenses funded by PPP loan and economic injury disaster loans (EIDL) fund proceedsexpenses over $100,000 are not deductible 
  • Deductibility of expenses funded by Rebuild Virginia grant proceedsthis falls under the same $100,000 maximum noted above 
  • Excess business loss limitation relaxation  

If you have any questions or would like to speak with one of our team members, please do not hesitate toreach out to our SC&H tax teamWe are here to help!