Virginia Finally Updates Its Internal Revenue Code Conformity Date for the 2018 Tax Year

February 2019

Summary

On February 15, Virginia Governor Ralph Northam (D) signed House Bill 2529. The bill includes an emergency clause that updates the Commonwealth’s conformity to the Internal Revenue Code (IRC) in effect on February 9, 2018, to the IRC “as [it] existed on” December 31, 2018. As emergency legislation, the bill will have retroactive application to January 1, 2018, and is effective for the 2018 tax year. With the passage of H.B. 2529, Virginia generally now conforms to most, but not all, of the 2017 federal tax reform law known as the Tax Cuts and Job Act (TCJA) amendments, for tax years beginning on or after January 1, 2018, with certain exceptions.
 

Details

The advancement of Virginia’s IRC conformity date brings the Commonwealth into general conformity with the IRC and, more importantly, with the TJCA. During the 2018 legislative session, changes due to the TCJA were adopted only for the 2017 tax year, leaving Virginia taxpayers in limbo with respect to all of the TCJA amendments that were first effective with the 2018 tax year.

The bill also establishes the Taxpayer Relief Fund. For fiscal years 2019 through 2025, any additional revenues attributable to the TCJA, beyond those necessary to fund the provisions of the bill, would accrue to the fund. The bill directs the General Assembly to appropriate money from the fund to enact permanent or temporary tax reform measures.
 

Business Tax Considerations

  • The income tax subtraction for “any amount included . . . by operation of section 951” is expanded for tax years beginning on or after January 1, 2018, to include Global Intangible Low-Taxed Income (GILTI) included in federal taxable income under Section 951A.  In Tax Bulletin 19-1, also issued on February 15, 2019, the Department of Taxation interprets the subtraction to equal the “net inclusion of GILTI” (i.e., GILTI income less the deduction provided by Section 250(a)(1)(B).  Although this is not how the new statute reads, it appears that the Department intends to limit the Virginia Section 951A subtraction to a “net GILTI amount.”
  • Virginia effectively will conform to the new business interest deduction limitation of Section 163(j).  However, for taxable years beginning on and after January 1, 2018, 20 percent of the net business interest expense disallowed as a deduction pursuant to Section 163(j) will be allowed as a Virginia subtraction modification.    
  • Because of Virginia’s federal taxable income starting point (after net operating losses (NOLs) and special deductions), Virginia will effectively conform to the new federal NOL limitation of 80 percent of taxable income, general repeal of the ability to carry back losses, and the ability to indefinitely carry forward losses.
  • In conformity with the TCJA, the bill repeals Virginia’s Section 199 domestic production activities deduction.
  • The bill continues Virginia’s decoupling with respect to various federal special depreciation deductions, including Section 168(k), and now 100 percent federal bonus depreciation.
 

Individual Income Tax Considerations

  • The bill increases the standard deduction to $4,500 for single individuals and $9,000 for married persons filing jointly for taxable years 2019 through 2025. For 2018, the standard deduction is $3,000 for single individuals and $6,000 for married couples filing jointly.
  • Individuals or married persons filing jointly a 2018 final return prior to July 1, 2019, for taxable years beginning on or after January 1, 2018, but before January 1, 2019, shall be granted a refund of up to $110 and $220, respectively from the Taxpayer Relief Fund. The refund is subject to funding and certification by the Governor before the final amounts are determined and will be issued between October 1, 2019, and October 15, 2019.
  • Pursuant to the revised statute, for taxable years beginning on and after January 1, 2019, Virginia decouples from the suspension of the overall limitation on itemized deductions.
For taxable years beginning on and after January 1, 2019, the actual amount of real and personal property taxes imposed by the Commonwealth or any other taxing jurisdiction not otherwise deducted solely on account of the dollar limitation imposed on individual deductions by Section 164(b)(6)(B) of the Internal Revenue Code are permitted as a deduction.
 

BDO Insights

  • With the passage of H.B. 2529, the Virginia Department of Taxation announced it will now begin processing 2018 tax returns. Several thousands of 2018 tax returns that have already been filed were not being processed until now. Updated forms and software updates will also be available for Virginia taxpayers.
  • Although the Department’s position in Tax Bulletin 19-1 with respect to the Virginia corporate income tax GILTI subtraction may be subject to challenge, the bulletin also discusses other Virginia IRC conformity issues.
  • Additional guidance from the Department will be issued in the following weeks.
  • Taxpayers affected by Virginia H.B. 2529 should consult with their financial statement auditor and tax advisor to evaluate and determine the potential financial statement implications under ASC 740, including the impact on current and deferred taxes, uncertain tax benefits, and disclosures. Taxpayers who have already filed a 2018 Virginia tax return but need to make an adjustment resulting from the reconciliations under H.B. 2529 are advised to consult the instructions for the appropriate income tax return and the Department’s website for further information about filing an amended return.
 
Contact information:
Visit Virginia Tax or call 804-367-8031 for individual income tax questions or 804-367-8037 for corporate income tax questions.

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