Virginia Updates Federal Conformity for 2021 Tax Filing Season

February 2022

BY

Elil ArasuManaging Director, Greater Washington D.C. State and Local Tax Practice Leader

Scott SmithManaging Director, National State & Local Tax Services Practice Leader

On February 23, 2022, Virginia enacted emergency legislation (H.B. 971) to advance its Internal Revenue Code (IRC) conformity date to December 31, 2021, to amend Virginia’s treatment of Paycheck Protection Program (PPP) loan expense deductions and to continue to decouple Virginia from various federal provisions, effective immediately. On that same day, the Virginia Department of Taxation issued Tax Bulletin 22-1 to provide taxpayers with guidance on reconciling this legislation with their 2021 income tax returns. The following addresses these developments and their potential impacts to Virginia taxpayers.
 

Virginia’s Fixed-Date IRC Conformity

As a fixed-date conformity state, Virginia generally advances conformity to the IRC each year via an emergency bill. An emergency bill ensures immediate enactment, whereas regular bills have an enactment date of July 1. For both corporate and personal income taxes, H.B. 971 delays Virginia’s IRC conformity date from December 31, 2020, to December 31, 2021.
 
With a December 31, 2021, conformity date, Virginia now includes general conformity to the American Rescue Plan Act of 2021 (ARPA), including the Restaurant Revitalization Fund.
 

Favorable Amendment to Treatment of PPP Loans

Last year in Virginia's conformity update law, while it adopted the federal treatment to exclude forgiven PPP loans from income, Virginia specifically decoupled from the federal deduction of related PPP loan expenses. Instead, Virginia created a state-level deduction of up to $100,000 for business expenses funded by forgiven PPP loan proceeds that were paid or incurred during tax year 2020, and a subtraction of up to $100,000 for Rebuild Virginia grant recipients. However, the deduction of up to $100,000 only applied for taxable years beginning on and after January 1, 2020, but before January 1, 2021. Therefore, fiscal year taxpayers whose tax year began before January 1, 2021, were precluded from taking the deduction of up to $100,000.
 
H.B. 971 retroactively amends Virginia’s deduction of up to $100,000 “for taxable years beginning before January 1, 2021.” As a result, all fiscal year taxpayers whose tax year began before January 1, 2021, and who incurred business expenses funded by forgiven PPP loans, now qualify retroactively for the deduction and may need to amend prior returns to take advantage.
 
For tax years beginning on or after January 1, 2021, Virginia now fully conforms to the federal treatment by allowing 100% of the related expense deduction of forgiven PPP loans. Therefore, no adjustment will generally be required for taxpayers that have business expenses funded with forgiven PPP loan proceeds, Economic Injury Disaster Loan (EIDL) program funding, and Restaurant Revitalization grants during tax year 2021.
 

Other Federal Provisions Virginia Continues to Decouple From in Taxable Year 2021

Although Virginia updated its general IRC conformity to December 31, 2021, it will continue to decouple from notable federal provisions, listed below.
  •  The special bonus depreciation allowance for certain property provided for under IRC Sections 168(k), 168(l), 168(m), 1400L and 1400N.
  • The carry-back of certain net operating losses generated in tax years 2008 and 2009 for five years under IRC Section 172(b)(1)(H).
  • The original issue discount on applicable high yield discount obligations under IRC Section 163(e)(5)(F).
  • The deferral of certain cancellation-of-debt income under IRC Section 108(i).
  • The suspension of the overall limitation on itemized deductions under IRC Section 68(f) for taxable years beginning on and after January 1, 2019.
  • Expenses related to the calculation of medical care and federal adjusted gross income.
  • Certain provisions in the Coronavirus Aid, Relief, and Economic Security Act related to net operating loss limitations and carry-backs, loss limitations applicable to taxpayers other than corporations and limitations on business interest.
  • Certain provisions related to the Consolidated Appropriations Act related to deductions, tax attributes and basis increases for certain loan forgiveness and other business financial assistance.