Virginia: Update to IRC and PPP Loan Conformity

Virginia Governor Ralph Northam on March 15, 2021 signed into law a provision that advances Virginia’s Internal Revenue Code conformity date to December 31, 2020 and addresses Virginia’s conformity with various state and federal relief programs. As a result, the Virginia Department of Taxation released Tax Bulletin 21-4 to provide information on this development.

 

IRC Conformity Legislation Update

Virginia House Bill 1935/Senate Bill 1146 advances the state’s IRC conformity date from December 31, 2019 to December 31, 2020. This change permits Virginia to generally conform to the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act (CAA).  Virginia specifically decouples from the following three CARES Act provisions of the business tax rules:

• For tax years 2018, 2019 and 2020, the temporary repeal of NOL limitations under IRC Section 172;
• For tax years 2018, 2019 and 2020, the temporary repeal of the excess business losses limitation under IRC Section 461(l); and
• For tax years 2019 and 2020, the increase to the business interest deduction limit under IRC Section 163(j).

Virginia effectively follows the Tax Cuts and Jobs Act (TCJA) version of Sections 172, 461(l) and 163(j) (and Virginia already allowed an additional 20% limitation). For Virginia tax purposes, taxpayers that utilize any of these three federal rules must keep proper records for tax years 2018, 2019 and 2020. If a taxpayer is allowed a larger deduction for Virginia purposes than for federal purposes in any of those three tax years, then a subtraction must be made in that year equal to the difference between the deduction allowed for Virginia purposes and the deduction allowed for federal purposes. Conversely, if a taxpayer is allowed a smaller deduction for Virginia purposes than for federal purposes in those same tax years, then an addition in that year equal to the difference between the Virginia deduction and the federal deduction must be made.

 

PPP Loans and Expense Conformity

 As a result of Virginia advancing its IRC conformity date to December 31, 2020, the state now conforms to the CARES Act Paycheck Protection Program (PPP) provisions, including the PPP loan forgiveness exclusion from gross income. However, under H.B. 1935, for tax years beginning on and after January 1, 2020, but before January 1, 2021, Virginia decouples from the federal deduction for related expenses paid with PPP loans. The new law now specifically allows a separate Virginia deduction of up to $100,000 for business expenses paid for with forgiven PPP loans.

A taxpayer incurring more than $100,000 of covered expenses paid with a PPP loan during tax year 2020 must add back the federal deduction, and is then allowed a deduction for those PPP expenses up to $100,000 on the Virginia 2020 tax return