Virginia Tax Conformity Update: What It Means for 2025 Tax Returns

Virginia tax conformity considerations for businesses and individuals

Virginia has officially addressed tax conformity for the 2025 tax year. While the outcome provides some clarity for taxpayers and practitioners, the legislative path and several key policy decisions are worth noting.

Conformity resolved through the “caboose” budget

Instead of introducing a standalone conformity bill, the General Assembly incorporated the conformity language directly into the Commonwealth’s “caboose” budget bills, HB 29 and SB 29. Governor Spanberger signed these measures into law on February 20, 2026.

The “caboose” budget is the General Assembly’s amendment to the current two-year state budget. It serves as a must-pass vehicle typically used to make technical and policy adjustments before the next full budget cycle. Because it moves as part of the broader budget process, policy items included in the caboose are often resolved more quickly and with greater political viability than through the standard legislative process.

Importantly, the House and Senate amendments were identical, eliminating the need for a conference committee and allowing for expedited resolution.

Attaching conformity language to the caboose budget was somewhat unprecedented and significantly reduced the opportunity for public input, particularly on tax matters. However, the approach did provide a timely resolution to conformity questions arising from recent federal tax changes under H.R. 1 (also referred to as The One Big Beautiful Bill Act, OBBBA).

Key elements of the final budget language

The final budget language:

• Repeals rolling income tax conformity
• Allows automatic conformity to federal “extenders”
• Makes the pass-through entity tax (PTET) permanent, including the out-of-state credit
• Provides timely resolution to conformity questions related to federal tax code changes in H.R. 1

While many conformity provisions will feel familiar, several highlights will directly impact 2025 tax filings.

Major 2025 conformity considerations

1. Virginia deconforms from federal research and development/experimentation (R&D) expensing

Virginia has deconformed from all R&D expensing provisions under H.R. 1, which is a new decoupling provision. Historically, Virginia had conformed with the federal treatment of R&D costs, notably the ability to immediately deduct R&D costs prior to 2022 and subsequently the requirement to capitalize and amortize from 2022-2024. Immediate deductibility was restored for 2025 by H.R. 1 for federal tax, but Virginia’s decoupling means a new state adjustment will be required for 2025 and beyond, resulting in additional complexity.

For Virginia tax purposes:

• Previously capitalized R&D costs must continue to be amortized.
• New R&D costs incurred in 2025 must also be capitalized and amortized. No immediate expensing.

This will likely require:

• A Virginia-only addition for any federal “catch-up” deductions related to previously capitalized R&D expenses.
• An addition to capitalize 2025 R&D expenses claimed as a federal deduction.
• A subtraction for ongoing amortization of those capitalized expenses.

Additionally, there has been no successful effort to extend the Virginia R&D tax credit beyond its December 31, 2024, expiration. As a result, Virginia R&D credits are not available for the 2025 tax year.

2. Deconformity from bonus depreciation and expanded Section 179

Virginia will continue to deconform from all federal bonus depreciation provisions, including the new Section 168(n) accelerated depreciation for qualified production property.

This means Virginia adjustments will still be required to reverse federal bonus depreciation and compute state-specific depreciation.

Virginia also deconforms from the expanded Section 179 expensing limits introduced by H.R. 1, which is also new as Virginia had not previously decoupled from federal Section 179 limitations in recent history.

3. Conformity to expanded Section 163(j)

Virginia is conforming to the expanded federal Section 163(j) EBITDA-based adjusted taxable income calculation.

In addition, Virginia provides a subtraction equal to 20% of interest expense disallowed at the federal level.

However, taxpayers claiming this subtraction must track it carefully as it must be recaptured in future years when the previously disallowed interest becomes deductible for federal purposes.

4. PTET made permanent

Virginia has removed all expiration dates related to the Pass-Through Entity Tax (PTET), effectively making PTET permanent including the out-of-state tax credit provisions.

For many pass-through entities and their owners, this provides welcome certainty for long-term planning.

What to expect next

We are hopeful that Virginia Tax will issue technical and implementation guidance on several of these impactful provisions soon.

In the meantime, taxpayers and their advisors should evaluate the state-level impact of federal changes under H.R. 1 and consider Virginia-specific additions and subtractions accordingly for current tax compliance and future planning.

If you have questions about how Virginia’s conformity changes may affect your business or individual return, contact your Keiter Opportunity Advisor.