2023 Virginia Income Tax Conformity Signed

Governor Glenn Youngkin signed SB 882, emergency fixed-date tax conformity legislation on February 27, 2023. The legislation advances Virginia’s date of conformity with federal tax law to December 31, 2022. The law is effective immediately.

Key Provisions of 2023 Virginia Tax Conformity for Businesses and Individuals

This legislation allows Virginia to conform to the Federal government’s Inflation Reduction Act of 2022 (IRA) and the Secure 2.0 provisions of the Consolidated Appropriations Act of 2023 (CAA). As such, adjustments are generally not required on Virginia income tax returns. Following is a summary of the key tax provisions included the legislation.

Inflation Reduction Act of 2022

On August 16, 2022, the Inflation Reduction Act of 2022 (H.R.5376) was signed into law. The following three provisions may impact Virginia income tax returns:

1. Enhancements to the Energy Efficient Commercial Building Deduction
2. Cost Recovery for Qualified Property and Energy Storage Technology
3. Extension of the Limit on Excess Business Losses

Secure 2.0 Provisions of the Consolidated Appropriations Act of 2023

The Consolidated Appropriations Act of 2023 (H.R.2617) (CCA) was signed contained several provisions amending the rules governing the federal treatment of retirement accounts and addressing charitable conservation easements. These provisions are collectively known as the Secure 2.0 provisions. There are several retirement related provisions that would have a substantial impact on Virginia taxpayers, including:

1. Option to treat employer matching or non-elective contributions as Roth contributions
2. Option for employers to offer pension-linked emergency savings accounts that are generally treated as Roth IRAs that benefit from tax exempt treatment
3. Exclusion of certain disability-related first responder retirement payments
4. Treatment of student loan payments as elective deferrals for purposes of matching contributions, which will allow employees with student debt to benefit from employer retirement contributions even if they are unable to make contributions themselves
5. Elective deferrals generally limited to regular contribution limitations
6. One-time election to enhance qualified charitable contribution distributions

Effective Date of Tax Preferences for Educators and Certain Hardwood Practices

Virginia’s conformity legislation also clarifies the effective date for two new tax preferences enacted during 2022:

1. An individual income tax deduction for qualified educator expenses
2. The Beneficial Hardwood Management Practices Tax Credit

The provisions are effective immediately and qualified taxpayers may claim the tax deduction/credit on their 2022 income tax returns.

Deconformity

As discussed in our March 2022 conformity update, Virginia will continue to deconform from the following provisions of federal tax law:

• Bonus depreciation allowed for certain assets under federal income taxation
• Five-year carry back of certain net operating losses (“NOLs”) generated in Virginia Taxable Years 2008 and 2009
• Tax exclusions related to cancellation of debt income
• Tax deductions related to the application of the applicable high yield debt obligation rules
• The suspension of the federal overall limitation on itemized deductions
• The reduction in the medical expense deduction floor
• Certain business provisions of the federal CARES Act
• The deduction of business expenses through certain COVID-related small business assistance programs prior to Taxable Year 2021

Update on Rolling Tax Conformity

The rolling income tax conformity bills (HB 2193 and SB 1405) were sent to conference when each chamber passed different versions. The final versions are a modified form of rolling conformity but are a significant step forward in increasing clarity for taxpayers and tax practitioners in the future.

The General Assembly is still in Session and the budget has not yet been finalized. It is possible there may be additional tax measures/changes that may be passed, and we will keep you advised if they do.

Please reach out to your Keiter Opportunity Advisor if you have any questions.

Sources:

• Tax Bulletin 23-1, Virginia Department of Taxation
• Virginia’s Legislative Information System