By Terry Barrett, CPA, Tax Senior Manager and Kay Gotshall, CPA, Tax Senior Manager | State and Local Tax Team
Virginia and other States’ Conformity to the CARES Act Provisions
Tax return filing and payment due dates have been top of mind given the time of the year. The IRS, states, and in some cases localities have extended filing and payment due dates to help ease the burdens, both financially and administratively, on taxpayers in the midst of the COVID-19 pandemic. Now that those deadline issues have been addressed, thoughts have turned to other tax matters. Congress passed the CARES Act (Coronavirus Aid, Relief, and Economic Security) on March 27, 2020, providing for several key federal tax relief provisions to help ease the financial burden on businesses. While the relief is at the federal level, it may also provide tax relief at the state level, depending upon whether a state conforms its tax laws to the Internal Revenue Code (“IRC”).
Conforming to the IRC essentially means that states uses federal income or taxable income (“Federal taxable income”) as the starting point for the determining state taxable income and tax liability. State conformity with the IRC varies. Some states conform on a rolling basis so that any federal changes are automatically adopted by the state; other states have fixed date conformity, meaning their laws conform as of a certain date. In most cases, though, states do not conform (aka decouple) from some federal provisions. Virginia is a fixed date conformity state. Virginia law conforms, with limited exceptions, to the IRC as of December 31, 2019. Thus, Virginia law currently does not conform to any CARES Act provisions.
To conform to the CARES Act, legislation will need to be passed by the General Assembly and signed by the Governor. While the Governor has mentioned the possibility of a special session this summer to address state budgetary issues it is not known whether conformity to the CARES Act will be addressed then. Historically because Virginia’s conformity is tied to the IRC and changes are made to the IRC in most years the General Assembly has addressed conformity issues during its regular sessions starting the second Wednesday in January each year. In the 2020 Regular Session, however, legislation calling for rolling conformity to the IRC was considered but carried over for study during the interim for reconsideration at the 2021 Regular Session.
Virginia and other states, are already faced with fiscal challenges due to the coronavirus. These challenges could be exacerbated by conformity to the tax provisions of the CARES Act unless there are offsetting revenue raisers, reductions in state government spending, or both. Thus, the Governor and General Assembly will need to consider how to best address the state’s fiscal challenges keeping in mind the fiscal challenges faced by taxpayers.
The key business tax provisions of the CARES Act are summarized in our article, The CARES Act: Summary of Tax Provisions for Businesses. Most notably of these for businesses are:
- NOL carrybacks
Under the CARES Act, taxpayers generally are allowed the carryback of net operating losses from tax years beginning 2018 through 2020 for up five years.
- Interest limitation increase (IRC 163(j))
The CARES Act increases the interest expense deduction limitation from 30% to 50% of adjusted taxable income for 2019 and 2020, for C-corporations and S-corporations. For partnerships, the limitation stays at 30% for 2019, and increases to 50% for 2020.
- Qualified improvement property (QIP)
The long awaited technical correction to allow for a 15-year life for QIP instead of the 39-year life that was left from the Tax Cuts and Jobs Act. The 15-year life allows for bonus depreciation to be taken on the qualified improvements.
Currently, Virginia deconforms to the Federal interest limitations by allowing for a 20 percent deduction of the federal interest limitation. In the past, Virginia has deconformed to federal NOL carrybacks of more than two years. Virginia has conformed to the 15 year life for QIP but does not conform to bonus depreciation. In the rush to amend returns, file NOL carry back claims or file a change in accounting method for the CARES Act, businesses need to be sure to consider the Virginia and other state ramifications. There may be a need to hold a state amended return or NOL carryback claim while waiting to see how a state conforms. If state conformity to say the 15-year life for QIP or other CARES Act federal provision is assumed and the state does not conform, an amended return will be required.
Other states’ Conformity to the CARES act
Only a few states have proactively addressed the CARES Act, either with legislation or pronouncements clarifying their policy, but several have automatically adopted some of the provisions due to their rolling conformity. Based upon a states fixed date v. rolling conformity approaches to the IRC, it appears that currently a majority of states do not conform to the CARES Act NOL carryback and the business interest limitation provisions. However, this may change if the states take specific action to adopt or decouple from the federal provisions.
As noted above, conformity to the CARES Act provisions will have a negative impact on state revenues and the states will need to determine the best course forward for them and their taxpayers.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.