Federal Tax Reform, State Consequences: Virginia After H.R. 1

Virginia’s response to federal tax changes

Federal tax legislation can ripple into state tax filings but in Virginia, those ripple effects depend heavily on conformity rules and (often) General Assembly action. Below is an overview of how H.R. 1 could affect Virginia taxpayers and why early 2026 will be a key timeframe.

What is happening at the federal level?

H.R. 1 extends and modifies certain current federal tax provisions and introduces new federal tax policies. Some of those provisions may affect Virginia returns either automatically or only if Virginia acts to adopt them.

A quick refresher: What does “Virginia conformity” mean?

Virginia begins its income tax calculations using federal starting points:

• Individuals: federal adjusted gross income (FAGI)
• Businesses: federal taxable income (FTI)

When federal law changes those starting points, Virginia will generally follow unless Virginia “deconforms” or the state pauses conformity.

Virginia’s conformity rules (and why they matter now)

Virginia adopted rolling conformity in 2023, but with important exceptions. Virginia deconforms from:

• Any single federal change with an estimated Virginia revenue impact of $15 million or more
• Any additional changes after total estimated impacts reach $75 million
  (Virginia still conforms to “tax extenders,” regardless of these triggers.)

Separately, the 2025 Appropriation Act pauses rolling conformity for provisions enacted in 2025 or 2026 that would have any Virginia revenue impact during the next five years. The practical result: Virginia will generally need new legislation to adopt federal changes passed in 2025–2026, even if Virginia would normally “roll” with federal law.

Virginia will, however, continue to automatically conform to federal tax extenders.

Which H.R. 1 provisions require Virginia action?

The following provides a concise overview:

• Extenders: No General Assembly action required (automatic)
• “Flow-through” provisions: Yes—General Assembly action required (Virginia must update its “date of conformity” to the Internal Revenue Code)

What does “flow-through” mean?

A “flow-through” provision is one that changes FAGI or FTI and therefore changes the starting point for Virginia income tax.

Extenders included in H.R. 1 (automatic conformity)

An “extender” generally continues an existing federal provision that was scheduled to expire. Because these extensions are assumed in forecasting, they are treated as having no revenue impact.

H.R. 1 includes extender-type provisions such as:

• Rollovers from qualified tuition programs to ABLE accounts
• Treatment of certain disaster-related personal casualty losses
• The look-thru rule for related controlled foreign corporations

H.R. 1 “flow-through” provisions Virginia may need to address

H.R. 1 extends/modifies federal provisions that flow into Virginia if Virginia updates its conformity date, including:

• Itemized deductions: new federal limit (Virginia already has its own limit)
• Section 179 expensing: increased to $2.5 million with a $4.0 million phaseout (from $1.0 million / $2.5 million)
• Business interest deduction: higher cap via a change to the definition of adjusted tax income
• Domestic research expenses: immediate deduction (retroactive) instead of 5-year amortization
• Opportunity zones: made permanent and restructured

New “flow-through” provisions in H.R. 1

H.R. 1 also introduces new items that would flow through to Virginia (again, only if Virginia updates conformity), such as:

• 1% floor for corporate charitable deductions
• 0.5% floor for individual charitable deductions
• A new special depreciation allowance under IRC Section 168(n)
  (Virginia has historically deconformed from similar “bonus depreciation” rules under IRC 168(k).)

Reasons for taxpayer consideration

If Virginia does not conform to flow-through provisions, taxpayers may need to make Virginia-specific modifications on their returns some of which can be complicated—because federal taxable income and Virginia taxable income would diverge.

Preliminary revenue impact: What full conformity could mean

Virginia’s preliminary estimates show that updating Virginia’s date of conformity to fully adopt H.R. 1 flow-through provisions could reduce state revenue by approximately:

• FY 2026: ($574.5 million)
• FY 2027: ($257.9 million)
• FY 2028: ($243.6 million)

The largest estimated driver is the domestic research deduction (including “catch-up” amounts tied to the prior amortization rules).

Timing risk: Why early 2026 is important

Virginia will likely need conformity legislation during the 2026 Regular Session. Due to tax return filing season timing, it may need to be emergency legislation.

If conformity is not resolved by early February 2026, Virginia warns it could create administrative issues such as:

• A delayed filing season, delaying refunds
• More complex adjustments on Virginia returns
• Potential amended returns later

Provisions that do not “flow through” (still require action, but will not complicate filing)

H.R. 1 also includes new provisions that would not automatically apply to Virginia just by updating conformity. Virginia would need separate state-level legislation to create Virginia versions of these.

Examples include:

• Charitable deduction for nonitemizers (TY 2026–2028)
• No tax on car loan interest (TY 2025–2028)
• No tax on tips (TY 2025–2028)
• No tax on overtime (TY 2025–2028)

How to prepare

• Expect uncertainty for Virginia 2025–2026 conformity until the General Assembly acts.
• Watch for early 2026 developments that could affect tax return filing timelines and required state modifications.
• If you are impacted by areas like R&D, special depreciation, interest limitation, or large deductions, plan for possible additional Virginia adjustments depending on what the state adopts.

The Keiter Tax team will continue to monitor tax legislation affecting Virginia businesses and individual taxpayers. If you have questions on Virginia tax conformity and how it impacts you, please contact your Keiter Opportunity Advisor | Email | 804.747.0000