Tax Season: Another Level of Complexity in Virginia?

Tax Season: Another Level of Complexity in Virginia?

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By Terry Barrett, CPA | Tax Senior Manager | State and Local Tax Team

Note: This article is current as of the date written and the summaries of the bills are subject to change during the legislative process.

Tax season has had a slower start this year.  First, there was the federal shutdown.  We do not know what, if any, lingering impact it will have on the federal tax season.  Now there are concerns that since the Virginia General Assembly has not passed legislation conforming Virginia’s tax code to the Internal Revenue Code, there may be delays for tax filings at the state level.

Virginia Tax Conformity: What it Means

Virginia law conforms, with limited exceptions [1], to the Internal Revenue Code (“IRC”) as of a fixed date.  Currently that date is February 9, 2018.  The law does not conform to most of the provisions of the federal Tax Cuts and Jobs Act (“TCJA”).  Conforming to the federal law essentially means that Virginia uses federal income or taxable income (“Federal taxable income”) as the starting point for the determining Virginia taxable income and tax liability.  What this really means is that preparing Virginia income tax returns is substantially less complicated when starting with Federal taxable income.

Legislation Required

Since Virginia is a fixed date conformity state, legislation is required to conform Virginia law to federal changes most years.  Normally, conformity legislation is introduced and passed early in the General Assembly Session.  With emergency enactment clauses, the legislation, once approved, becomes effective immediately and allows the Virginia Department of Taxation, tax practitioners, and taxpayers alike to get down to the business of “busy season” without delay.  The emergency enactment clauses require affirmative vote of 80 percent of the members voting, which has not been an issue in most years.  However, as conformity to the federal law – the TCJA — is expected to result in a windfall to the state of approximately $1.2 billion at the expense of Virginia taxpayers, this is not a normal year.

Numerous bills have been introduced this General Assembly session to update Virginia’s conformity to the federal tax reform provisions; many of the bills have also included what are considered to be tax policy changes.  Given the proposed tax policy changes as well as different opinions as to what to do with the anticipated additional tax revenues created by conformity to the TCJA, agreement on conformity legislation has been slow.  The possibility of immediate or early enactment of the conformity bills seems remote right now.  Without an emergency clause, and assuming legislation even passes both Houses of the General Assembly and is signed by the Governor, it will become effective “in due course” or July 1, well after the original due date for Virginia income tax returns.

Since before the General Assembly Session began, the Virginia Society of CPAs has been advocating passage of the conformity legislation immediately so tax practitioners and taxpayers alike could move forward with tax season, and then consider tax policy issues/changes.  An example of a tax policy change as opposed to a conformity issue is one that would allow Virginia taxpayers to itemize their deductions v. taking the standard deduction.  Virginia law currently provides that if one takes the federal standard deduction, one must take the state standard deduction.  Since the federal standard deductions were raised substantially by the TCJA, some have estimated that 90 percent of taxpayers will take the federal standard deduction.  By claiming the federal deduction, under current law Virginia taxpayers will be limited to the state standard deduction of 3,000 dollars for individual taxpayers and 6,000 dollars for married taxpayers filing joint returns.

While numerous bills providing for conformity and tax policy changes were proposed and considered, currently there are two conformity bills still alive in the General Assembly, House Bill No. 2355 and Senate Bill No. 1372.  Both have been reported out of their chambers of origination.  Each is now headed to the other for consideration.  Both originally had emergency clauses to make them effective immediately.  These clauses were removed as there were not enough affirmative votes for the legislation to pass with such clauses.  There is another bill, House Bill No. 2529, that while not a conformity bill proposes tax policy changes. This bill was also reported out of the House of Delegates and will now be considered by the Senate. The following summarizes the bills as passed by their respective bodies.

Conformity Bills with Other Provisions (House Bill No. 2355 and Senate Bill No. 1372)

Both bills conform Virginia tax law to the Internal Revenue Code as of December 31, 2018, thereby encompassing most of the provisions of the TCJA; however, each bill has a different approach from a policy perspective.

HB 2355 proposes to provide that for Fiscal Years 2019 and 2020, any additional revenues generated as the result of conforming to the temporary individual income tax provisions of the TCJA that expire before January 1, 2016, will be transferred to a special nonreverting fund called the Taxpayer Relief Fund.  By August 1, 2019, the Department of Taxation would be required to submit a plan for consideration by the General Assembly prior to the start of the 2020 Session to refund the revenues to Virginia taxpayers who paid additional tax to Virginia as an indirect result of the federal conformity.

SB 1372 proposes to provide various tax policy changes, some effective for taxable year beginning on and after January 1, 2018, and some effective for taxable years on and after January 1, 2019 as outlined below.

  • Effective for taxable years beginning January 1, 2018:
    • Provides an individual and corporate income tax subtraction for 20 percent of the amount of business interest that is disallowed as a deduction for federal income tax purposes (commonly referred to as § 163(j) interest);
    • Expands Virginia’s corporate income tax subtraction for subpart F income (foreign income) to include global intangible low-taxed income (“GILTI”), meaning the GILTI could also be deducted to the extent it is included in a taxpayer’s federal taxable income.
  • Effective for taxable years beginning on and after January 1, 2019, but before January 1, 2026:
    • Increases Virginia’s standard deduction from 3,000 dollars to 4,500 dollars for individuals and those married but filing separate returns, and from 6,000 to 9,000 dollars for those married filing joint returns.
  • Effective for taxable years beginning January 1, 2019:
    • Allows an individual income tax deduction up to 10,000 dollars of the actual amount of real and personal property taxes imposed by Virginia or any other taxing jurisdiction not otherwise allowed as a deduction given the federal limitation on deductions for state/local taxes of 10,000 dollars.;

Two other provisions of the bill would require:

  • A refund of up to 110 dollars to an individual or up to 220 dollars to married persons filing joint returns.  The refund would be contingent upon filing a return before July 1, 2019, and would be allowed up to the amount of the individual/married person’s tax liability after the application of any deductions, subtractions, or credits to which such individual/married person is otherwise entitled.  The refunds would have to be issued by the Department of Taxation between October 1 and October 15, 2019.
  • Any additional Virginia tax revenue generated due to conformity to the TCJA for taxable years beginning on and after January 1, 2018, but before January 1, 2019, beyond those reasonably expected to be collected absent the federal policy changes, and after the 110/220 dollar refunds have been issued, are to be transferred to a special nonreverting fund to be known as the “Tax Reform Fund.”  The General Assembly would then appropriate such revenues for temporary or permanent tax reform measures during the 2020-2022 biennium.

Tax Policy Changes Bill (House Bill No. 2529)

As noted above, House Bill No. 2529 does not provide for conformity to the federal tax law. Rather, it makes various tax policy proposals as follows:

For taxable years beginning on and after January 1, 2018:

  • Expands Virginia’s corporate income tax subtraction for subpart F income (foreign income) to include global intangible low-taxed income (“GILTI”), meaning the GILTI could also be deducted to the extent it is included in a taxpayer’s federal taxable income.

For taxable years beginning on and after January 1, 2019, but before January 1, 2026:

  • Increases the Virginia standard deduction from 3,000 to 4,000 dollars for individual taxpayers and those married but filing separately, and from 6,000 dollars to 8,000 dollars for married taxpayers filing joint returns.
  • Allows taxpayers to claim the Virginia standard deduction or to itemize deductions on their Virginia income tax returns regardless of the election taken on the federal income tax return.

For taxable years beginning on and after January 1, 2019:

  • For taxpayers opting to itemize deductions, allows a full deduction for the amount of real property and personal property taxes not otherwise deducted on the state return solely due to the cap on the federal deduction for state and local taxes paid (as required by the TCJA).

Several things could happen now with the conformity bills:  the bills could be reconciled, emergency clauses added, and approved by both Houses and the Governor which would allow Virginia to get back on track with busy season (but likely with some delays); the bills could be amended to approach the conformity issue differently with or without policy changes; both bills could be killed leaving Virginia’s conformity to the Internal Revenue Code as of February 9, 2018 (but without conformity to the TCJA provisions); the General Assembly could decide to address the issues in a Special Session, etc. House Bill No. 2529 could be passed, rolled into one or both of the conformity bills, amended, or killed. There also is the possibility that conformity and/or tax policy provisions could be added to, debated, and approved as part of the budget bill.

Much uncertainty exists right now but one thing is certain — without passage of conformity legislation and soon, busy season will be disrupted.  Time will tell what happens next, but we would hope the General Assembly can, at a minimum, agree on conformity as soon as possible so we can get to work.

Keiter is closely monitoring the legislation and will keep you informed of any changes to Virginia tax conformity. Questions on this topic? We can help. Contact your Keiter representative or our State and Local Tax team. | Email | 804.747.0000

[1] Virginia historically has deconformed from the following IRC provisions: (i) bonus depreciation allowed for certain assets under federal law; (ii) the five-year carry-back of net operating losses generated in certain taxable years; and (iii) tax exclusions related to the cancellation of debt income or the application of high yield debt obligation rules.  In 2018, Virginia deconformed from the provision of the TCJA that temporarily increased the medical expenses deduction for taxable years 2017 and 2018; and all of the provisions of the TCJA and Bipartisan Budget Act of 2018 that affected taxable year 2018 and after other than very limited provisions for tax relief for specified 2016 disaster areas and combat zone benefits for members of the armed forces performing services in the Sinai Peninsula.

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About the Author

Terry Barrett specializes in state and local tax concerns for her clients. She has over 30 years of experience working in the public and private accounting sector. She is a graduate of Virginia Commonwealth University.

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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.


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