Virginia Income Tax Conformity Update

Gov. Glenn Youngkin signed HB 971, emergency fixed-date tax conformity legislation on February 23, 2022. Key provisions of the legislation relate to COVID-19 business assistance programs and general conformity to the American Rescue Plan. Further, Virginia de-conforms to certain provisions of the Internal Revenue Code. These are summarized below.

Key Provisions of Virginia Tax Conformity for Businesses and Individuals

1. Certain COVID-19 business assistance programs

The law provides the following regarding COVID-19 business assistance programs:

• • Retroactively allows the up to $100,000 Virginia-specific deduction for Paycheck Protection Program (“PPP”) loan forgiveness recipients to certain fiscal year filers who were previously denied such deduction because it was limited to Taxable Year 2020 only;
  • Retroactively allows the up to $100,000 Virginia-specific subtraction for Rebuild Virginia grant recipients to certain fiscal year filers who were previously denied such subtraction because it was limited to Taxable Year 2020 only;
  • For Taxable Years 2021 and after, allows full deductibility of expenses paid or incurred with forgiven PPP loan proceeds; and
  • For Taxable Year 2021 and after, allows full deductibility of expenses paid or incurred with Economic Injury Disaster Loan (“EIDL”) program funding and funding from certain other COVID-19 business assistance programs.

Note that there have been no changes to the Virginia income tax treatment for the business assistance programs for Taxable Year 2020 other than those mentioned above for fiscal year filers.  For a summary of the legislation passed last year which provided limited relief relating to the COVID-19 business assistance programs see our 2021 blog, Virginia Tax Conformity is Now Law.

2. General conformity to the American Rescue Plan Act

There are five provisions in American Rescue Plan Act (ARPA) that have an impact on Virginia income tax returns being prepared during the 2022 tax filing season. These include:

• • Expanding eligibility for the Earned Income Tax Credit, with most changes effective solely for Taxable Year 2021;
  • Enhancing the Child and Dependent Care Tax Credit for Taxable Year 2021, which benefits Virginia taxpayers who claim the Virginia Child and Dependent Care Deduction;
  • Increasing the amount taxpayers can contribute to Child and Dependent Care Flexible Spending Accounts for Taxable Year 2021;
  • Excluding student loan forgiveness from gross income for Taxable Years 2021 through 2025; and
  • Allowing certain business taxpayers to receive tax-free assistance under the Restaurant Revitalization and Targeted EIDL Advance grant programs while also deducting the business expenses paid with such tax-free funds.

3. Deconformity regarding the following IRC provisions

• • Bonus depreciation allowed for certain assets under federal income taxation.
  • The five-year carry-back of net operating losses (“NOLs”) generated in certain taxable years (2008 & 2009).
  • Tax exclusions related to cancellation of debt income.
  • Tax deductions related to the application of the applicable high yield debt obligation rules.
  • Suspension of the federal overall limitation on itemized deductions – the Pease limitation.
  • The reduction in the medical expense deduction floor. VA = 10%; federal = 7.5% of AGI
  • Certain business provisions of the federal CARES Act adopted in 2019 which:
    • Suspended certain net operating loss (“NOL”) limitations for Taxable Years 2018, 2019, and 2020;
    • Suspended the excess business loss limitation for Taxable Year 2018, 2019, and 2020; and
    • Increased the business interest limitation for Taxable Year 2019 and 2020.

Access the Virginia Department of Taxation’s tax bulletin 22-1 for more information on the law changes.

Other pending legislation affecting pass-through entities

Legislation is pending (HB 1121 and SB 692) that will permit a qualifying pass-through entity (PTE) to make an annual election for Taxable Years 2022 through 2025 to pay an elective income tax at the rate of 5.75% at the entity level. A corresponding individual income tax subtraction would be allowed for any amount of income derived from a PTE having Virginia taxable income if the PTE makes the election and pays the entity level tax. Currently 22 states have laws, and several others are considering, allowing similar elections by pass-through entities. The legislation will also allow taxpayers to claim a credit on their individual income tax returns for similar taxes paid to other states for Taxable Years 2021 through 2025. It is noteworthy that the Virginia entity-level tax election would not impact 2021 income tax returns.

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.