Virginia Switches to Rolling Conformity Beginning With Tax Year 2023

On April 12, following a special one-day reconvene session of the Virginia General Assembly, Gov. Glenn Youngkin signed S.B. 1405 to change Virginia’s method of conformity with the Internal Revenue Code from specific, or fixed-date, conformity to automatic, or rolling, conformity with federal tax changes as they occur.

Since 2003, Virginia had been a fixed-date IRC conformity state. That required the legislature to advance the conformity date each year, which it did just recently to update the fixed date of conformity to December 31, 2022 (see S.B. 882 and Virginia Tax Bulletin 2023-1). In response to input from taxpayers, tax practitioners, and the Virginia Department of Taxation (Department) over several years, the General Assembly passed S.B. 1405 unanimously.  

General Conformity Exceptions

For tax years beginning on or after January 1, 2023, Virginia will adopt rolling conformity with the IRC. However, it will not automatically conform with any federal provisions that result in a revenue impact of at least $15 million in the fiscal year of the amendment or any of the four succeeding fiscal years. This rule does not apply if the General Assembly subsequently adopts the federal provision. It also does not apply to a congressional amendment to extend the expiration date of a federal tax provision Virginia previously conformed with – that is, federal tax extenders.

Virginia also will not automatically conform to congressional amendments that occur between the General Assembly’s sine die adjournment of one regular session and the first day of the next regular session if their projected impact would increase or decrease general fund revenues by at least $75 million in the fiscal year of the amendment or any of the four succeeding fiscal years. This rule does not apply if the General Assembly subsequently adopts the provision, the provision was part of a federal tax extender, or the provision was enacted before the cumulative projected impact was met (the last category will still be included in the calculation of the $75 million threshold).  

Specific Conformity Exceptions

Virginia will continue to decouple from the following federal provisions:

• Bonus depreciation under IRC sections 168(k), 168(l), 168(m), 1400L, and 1400N.
• The five-year carryback of some net operating losses (NOLs) generated in tax years 2008 and 2009 under IRC section 172(b)(1)(H).
• The original issue discount on applicable high-yield discount obligations under IRC section 163(e)(5)(F).
• The deferral of some cancellation-of-debt income under IRC section 108(i).
• The suspension of the overall limitation on itemized deductions under IRC section 68(f) for tax years beginning on and after January 1, 2019.
• Expenses related to the calculation of medical care and federal adjusted gross income.
• Some provisions in the CARES Act related to the suspension of the NOL carryforward limitation, the temporary allowance of NOL carrybacks, and the suspension of the IRC section 461(l) loss limitations.
• For tax years beginning before January 1, 2021, specific provisions of the Consolidated Appropriations Act and American Rescue Plan Act related to deductions, tax attributes, and basis increases for some loan forgiveness and other business financial assistance.

Insights

• The Department is expected to issue guidance on Virginia’s switch to rolling IRC conformity.
• The fiscal impact amounts will be adjusted annually for inflation, beginning January 1, 2024.
• The Virginia Secretary of Finance, in consultation with the General Assembly, will determine the fiscal impact of congressional amendments after they occur.
• This legislative change is an example of the tax practitioner community working with a state legislature to effect change to resolve a long-standing position that was causing administrative and compliance burdens.