On February 23, 2022, Virginia Gov. Glenn Youngkin signed House Bill 971 updating Virginia’s date of conformity to the Internal Revenue Code (IRC) from December 31, 2020, to December 31, 2021. Simultaneously, the Virginia Department of Taxation (DOT) issued Tax Bulletin 22-1 (Important Information Regarding 2021 Virginia Income Tax Returns) to provide taxpayers with additional detail on Virginia’s updated date of conformity and the impact on returns.1
Background
Virginia’s updated date of conformity to the IRC means that changes made as part of the American Rescue Plan Act (ARPA), signed on March 11, 2021, are effective for Virginia income tax purposes for the 2021 tax year unless Virginia specifically decouples from those changes.2 As a fixed-date conformity state, changes made to the IRC by the ARPA would not be effective at the state level for Virginia taxpayers absent the passage of House Bill 971.
Impact of House Bill 971 for Tax Year 2021
Virginia law conforms to specific provisions of the ARPA which will affect Virginia income tax return preparation for the 2021 tax year. Specific provisions of the ARPA that Virginia taxpayers will now need to consider for the 2021 tax year include:
- Impact on taxpayers claiming the Virginia Child and Dependent Care Deduction
- Increase in the contribution amount to Child and Dependent Care Flexible Spending Accounts
- Increase in eligibility for the Earned Income Tax Credit
- Exclusion of student loan forgiveness from gross income for tax years 2021 through 2025
- Full deductibility of expenses paid for by forgiven federal assistance under specified federal COVID-19 relief programs, e.g., Paycheck Protection Program (PPP), Economic Injury Disaster Loan (EIDL)
Effect of House Bill 971 for Tax Year 2019
Virginia decoupled from the federal income tax treatment of forgiven loans issued under COVID-19 relief programs. Virginia allowed the exclusion from income of a forgiven COVID-19 relief loan (similar to the federal income tax treatment) but limited the deductibility of expenses paid for by a forgiven COVID-19 relief loan to $100,000.3 This provision was put into place for tax years beginning on or after January 1, 2020, and before December 31, 2020. Virginia provided the same limitations for their state-level COVID-19 relief program as Rebuild Virginia grant recipients could only deduct $100,000 of the expenses paid for by a Rebuild Virginia grant.4
House Bill 971 modified Virginia’s treatment of COVID-19 relief programs for income tax purposes for tax years 2019 and 2021.5 For tax year 2019, taxpayers can now retroactively use the $100,000 deduction allowed for business expenses paid for using the forgiven PPP loans and the $100,000 subtraction for Rebuild Virginia grant recipients. This legislative change means fiscal year-end taxpayers whose fiscal year began in 2019 and ended in 2020 could see a benefit to amending their 2019 Virginia return to claim this additional deduction.
For tax year 2021, Virginia fully conforms to the federal tax treatment of the COVID-19 business assistance programs. No adjustment will be required on the taxpayer’s Virginia income tax return for business expenses paid for by the forgiven PPP loans, EIDL, and Restaurant Revitalization Fund grants that were received and forgiven during tax year 2021.6
Note that the income tax treatment for recipients of EIDL funding for tax years 2019 and 2020 remains the same. As such, taxpayers are still expected to report a fixed date conformity addition equal to the amount of business expenses paid using tax-exempt EIDL funding on their taxable year 2019 and 2020 returns.
Even with the updated date of conformity to the IRC, Virginia Tax Bulletin 22-1 makes it clear that the state still decouples from provisions of the IRC such as bonus depreciation and the five-year carryback of net operating losses generated in tax years 2008 and 2009 (among others).
Taxpayer Instructions
Taxpayers will have to review the relevant 2021 income tax instructions with regards to making specific state adjustments including bonus depreciation, net operating loss carryback, cancellation of debt income, and high-yield discount obligations. Adjustments are not necessary for decoupling from the suspension of the federal overall limitation on itemized deductions and increased medical expense deductions. Taxpayers who have already filed a 2021 return are now free to amend the return to reflect adjustments they need to make.
Forvis Mazars Observations
- Under prior Virginia law, taxpayers with a fiscal year that began in 2019 and ended in 2020 and received PPP funds during that fiscal year had to add back the entire amount of the expenses paid for by a forgiven PPP loan on their 2019 Virginia return. Taxpayers in this situation typically were ineligible to take the $100,000 deduction on their 2020 Virginia returns due to the PPP funds being spent during their 2019 tax year. With the passage of House Bill 971, all Virginia taxpayers who received PPP funds or a Rebuild Virginia grant should consider amending their 2019 Virginia return.
- Taxpayers who have already filed a 2021 Virginia return should consider the changes described above and determine whether an amended return may be beneficial.
If you have any questions about House Bill 971 or its effect on your business, please reach out to a professional at Forvis Mazars or submit the Contact Us form below.
- 1https://www.tax.virginia.gov/sites/default/files/inline-files/tb-22-1-irc-conformity-advanced.pdf.
- 2https://www.congress.gov/117/plaws/publ2/PLAW-117publ2.pdf.
- 3See House Bill 1935, Chapter 117 of 2021 Acts of Assembly and Senate Bill 1146, Chapter 118 of the 2021 Acts of Assembly.
- 4See Virginia Tax Bulletin 21-4 (March 15, 2021).
- 5Supra at note 1.
- 6Supra at note 1.