HR 1 Forces Key Virginia Tax Decisions Ahead of 2026 Filing Season

The VSCPA will advocate for CPAs’ and taxpayers’ interests during 2026 Virginia General Assembly session.

The federal budget bill (HR 1) will significantly reshape both national and Virginia tax policy in the coming years. The new law extends and modifies a range of tax provisions, creating immediate implications for Virginia’s tax conformity rules, state revenues, and the 2026 filing season. Below are key issues Virginia legislators and the Virginia Department of Taxation (TAX) must consider and/or address in the coming months.

Rolling income tax conformity: Paused

Virginia’s 2025 budget legislation temporarily paused rolling tax conformity, except for extenders that will be adopted automatically, in anticipation of federal tax changes expected to have a significant impact state revenue. As a result, the Virginia General Assembly must pass legislation during the 2026 session to conform to most provisions of HR 1.

The legislation will have to update Virginia’s conformity date for any federal provisions that “flow through” to the state tax base, i.e., changes impacting the calculation federal adjusted gross income (FAGI) and taxable income. Without timely legislation, taxpayers and practitioners may face administrative complications in early 2026, including delayed filing seasons and complex return adjustments.

Key flow-through provisions

Several major federal tax changes would directly affect Virginia taxpayers regardless of whether Virginia conforms or not, including:

• New limits on itemized deductions (Virginia currently imposes its own limit).
• Section 179 expensing cap increase to $2.5 million with a $4 million phaseout.
• Immediate expensing of domestic research expenses (retroactive).
• Permanent restructuring of Opportunity Zones.
• New floors for charitable deductions (1% corporate; 0.5% individual).
• A special depreciation allowance under new IRC § 168(n), from which Virginia has historically deconformed.

Preliminary, negative revenue impacts

TAX projects significant fiscal effects if Virginia fully conforms to H.R. 1, with an estimated revenue impact of -$574.5 million in FY26, -$257.9 million in FY27, and -$243.6 million in FY28.

The largest drivers of reduced funds are retroactive research deductions and bonus depreciation changes, each creating substantial short-term revenue losses. Virginia typically deconforms from bonus depreciation and is expected to do the same again.

HR 1 also includes tax policy provisions that do not flow through automatically, such as excluding tips, overtime, car loan interest, and charitable deductions for non-itemizers from taxation. Adopting these at the state level would require separate Virginia legislation and would add more than $340 million in annual revenue losses starting FY 2026.

Next steps

The VSCPA will be actively lobbying Virginia lawmakers ahead of the 2026 General Assembly session to make them aware of the importance of making timely decisions on these crucial tax-related issues. We encourage Virginia CPAs to do the following to support our efforts:

• Contact legislators early to support passing timely income tax conformity legislation.
• Prepare clients for potential transitional adjustments depending on legislative outcomes.
• Monitor TAX guidance for conformity scenarios and implementation timing.

The bottom line: The decisions Virginia makes in response to HR 1 will have far-reaching implications for taxpayers, practitioners and state revenues.

Questions or concerns? Contact VSCPA Vice President, Advocacy & Pipeline Emily Walker, CAE. Stay tuned to our communications for more info!