The case for conformity

By Jill Edmonds

Every year, the VSCPA lobbies the Virginia General Assembly to quickly pass legislation so that Virginia’s tax code conforms to the federal tax code. But since the Tax Cuts and Jobs Act of 2017 (TCJA) and the General Assembly’s decision to wait to address conformity in 2019, the issue has a new sense of urgency. That’s why the VSCPA kicked into high gear this fall, issuing a whitepaper, “Virginia Tax Conformity: 2018 and Beyond,” urging legislators to act quickly and decisively in 2019 on a variety of tax-related issues to protect Virginia taxpayers.

The VSCPA Tax Advisory Committee, helmed by Seth Davis, CPA, and with a lot of work by Vivian Paige, CPA (see the complete list of Committee members on page XX), and Society staff used the VSCPA’s tax policy principles to guide them as they shaped their recommendations. Approved by the VSCPA Board of Directors in 2013, the guiding principles are listed in full on page XX. Were the recommendations focused on addressing conformity in a timely manner? Were they advocating simplicity and transparency? The Committee and staff wanted to ensure the whitepaper advocated for protecting taxpayers and tax preparers, as well as had the best interests of the Commonwealth in mind.

Why conformity is important

Along with 17 other states, Virginia uses static conformity each year to adopt federal definitions of income as defined in the U.S. Internal Revenue Code (IRC). (Conformity does not include alignment with federal tax rates, tax brackets, exemption amounts, etc. — the Commonwealth sets its own rules.) To conform Virginia’s tax code to the IRC, the General Assembly passes retroactive emergency legislation each year, usually with a few exceptions, such as bonus depreciation, certain net operation loss (NOL) carrybacks and the reduction in the medical expense deduction floor.

Right now, Virginia conforms to the IRC as of Feb. 9, 2018, with those few exceptions. But in passing emergency legislation last winter, the General Assembly declined to address TCJA changes beyond those affecting 2017 returns. Lack of guidance has hampered Virginia taxpayers’ and tax preparers’ ability to adequately plan for 2018.

VSCPA members have said that the exceptions to conformity each year do present challenges, especially the medical expense deduction floor. On the anonymous VSCPA Tax Conformity Survey, one member expressed concern with dealing with the NOL carryback nonconformity.

“I've always hoped that Virginia would issue a NOL form to help preparers track the Virginia modifications to federal NOLs inside a return, not on Excel,” wrote the member. “I know that the Virginia tax department likely does not have the funding to react to TCJA, as the Gen Assembly likely does not realize the true breadth of this law. So our profession also needs to advocate for greater funding for the Virginia Department of Taxation.”

The VSCPA’s recommendations

The Virginia General Assembly must pass tax conformity for 2018 tax returns as early as possible and align Virginia tax law to federal law as closely as possible. We know that will be a challenge — the 2019 session is short, so lawmakers must make this a priority. It helps our case that Virginia Secretary of Finance Aubrey Layne, CPA — a VSCPA member — agrees with the urgency. Read Sec. Layne’s thoughts on conformity on page XX. See the full list of recommendations at [left or right].

Early conformity

Quickly addressing conformity will minimize tax return complexity and greatly help with tax administration and compliance. If there’s no conformity? Individuals would have to make up to 20 complex modifications on their returns, and businesses up to 30. Software developers also need quick passage so they can modify the platforms upon which many tax preparers depend, and TAX needs to update their filing systems. In short, a lot of people need conformity to do their jobs.

Not conforming to the medical deduction floor for 2017 created headaches preparing those returns; the VSCPA advocates for allowing the reduced floor on Virginia returns in 2018.

Abatement

If Virginia taxpayers incur penalties related to underpayment of their tax liabilities as a consequence of a lack of conformity, those penalties should be automatically abated — without taxpayers or their preparers having to take action, such as submit a request.

Hold funds raised

If Virginia conforms, additional tax revenue could be raised (although the amount is uncertain). This also happened when the Tax Reform Act of 1986 was passed, and the Commonwealth established a special fund to separate monies until the actual amount could be determined and a plan developed the additional revenue. The VSCPA advocates for the same action now.

Effective date delays

We understand Virginia lawmakers’ desire to tackle larger tax-related issues, such as reform and policy changes. But it’s critical that any comprehensive changes do not go into effect any sooner than Jan. 1, 2019. This deadline will allow taxpayers the certainty they need to file and fulfill their 2018 tax obligations.

Weighing in on tax policy

In addition to making conformity recommendations, the VSCPA whitepaper tackled larger tax-related issues facing the Commonwealth, offering feedback on a number of options lawmakers could take. While not specifically advocating for one option over another, the VSCPA understands that lawmakers have an urgent need to address tax policy under the shadow of the TCJA. Those ideas include:

• Increasing the standard deduction.
• Allowing taxpayers to itemize on their Virginia returns, even if they take the standard deduction on their federal returns.
• Increasing the personal exemption amount.
• Reducing tax bracket amounts.
• Increasing filing thresholds.
• Increasing the benefits of the Earned Income Tax Credit.

Whether or not the Virginia General Assembly implements one or more of these options, the VSCPA is clear: Virginia should consider adjustments for individuals and businesses to address the increased tax liabilities created by the TCJA. This won’t be easy, given the TCJA’s many temporary individual provisions.

A future with full conformity

Constantly passing emergency legislation year after year to address conformity continues to burden Virginia’s taxpayers and tax preparers. The VSCPA believes it’s time to fully conform to federal tax law — despite the temptation to deconform with certain provisions. Yes, conforming on things like bonus depreciation will result in reduced revenue to Virginia. But other provisions will increase revenue. We should set our sights on simplicity. If we want comprehensive tax reform, let’s eliminate complexity from the start.

The VSCPA is always working to represent the best interests of its members. If you have a question or concern, reach out anytime to Vice President of Advocacy Emily Walker.