Unlike most recent years, there were few changes that affect a significant number of Virginia taxpayers. The few relatively significant changes are described below.
In addition, Virginia practitioners are encouraged to also review the “2016 Legislative Summary” for items that may affect their clients in the following areas:
- Sunset dates for income tax credits and sales tax exemptions
- Employer filing requirements for income tax
- Changes to various income tax credits
- Retail sales and use tax exemptions and certain other provisions
- Local tax legislation (real estate, tangible personal property tax and other taxes)
For a full report on all the changes (this list is not all-inclusive), read the “2016 Legislative Summary” from the Virginia Department of Taxation (TAX), available as a PDF at tax.virginia.gov.
Please review the Table of Contents for other items that may be of particular interest.
All changes went into effect July 1, 2016, unless otherwise stated.
Tax conformity
The 2016 General Assembly advanced Virginia’s date of conformity to the U.S. Internal Revenue Code from Dec. 31, 2014, to Dec. 31, 2015. On Dec. 18, 2015, Congress enacted the Protecting Americans from Tax Hikes Act of 2015 (PATH). This legislation extended a number of expiring federal tax provisions, modified certain expiring provisions that were extended and added several new federal tax provisions.
In addition to the PATH Act, Congress also enacted the Don’t Tax Our Fallen Public Safety Heroes Act (HR 606), which exempts certain income received by dependents of public safety officers who die in the line of duty, and the Bipartisan Budget Act of 2015 (HR 1314), which changes the IRS procedures for auditing partnerships and clarifies some of the federal partnership rules.
Virginia still disallows any bonus depreciation allowed for certain assets under federal income taxation and any five-year carry-back of federal net operating losses (NOL). In addition, Virginia will continue to deconform from certain applicable high-yield discount obligations and cancellation of debt income provisions.
The effective date was Feb. 5, 2016.
Achieving a Better Life Experience (ABLE) Savings Trust Accounts
Under the federal Achieving a Better Life Experience Act of 2014, Congress authorized states to establish ABLE savings trust accounts to assist individuals and families in saving for education, housing, transportation, employment training and support, assistive technology and personal support services, health, prevention and wellness, financial management and administrative services and other expenses of individuals who were disabled or blind prior to the age of 26. The Virginia College Savings Plan is the designated state agency that will administer ABLE savings trust accounts.
Under federal law, earnings on contributions to ABLE savings trust accounts are exempt from federal income tax. Because Virginia conforms to federal income tax treatment such earnings are also exempt from the Virginia income tax.
The 2016 General Assembly established a personal income tax deduction for contributions made to ABLE saving trust accounts. For contributors under age 70, the deduction claimed on any individual income tax return in any taxable year is limited to $2,000 per ABLE account. If the contribution to an ABLE account exceeds $2,000, the remainder may be carried forward and subtracted in future taxable years until the ABLE account contribution has been fully deducted. For contributors who have attained age 70, taxpayers may claim a deduction for the full amount contributed to an ABLE account, less any amounts previously deducted. Notwithstanding the statute of limitations, any deduction that is taken is subject to recapture during the taxable year or years in which distributions or refunds are made for any reason other than to pay qualified disability expenses or the beneficiary’s death.
This is effective for taxable years beginning on or after Jan. 1, 2016
Research and Development Tax Credits
Several changes were made to the existing Research and Development Expenses Tax Credit and a new tax credit — the Major Research and Development Expenses Tax Credit — was created.
The changes include the following:
- Allow a taxpayer to elect to compute the credit using a simplified method in lieu of the current statutory method;
- Increase the amount of credit each taxpayer may earn annually;
- Increase the annual credit cap from $6 million to $7 million;
- Extend the sunset date for the credit to taxable years beginning before Jan. 1, 2022; and
- Prohibit taxpayers with Virginia qualified research and development expenses in excess of $5 million from claiming the credit.
The Major Research and Development Expenses Tax Credit was established for taxpayers with Virginia qualified research and development expenses in excess of $5 million for a taxable year. The amount of this credit is equal to 10 percent of the difference between:
- The Virginia qualified research and development expenses paid or incurred by the taxpayer during the taxable year; and
- 50 percent of the average Virginia qualified research and development expenses paid or incurred by the taxpayer for the three taxable years immediately preceding the taxable year for which the credit is being determined.
Practitioners with clients who are affected by Research and Development Tax credits should become familiar with the additional requirements and provisions that are included in this legislation.
Tax Credit for Contributions to Political Candidates
A Jan. 1, 2017 sunset date for the individual income tax credit for contributions to political candidates was enacted. This credit is currently allowed for contributions to political candidates in a primary, special or general election for local or state office held in the year in which the contribution was made. The credit is equal to 50 percent of the contribution, up to $25 for an individual taxpayer, or $50 for taxpayers filing a joint return.
Limitation on the Collection of Taxes by the Virginia Department of Taxation (TAX)
TAX must now cease all efforts to collect any unpaid tax seven years after the assessment of the tax, even if a collection action has been initiated before the expiration of the seven-year period.
Under current law, the period of limitations for the TAX to make or institute collection action by levy, a proceeding in court, or any other means available to the tax commissioner under the laws of the Commonwealth is seven years from the date of the assessment. If some form of collection action is taken within the seven-year limitations period, most assessments remain collectible until satisfied.
As under current law, the period of limitations on collection will continue to be suspended for periods when (i) the taxpayer’s assets are in control or custody of the U.S. Bankruptcy Court or any other federal or state court, or (ii) the taxpayer is outside the Commonwealth for a continuous period of at least six months. Legislation also clarifies that the period of limitations on collection will be suspended for any periods when an installment payment agreement between the taxpayer and the TAX is in effect. Collection actions pursuant to execution of liens created by a judgment lien or a memorandum of lien are not affected by this legislation.
Constitutional Amendment: Exemption for Surviving Spouse of Certain Emergency Services Providers
Legislation provided for a voter referendum at the Nov. 8, 2016, election to approve or reject an amendment to the Constitution of Virginia allowing the General Assembly to provide a local property tax exemption for the real property of the surviving spouse of any law-enforcement officer, firefighter, search and rescue personnel or emergency medical services personnel who was killed in the line of duty. This amendment provides that the surviving spouse must occupy the real property as his or her principal place of residence and that the exemption ceases if the surviving spouse remarries.
Real Property Tax Exemption for Spouses of Servicemembers Killed in Action
Legislation expanded the definition of “killed in action” as determined by the U.S. Department of Defense, for purposes of the real property tax exemption for the principal place of residence of a surviving spouse of a servicemember killed in action, to include the determination of “died of wounds received in action” by the Department of Defense.
Multiple Classifications of Tangible Personal Property Tax
Localities are now required to apply the lowest tax rate applicable to any item of tangible personal property that falls under multiple classifications for purposes of the local Tangible Personal Property Tax.
Under current law, localities are authorized to establish different classes of property for purposes of the Tangible Personal Property Tax and assign a different tax rate to each classification. Localities must apply the lowest rate applicable to any computer equipment and peripherals used in a data center, as well as any motor vehicle, if the property falls under multiple classifications. Current law does not specify the tax rate of other items of tangible personal property that fall under multiple classifications.