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Virginia tax legislation: What you need to know

After two years of trying tax seasons, Virginia CPAs are gearing up for a more normal (we hope?) tax season.
November 18, 2021

Please note, this article appeared in the fall 2021 issue of Disclosures magazine and covers legislation from 2021. If you need more current legislative information, please check out the Advocacy section and our comment letters and positions.

A variety of legislation was passed by the Virginia General Assembly this year. The below items all went into effect on July 1, 2021, unless otherwise noted. For a full report on all the changes, as this list is not all-inclusive, read the “2021 Legislative Summary” (PDF) from the Virginia Department of Taxation, available as a PDF at tax.virginia.gov.

Conformity of Virginia’s tax code to the Internal Revenue Code

After many conversations among legislators on how to handle conforming with federal coronavirus relief legislation, conformity was passed effective March 15, 2021, and advanced from Dec. 31, 2019, to Dec. 31, 2020.  Virginia generally conforms to the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Consolidated Appropriations Act of 2021 (CAA), with certain exceptions. Ultimately, Virginia does conform to:

  • COVID-19-related retirement distributions.
  • Above-the-line charitable contributions deduction.
  • Deduction limitations for certain charitable contributions.
  • Exclusion of educational payments.
  • Extension of the $300 deduction for non-itemizers to taxable year 2021.
  • Enhancing the charitable deduction for individuals for certain contributions.
  • Temporary full business meals deduction.
  • Extension of exclusion for certain employer payments of student loans.
  • Depreciation of certain residential rental property over a 30-year period.
  • Temporary enhancement of the EITC. 
  • Repeal of the deduction for qualified tuition.

With respect to forgiven Paycheck Protection Program (PPP) loan expense deductibility and Rebuild Virginia grant income, Virginia allows a deduction of up to $100,000 for tax year 2020. All previous deconformity remains in place, such as bonus depreciation, and Virginia also does not conform to the following:

  • Extension of the 7.5% floor in the medical expense deduction.
  • Provisions of CARES Act related to the net operating loss (NOL) limitations and carryback.
  • Excess business losses for noncorporate taxpayers.
  • Business interest deduction limitations.
  • Deductibility of business expenses funded by PPP loan and Economic Injury Disaster Loan (EIDL) fund proceeds except as described above.

Further guidance on EIDLs

TAX let us know that Virginia will conform to the tax-free treatment of such loans by generally conforming to section 278(c) of the CAA. In addition, the conformity legislation would deconform from §§ 278(b)(2) and 278(c)(2) of the CAA, which authorize deductions for expenses paid with emergency EIDL grants, targeted EIDL advances, and subsidies for certain loan payments. As a result, a fixed date conformity addition would be required for any deductions claimed on a federal return for expenses for which the taxpayer has been reimbursed by such grants, advances or subsidies. 
The Virginia-specific tax deductions and subtractions in the conformity bills are limited to Paycheck Protection Program loan recipients and Rebuild Virginia grant recipients only. Such proposed subtraction and deduction do not apply to recipients of EIDL grants, targeted EIDL advances and subsidies for certain loan payments.

Electronic payment requirement for estimated taxes

Certain taxpayers who pay estimated taxes must make all income tax payments on or after July 1, 2021, electronically if those payments exceed $2,500 or if their total tax liability exceeds or can reasonably be expected to exceed $10,000.

Interest waivers in emergencies

Effective April 1, 2021, If the governor declares a state of emergency, the tax commissioner can waive interest for any class of taxpayers who would receive undue hardship due to the imposing interest. 

Retail sales and use tax exemptions for personal protective equipment (PPE)

A variety of PPE is exempt from sales and use tax for qualifying businesses, such as face coverings, gloves, signs related to COVID-19 and much more.

Marijuana retail taxes

As non-medical marijuana is legalized in Virginia, stores that sell retail marijuana and marijuana products will have to pay retail taxes as of Jan. 1, 2024. The tax will be administered by the new Virginia Cannabis Control Authority.

Issues under study: Tax policy, unitary combined reporting and more

Legislation has established groups to investigate certain tax-related issues:

  •  A Joint Subcommittee on Tax Policy will evaluate the fiscal impact of amendments to tax brackets, rates, credits, etc.; evaluate factors relevant to making Virginia’s tax system more equitable; give tax code amendment recommendations; and more.
  • A working group will assess the feasibility of transitioning to a unitary combined reporting system for corporate income tax purposes. 
  • TAX will evaluate establishing an online portal for tax practitioners, including looking at comparable services offered by other states and estimated costs.
  • The Joint Legislative Audit and Review Commission (JLARC) will study increasing the progressivity of Virginia's individual income tax system by evaluate the fiscal impact of amendments to tax brackets, tax rates, credits, deductions, and exemptions, as well as any other factors it deems relevant to making Virginia's individual income tax system more progressive and fair in response to economic dynamics.

The VSCPA will reach out to stakeholders to communicate CPAs feedback on these issues.
 

Tax credit changes

  • Coal: Several coal-related credits like the Coalfield Employment Enhancement Tax Credit are repealed.
  • Conservation Tillage Equipment and Pesticide and Fertilizer Application Equipment: Nonrefundable credit eliminated and replaced with new refundable credit for individuals and corporations.
  • Agricultural Best Management Practices: 50% of the first $100,000 expended for agricultural best management practices and enhanced for certain taxpayers with an approved resource management plan. 
  • Research and Development: Credits to the Bank Franchise Tax expanded.
  • Port of Virginia: Sunset dates extended for International Trade Facility Tax Credit, Barge and Rail Usage Tax Credit, and the Port Volume Increase Tax Credit.