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Virginia Lawmakers to Debate IRC Conformity 

Posted on Jan. 13, 2021

Virginia would decouple from some income tax changes in the federal Coronavirus Aid, Relief, and Economic Security Act, under a pair of bills filed ahead of the 2021 legislative session, which is set to begin January 13.

H.B. 1935, filed January 11 by House Finance Committee Chair Vivian Watts (D), would update the state’s reference to the Internal Revenue Code from December 31, 2019, to December 31, 2020, but would decouple from some recent IRC changes. 

The bill contains an emergency clause, which means it would take effect on passage. 

An identical bill (S.B. 1146) was filed January 5 by Senate Finance and Appropriations Committee Chair Janet Howell (D). Both bills appear to mirror the fiscal 2020–2022 biennial budget amendments (S.B. 1100) proposed by Gov. Ralph Northam (D) in December 2020.

Typically, finance committee chairs in the House and Senate introduce conformity bills on behalf of the governor, according to Emily Walker, vice president of advocacy for the Virginia Society of CPAs. 

The proposals would decouple from the federal Tax Cuts and Jobs Act’s suspension of the overall limitation on itemized deductions under IRC section 68(f) for tax year 2017 and for tax years beginning on or after January 1, 2019. The state would also decouple from the reduction in the medical expense deduction floor for tax year 2017 and tax years beginning on and after January 1, 2019. 

Under the bills, the state would also decouple from changes in the CARES Act related to net operating losses, excess business losses, and limitations on business interest expense deductions. Those business changes are expected to reduce fiscal 2022 revenues by about $665.7 million in fiscal 2022, according to a November 19 presentation from the Senate Finance and Appropriations Committee. 

The CARES Act decreased the TCJA’s limitation on business interest expenses subject to deduction in tax years 2019 and 2020 under IRC 163(j), and eliminated loss limitations on noncorporate taxpayers as imposed by the TCJA under IRC 461(l) for tax years 2018, 2019, and 2020. It also relaxed the TCJA’s limitation on the NOL deduction and allowed a five-year carryback of NOLs generated in tax years 2018, 2019, and 2020. 

Jared Walczak, vice president of state projects at the Tax Foundation, told Tax Notes, “Virginia would not be alone in decoupling from the liquidity-enhancing provisions of the CARES Act, but temporarily rolling back some of the tax code's built-in disincentives for investment could help some businesses stay afloat during the pandemic.

“Increasing the odds that businesses survive this crisis is arguably worth much more to the commonwealth than the revenue associated with decoupling from these provisions, which Congress designed as a lifeline for employers,” Walczak said.

Partial conformity with the CARES Act as proposed in S.B. 1100 would reduce general fund revenues by about $41.7 million over the biennium, legislative analyst April Kees said during a January 11 presentation to the Senate Finance and Appropriations Committee. 

The estimate does not account for tax provisions in the federal Consolidated Appropriations Act, 2021 (H.R. 133), signed into law December 27 by President Trump. That will be a topic of further discussion for the committee, Kees said. 

The federal appropriations act doesn’t restrict business deductions for Paycheck Protection Program-related expenses, clarifying that expenses paid with a forgiven PPP loan can still be deducted from a business’s taxes. The changes follow April 2020 guidance from the IRS (Notice 2020-32, 2020-21 IRB 837), which announced that expenses funded with forgiven PPP loans weren’t deductible.

Walker said the Virginia conformity bills, as drafted, would include IRC changes under H.R. 133. She noted that the bills and the governor’s budget were drafted before the federal law was enacted.

“The revenue impact wasn’t contemplated; I have heard they are working through those numbers to get a good estimate, and we’ll see what they recommend,” Walker said. 

Walker said the Society of CPAs typically supports conformity, although it does not take a position on specific provisions. “Our concerns are about timing and how [conformity] impacts tax filing season; we would like to see it happen as quickly as possible,” she said. 

Adam Thimmesch, a law professor at the University of Nebraska-Lincoln, told Tax Notes that he thinks states should consider decoupling from the federal PPP tax provisions and that static conformity states like Virginia should consider the issue very carefully before updating their conformity dates. 

“Conforming to the federal double tax benefits would be incredibly costly for states, and it is likely that more directed assistance would better address states’ needs. Piggybacking on both federal tax benefits, in contrast, would simply provide more aid to the exact same group of taxpayers who have already received even greater federal assistance, leaving those who did not get assistance shouldering greater burdens,” Thimmesch said. 

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