Menu
Tax Notes logo

Virginia Legislators Reach Compromise on IRC Conformity

Posted on Mar. 3, 2021

The Virginia General Assembly has reached a compromise on IRC conformity legislation, which would decouple the state from some federal COVID-19 tax relief that would have substantially reduced state revenues. 

The conference committee report for S.B. 1146 passed after legislators worked out their differences on S.B. 1146 and H.B. 1935. The Senate voted February 27 to agree to the conference report by a vote of 38 to 0 after the House agreed to the report February 25 on a 94-2 vote. The legislation heads next to Gov. Ralph Northam (D). 

The legislation would advance Virginia’s date of conformity to the IRC from December 31, 2019, to December 31, 2020.

Under the conference report, the state would decouple from changes in the Coronavirus Aid, Relief, and Economic Security Act (P.L. 116-136) related to net operating losses, excess business losses, and limitations on business interest expense deductions. Those business changes could reduce fiscal 2022 revenues by about $665.7 million, according to a November 19, 2020, presentation from the Senate Finance and Appropriations Committee. 

The conference report would conform to the federal tax exemption for loans forgiven under the Paycheck Protection Program and Economic Injury Disaster Loan program but would decouple from the provision of the Consolidated Appropriations Act, 2021 (P.L. 116-260), that allowed expenses paid for with the loans to be deductible.

The bill would create an income tax deduction of up to $100,000 of the amount that is not deductible when computing federal adjusted gross income related to PPP loans. The state would also establish a deduction of $100,000 for Rebuild Virginia grant proceeds.

The main point of disagreement was over deductions for expenses related to the forgiven federal loans. The House bill allowed only a $25,000 deduction for PPP loans and a $25,000 deduction for Rebuild Virginia grants for noncorporate taxpayers. The Senate’s version of the bill, which allowed for a $100,000 deduction for corporate and noncorporate taxpayers, is what ended up in the conference committee report. 

House Finance Committee Chair Vivian Watts (D), sponsor of H.B. 1935, said the conference report for S.B. 1146 would send $100 million to businesses affected by the COVID-19 pandemic for tax year 2020.

“The $100 million, in addition to that being tax-free, provides for a deduction of the business expenses for which that money was used,” Watts said during a February 27 House session.

Watts said the fiscal impact would be spread over the next two fiscal years because of the delayed tax filing deadlines.

Copy RID