The measures would apply retroactively to tax years beginning on or after January 1, 2018. 

In 2018, Virginia advanced its Internal Revenue Code-conformity date to the Code as in effect on February 9, 2018, with certain exceptions. Notably, Virginia did not adopt any provisions of the Tax Cuts and Jobs Act (TCJA), except those that affected the computation of federal adjusted gross income for individuals or federal taxable income for corporations for tax years beginning after December 31, 2016, and before January 1, 2018.

In other words, none of the TCJA changes that were effective beginning on or after January 1, 2018, was adopted.

This year, two companion bills—House Bill 2529 and Senate Bill 1372—were introduced to advance Virginia’s conformity to the Internal Revenue Code to the Code as of December 31, 2018, and to eliminate the language explicitly not adopting the 2018 TCJA changes. 

Assuming the legislation is signed by the governor, Virginia would fully conform to the TCJA—but with certain exceptions. 

• GILTI and FDII:  For corporate taxpayers, the bills adopt a subtraction effective for tax years beginning on or after January 1, 2018, for any amount included in income under IRC section 951A (global intangible low-taxed income or “GILTI”). Virginia is a “line 30” state and starts the computation of Virginia taxable income with federal taxable income after NOLs and special deductions. Thus, Virginia corporate taxpayers would report federal taxable income as computed with the IRC section 250 deductions for GILTI and foreign derived intangible income (FDII), and then would be allowed a subtraction for any amount included in income by operation of IRC section 951A. Although the conformity bill does not specifically limit the subtraction to “net GILTI” (i.e., GILTI net of the IRC section 250 deduction), the statutory section allowing the subtraction for GILTI specifically states that subtractions would be allowed “to the extent included in and not otherwise subtracted from federal taxable income.”  As such, this language would likely prevent a taxpayer from deducting the gross GILTI amount, as well as taking the section 250 deduction for GILTI (i.e., no “double-dipping”).
• Limitation on business interest expense deductions: The conformity bills do not decouple from the IRC section 163(j) limitations on the deductibility of business interest expense, but provide for a Virginia-specific modification to the amount of interest that may be disallowed. Effective for tax years beginning on or after January 1, 2018, taxpayers would be allowed a subtraction equal to 20% of the business interest disallowed as a deduction under IRC section 163(j). While this provision was likely intended to benefit corporate taxpayers, it will create some complexities, especially in light of the fact that Virginia has related-party add-back rules that apply to certain types of intercompany interest. Not only would taxpayers have to track an 80% carryforward of the disallowed interest, they would have to ascertain the characterization as related- or unrelated-party interest for both the interest that is limited under federal law and the 20% Virginia subtraction from the amount of interest disallowed.  

For individual income taxpayers—for tax years beginning on or after January 1, 2019—Virginia decouples from the provision in the TCJA that suspends the overall limitation on itemized deductions. In other words, beginning in 2019, Virginia would limit itemized deductions for individuals (as these deductions were limited prior to the TCJA).

In addition, for tax years beginning on and after January 1, 2019, but before January 1, 2026, the Virginia standard deduction is increased from $3,000 to $4,500 for single individuals and from $6,000 to $9,000 for married persons filing a joint return. Under Virginia law, taxpayers that elect to itemize their deductions for federal purposes must also itemize their deductions for Virginia purposes.

Finally, also effective beginning in 2019, individuals are allowed a deduction for the actual amount of real and personal property taxes imposed that are not allowed to be deducted solely on account of the federal tax law cap of $10,000 on state and local tax (SALT) deductions.

In the days leading up to the passage of the conformity bills, there was much discussion about what the legislature needed to do with the anticipated extra revenues generated as a result of conformity to certain individual income tax provisions (the text of the bills estimated the additional revenues would total approximately $450 million annually after adjusting for economic growth).

Under the final conformity bills, a non-reverting "taxpayer relief fund" is created. The additional revenues collected through 2025 as a result of the individual tax reforms in the TCJA would be transferred to the fund and would be used "to effectuate permanent or temporary tax reform measures.”

In addition, certain of the extra revenues would be used to provide a refund for the 2018 tax year in amounts of up to $110 for individuals, or $220 for married persons filing a joint return. Any refunds issued pursuant to this provision would be subject to collection under the provisions of the Setoff Debt Collection Act.

These refunds would be issued on or after October 1, 2019, but before October 15, 2019.

For more information, contact a tax professional with KPMG’s State and Local Tax practice:

Diana Smith | +1 703-286-8214 | dfsmith@kpmg.com