Fixed Date Conformity in Virginia
Fixed Date Conformity Provisions
Since 1972, Virginia has conformed to federal income tax law. Whenever federal income tax law changed, the changes automatically affected Virginia income taxes, unless otherwise exempt. Beginning in 2002, each session of the Virginia General Assembly has fixed a date of conformity with the Internal Revenue Code. Under emergency legislation (House Bill 402; Chapter 2 of the 2016 Acts of Assembly) passed by the 2016 General Assembly and signed by Governor McAuliffe on February 5, 2016, Virginia's conformity to the terms of the Internal Revenue Code will advance from December 31, 2014 to December 31, 2015, which affects conformity with the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). For details on how the PATH Act impacts Virginia income tax returns for taxable year 2015, see Tax Bulletin 16-1.
Previous legislation (House Bill 1085; Chapter 1 of the 2014 Acts of Assembly and Senate Bill 288, Chapter 2 of the 2014 Acts of Assembly) extended Virginia's conformity to the federal enhanced Earned Income Tax Credit ("EITC") to taxable years ending before January 1, 2018.
Clarification on Cancellation of Debt Income
Cancellation of debt income ("CODI") arises when a creditor forgives all or any portion of a debt, such as when a bank agrees to a short sale in lieu of foreclosure. Although the creditor will issue a Form 1099 reporting the amount of debt forgiven in the transaction, there are several exceptions that exempt the CODI from taxation, such as the debtor being insolvent or bankrupt.
In the case of individuals, if the CODI arose from the taxpayer's principal residence the taxpayer may qualify for exemption under the Mortgage Debt Relief Act of 2007. Virginia fully conforms to the federal exemption from taxation of CODI attributable to insolvency, bankruptcy, or the Mortgage Debt Relief Act of 2007.
In 2009 Congress added subsection (i) to IRC § 108 (Deferral and ratable inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument). This subsection allows a business to elect a five-year deferral to report CODI arising from certain refinancing of business debt.
In 2010 the General Assembly deconformed from the federal deferral under IRC § 108(i). Therefore, businesses that elect to defer their qualifying CODI under IRC § 108(i) will be required to make fixed date conformity adjustments on many of their Virginia income tax returns throughout the deferral period. In all other respects Virginia conforms to the treatment of CODI under IRC § 108.
Businesses that are required to make a fixed date conformity adjustment on their Virginia returns attributable to the IRC § 108(i) deferral may elect to make the addition over three taxable years if the reacquisition transaction closed on or before April 21, 2010. The General Assembly extended this election at its 2011 session to apply to transactions closing between January 1 and April 21, 2010. Because this was not enacted until the Governor signed HB 1874 on February 16, 2011, the extension is not reflected in the forms and instructions.
Regardless of whether the business elects to report the fixed-date conformity addition over one year or three years, the business will report a fixed-date conformity subtraction in each taxable year that the deferred CODI is subsequently included in its federal taxable income.