What is Conformity? 

Generally, the General Assembly passes legislation that specifies how Virginia will conform to the federal tax code for the previous calendar year, impacting how Virginians file their income tax returns. This year, the General Assembly passed legislation advancing our date of conformity to December 31, 2020.

Is Virginia Conforming to Recently Enacted Federal Tax Legislation? 

The U.S. Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES” Act) and the Consolidated Appropriations Act, 2021 (“the CAA”), which impacted the federal tax code. 

Virginia is mostly conforming to both the CARES Act and the CAA, including the federal tax exemption for Paycheck Protection Program (“PPP”) loan forgiveness, with the following exceptions: 

PPP Loan Proceeds Deduction Limit

The CAA allows taxpayers to claim a federal deduction for business expenses funded by forgiven PPP loan proceeds. Virginia’s Conformity legislation limits the deduction to $100,000 for business expenses funded by forgiven PPP loan proceeds. The Virginia deduction may be claimed solely for Taxable Year 2020. If you claimed a federal deduction for business expenses funded by forgiven PPP loans on your Taxable Year 2019 return, you must add back the full amount of such deduction on your Taxable Year 2019 Virginia return.

What if my PPP loan has not yet been forgiven? 

If, at the end of Taxable Year 2020, your PPP loan had not yet been forgiven, but you had a reasonable expectation that it would be, you may claim the deduction up to the $100,000 deduction limit on your Taxable Year 2020 return. See IRS Revenue Ruling 20-27 for more information. 

How does the limit apply to pass-through entities?  

For pass-through entities, the $100,000 limit generally applies at the entity level, and does not need to be applied again at the owner level for the portion that has already been limited. Therefore, an individual with an ownership stake in multiple pass-through entities that have each applied the $100,000 limit to their deductions can, in aggregate, claim a deduction for expenses paid using PPP loan proceeds in excess of the limit. 

The limit will otherwise apply at the taxpayer level. For example, individuals who receive federal Schedule C income from businesses that they operated or professions they practiced as a sole proprietor will be required to apply the $100,000 limit in aggregate to all deductions arising from all their businesses and professions.   

What action do I need to take? 

  • You don’t need to make any adjustments on your 2020 Virginia return if you received PPP loan forgiveness of $100,000 or less. 
  • However, if you received PPP loan forgiveness of more than $100,000, you must report a fixed date conformity addition (not below zero) for the amount of business expense deduction disallowed under the principles in IRS Notice 2020-32 and subsequent pre-CAA IRS guidance over $100,000. 

See Virginia Tax Bulletin 21-4 for additional information regarding the calculation of this fixed date conformity addition. 

Business Changes Made by the CARES Act

Virginia’s legislation also deconforms from three provisions in the CARES Act that temporarily change limitations to: 

  • Net operating loss deduction
  • Excess business losses
  • Business interest deduction 

What Action Do I need to Take? 

  • See Virginia Tax Bulletin 21-4 for guidance on how to make adjustments related to these business changes. You may be required to make adjustments to your 2020 returns and returns for subsequent taxable years. And, because these changes are retroactive, you may also need to file an amended return for previous taxable years. 
Economic Injury Disaster Loan (EIDL) Funding 

Virginia’s legislation deconforms from a provision in the CAA that allows you to claim a federal deduction for business expenses funded by certain EIDL funding. 

What Action Do I need to Take? 

  • You must report a fixed date conformity addition equal to the amount of business expenses paid using tax-exempt EIDL funding that were deductible on the federal return. See Virginia Tax Bulletin 21-4 for more information. 
Medical Expense Deduction Threshold

Virginia’s legislation deconforms from the provision in the CAA that permanently reduces the medical expense deduction threshold. 

What Action Do I need to Take? 

  • You must use this reduced deduction threshold when filing your Virginia return. This is the same calculation used on the Virginia return in prior years and has not changed. 
Subtraction for Rebuild Virginia Grants

Under Virginia’s legislation, you can make an individual and corporate income tax subtraction up to $100,000 of all Rebuild Virginia Grants received for Tax Year 2020, as long as those grants were not otherwise subtracted from income. This $100,000 limit applies separately from the PPP loan deduction limit. 

What Action Do I need to Take? 

  • You may report a subtraction on your Virginia return. See Virginia Tax Bulletin 21-4 for additional information on the calculation of the subtraction. 

What about the American Rescue Plan Act of 2021 and unemployment income? 

Virginia does not currently conform to federal tax legislation enacted during 2021, including the American Rescue Plan Act, because our date of conformity is fixed at December 31, 2020.

Note: The American Rescue Plan Act of 2021 excluded certain unemployment payments from taxable income at the federal level. Since Virginia already does not tax unemployment compensation benefits, you will continue to claim the Virginia subtraction for the full amount of unemployment compensation benefits and use the Virginia Fixed Date Conformity addition for the amount of unemployment income excluded on your federal return, so that you are not subtracting your unemployment benefit twice.

Where can I find more information?

For more information, reference Virginia Tax Bulletin 21-4

If you need assistance or would like to speak directly with a representative about these changes, call Customer Services at 804.367.8037.