United States

Virginia bill updates IRC conformity and addresses federal tax reform

TAX ALERT  | 

On Feb. 15, 2019, Virginia Gov. Ralph Northam signed Senate Bill 1372, updating Virginia’s conformity to the federal tax reform law commonly known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97. The bill, which immediately became law upon the governor’s signing, advances the state’s IRC conformity date to Dec. 31, 2018, and decouples from certain other provisions. The bill does not revise the state’s current nonconformity from the following IRC provisions:

  • Bonus depreciation allowed for certain assets under federal income taxation
  • The five-year NOLs generated in certain taxable years
  • Tax exclusions related to cancellation of debt income
  • Tax deductions related to the application of the applicable high yield debt obligation rules

Individual Income Tax

Senate Bill 1372 specifically decouples from the TCJA’s $10,000 state and local tax deduction cap. Recall that, prior to the TCJA, taxpayers’ deductions for state and local taxes were generally unlimited. The TCJA limited the deduction to $10,000 in state and local taxes which were not paid or accrued in carrying on a trade or business. Virginia’s legislation allows taxpayers, for taxable years beginning on or after Jan. 1, 2019, to deduct the actual amount of real and personal property taxes paid, that would not otherwise be deducted solely on account of the $10,000 federal annual limitation.

The bill also increases the standard deduction to $4,500 for single filers and $9,000 for married persons filing jointly. Those deductions are currently $3,000 and $6,000, respectively. In addition to increasing the standard deduction, the legislation allows a taxpayer to itemize deductions, regardless of the taxpayer’s election for federal income tax purposes. Previously, if a taxpayer elected the standard deduction for federal purposes, they had to use the same election for Virginia purposes. The legislation also provides a refund of up to $110 for individual filers and $220 for married filers filing jointly, for taxpayers filing 2018 tax year returns by July 1, 2019.

Finally, any additional revenues generated by certain TCJA provisions related to individual income tax reform, beyond those necessary to fund the provisions of the bill, will accrue to a Taxpayer Relief Fund. The General Assembly will use this fund to enact future tax reform measures.

Corporate Income Tax

Senate Bill 1372 expands Virginia’s existing corporate income tax subtraction for subpart F income to include Global Intangible Low-Tax Income (GILTI). For taxable years beginning on or after Jan. 1, 2018, a taxpayer can subtract GILTI from income to the extent included in a taxpayer’s federal taxable income.

The legislation also allows for both an individual and corporate tax deduction for 20 percent of the amount of business interest that is disallowed as a deduction for federal purposes under section 163(j). This provision is effective for taxable years beginning on or after Jan. 1, 2018.

Takeaways

Certain provisions of this law are effective for tax years beginning Jan. 1, 2018. Accordingly, Virginia taxpayers should note how the provisions regarding the business interest deduction and GILTI will affect their 2018 tax returns. Individual taxpayers will be able to claim an increased standard deduction, and increased deduction for state and local taxes, starting with the tax year beginning Jan. 1, 2019. Taxpayers uncertain on how to apply these new provisions should consider speaking to their tax advisers and to determine whether extensions may be necessary.

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