The Virginia General Assembly has not yet passed tax conformity in Virginia, which could cause major problems for Virginia taxpayers and tax preparers. Years ago, when the legislature decided to enact fixed-date conformity, it was understood that the General Assembly would then have to pass a conformity bill annually. And in the past, the bill has sailed through without issue. This year, however, the bill is in danger — which poses major threats for taxpayers.
Here are some of the most prominent issues that would result from NOT passing conformity:
- Please refer to the impact statement, paragraph 11, attached to SB 545, which states “Because federal adjusted gross income (individuals) and federal taxable income (business) are the starting point for Virginia tax returns, if the bill is not enacted, Virginia taxpayers would be required to make complex ‘Fixed-Date Conformity’ adjustments to remove the changes made by this Act when they prepare their Virginia tax returns.”
a. Not only would this cause increased cost and complexity for taxpayers, the Virginia Department of Taxation (TAX) would encounter significant programming issues in processing tax returns. Electronic filing, which has been a cost reduction goal of TAX for many years, would suffer a setback, as many of the returns would not be able to be e-filed, as the start point of the calculation would not be match federal filing. Not only would there be increased programming costs, but probably additional forms for taxpayers to complete to reconcile federal and Virginia taxable income.
b. Businesses and individual taxpayers would be faced with the added cost of having two sets of tax records, one for the Internal Revenue Service (IRS) and another for TAX.
- Changes made to the Federal Earned Income Tax Credit would not carry forward to the Virginia calculation. Those taxpayers who need the relief most would have a tax INCREASE on their Virginia returns, whereas their federal taxes will have been lowered.
- Failure to adopt conformity would not necessarily achieve the desired budget savings that may be anticipated. Although it is difficult to measure the impact, additional costs might include program and administration costs for TAX; additional taxpayer costs, which would be deducted by businesses; and decreased compliance due to added complexity, which could cost the Commonwealth money and not increase tax collections.
- Business taxpayers looking to expand or increase productivity could be disadvantaged because of lower depreciation deductions. This is a mere timing difference. It may also influence job creation in the Commonwealth. Currently, Virginia is in a competition with Maryland and Washington, D.C., to attract major corporations, and decoupling completely from the Internal Revenue Code could be the influencing factor NOT to locate in the Commonwealth.
- Most jurisdictions have advanced conformity, with exceptions similar to those contained in the original bill. Failing to accomplish conformity would be a giant step backward for Virginia.
- Federal legislation in 2009 increased the fringe benefit for taking mass transit to work or parking at or near the employer. This would not be adopted by Virginia if conformity were not advanced. Thus, taxpayers would have to recalculate the W-2 income received from an employer.
- For taxpayers who are S corporations and contemplating selling their businesses, the period for calculating the “built-in-gain” would be different for federal and Virginia. Virginia S corporation owners would pay higher taxes than those in jurisdictions where conformity was advanced.
- The expanded definition of expenses available to be paid by Section 529 plans would not conform from federal to Virginia. Congress expanded the definition of expense able to be reimbursed from 529 and that would not be the same definition in Virginia.
These are just a few of the issues that might ensue if we don’t pass conformity in Virginia.