Virginia Confor—maybe

Virginia tax conformity, which in previous sessions of the legislature passed as a standalone piece of legislation, got caught in the budget process this year.

Those looking for the exact conformity provision need to look around page 370 in the Virginia budget, where it was finally passed on April 21 in the veto session of the legislature. The new conformity language will be in effect as soon as Gov. Bob McDonnell signs HB29, which is the amended 2008–2010 budget bill.

Confor—maybe depends on whether any of the now nonconforming provisions apply to you or your clients.

First, Virginia’s fixed-date of conformity to the terms of the Internal Revenue Code have advanced from December 31, 2008, to January 22, 2010. This allows the contributions for Haiti relief, extended by Congress, to also apply to Virginia.

Second, there are exceptions, four of which are detailed below:

1. Virginia has not adopted the bonus depreciation provisions of the Internal Revenue Code. This creates a difference between federal and state depreciation for those who have adopted bonus for federal purposes. Reminder that bonus is mandatory on the federal return and failure to attach an opt-out schedule means you have adopted bonus. This further creates a problem when completing the Virginia return. Great care should be used when dealing with pass-through entity tax situations.
2. Virginia did not adopt the five-year net operating loss carry back loss provisions in the Internal Revenue Code. Virginia retains the two back and forward 20-year provision. This, again, creates federal and Virginia differences.
3. Virginia did not adopt one portion of the cancellation of indebtedness rules put in the Internal Revenue Code. Section 108(i) was not adopted in Virginia in the same manner as in the Internal Revenue Code. For IRS purposes, this provision allows cancellation of indebtedness income realized in 2009 or 2010 to be spread over five years beginning in 2014 for the 2009 income and 2015 for the 2010 income. For Virginia, the 2009 income is recognized for tax purposes over a three-year period beginning in 2009. Thus, again, there are differences between federal and state filings. Remember this is only a timing difference.
4. Lastly, the Section 199 deduction for federal was increased to 9% of eligible expenses beginning in 2009. Virginia froze the percentage at 6%. Thus, the Virginia deduction for manufacturers is two-thirds the amount claimed on the federal return.

This is a brief summary of the conformity provisions included in the budget bill. For more detailed information, tune in to the webcast on the afternoon of May 11 when a member of the Virginia Department of Taxation and I will discuss the conformity bill and how to handle amended returns, as well as what disclosures will need to be included.