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On March 15, 2021, Virginia Gov. Ralph Northam approved legislation that retroactively updates the Commonwealth’s Internal Revenue Code (IRC) conformity date from Dec. 31, 2019, to Dec. 31, 2020.1
Additionally, as part of the General Assembly two-year spending plan, covering FY2020-2022 and enacted on April 7, 2021, corporations that are members of a unitary group will be required to file an informational report with the state by July 1, 2021.2
Virginia advances federal conformity to Dec. 31, 2020
Virginia generally employs fixed-date conformity to the IRC. While the conformity date has been advanced from Dec. 31, 2019, to Dec. 31, 2020, Virginia continues to decouple from several IRC provisions, including net operating loss (NOL) carrybacks, bonus depreciation allowances, cancellation of debt income, high-yield debt obligations, increased medical expense deductions, and itemized deduction limitations.3
In addition to these historic decoupling provisions, Virginia also chose to decouple from several pandemic-related provisions adopted in federally enacted legislation last year.
CARES Act decoupling
By advancing the IRC conformity date to the end of 2020, the legislation generally conformed to the CARES Act, but did specifically decouple from three provisions related to decreases in taxable income: (i) the suspension of NOL limitations for the 2018-2020 tax years; (ii) the suspension of the excess business loss limitation for the 2018-2020 tax years; and (iii) raising the business interest limitation for the 2019 and 2020 tax years.4
In order to appropriately file their Virginia corporate income tax returns, taxpayers will need separate records to determine Virginia taxable income and may be required to adjust their NOLs and Virginia deductions. Effectively, Virginia taxpayers must file as if these provisions of the CARES Act were never enacted. Additionally, as the decoupling is retroactive, amended prior year Virginia income tax returns may be required.
Consolidated Appropriations Act (CAA) decoupling
Virginia generally conformed to the CAA, enacted by Congress on Dec. 27, 2020, but there were specific provisions from which Virginia has decided to decouple. First, Virginia taxpayers seeking to take advantage of the CAA allowance to deduct business expenses which were funded by a Paycheck Protection Program (PPP) loan will be limited to a $100,000 deduction. PPP loans were established by the CARES Act for small businesses (500 employees or fewer).5
Any corporate or individual income taxpayers with greater than $100,000 in PPP loan forgiveness will have a decoupling adjustment for Virginia tax purposes.
Second, the Economic Injury Disaster Loan (“EIDL”) program allows applicants to request a $10,000 advance and provides assistance with repayment in certain cases. While Virginia conforms to the federal treatment of EIDL funds as non-taxable, Virginia does not allow the accompanying deduction for expenses paid using EIDL funding. This will cause a decoupling adjustment for any Virginia taxpayers taking advantage of that deduction on their federal income taxes.6
Rebuild Virginia Grant decoupling
While Rebuild Virginia grants would normally be considered taxable in Virginia as they are subject to federal income tax, the Virginia legislation included a subtraction for up to $100,000 from both individual and corporate income taxes. If the taxpayer is a pass-through entity, then the limitation will apply to the entity that received the grant. It should be noted that this subtraction is allowed only during the 2020 tax year to the extent the grants were included in taxable income.7
Virginia information report of unitary combined filing
Traditionally, Virginia has not enforced mandatory unitary combined reporting, instead allowing businesses to file a separate return, or elect to file a combined or consolidated return for unitary entities with activity in the state.8
However, Virginia enacted legislation as part of its budget bill that will require corporate members of a unitary group to file an informational report, recalculating their 2019 tax year computations on a unitary combined basis for determining Virginia taxable income and the associated tax due.9
The one-time report is due to the Virginia Department of Taxation by July 1, 2021
, and the due date cannot be extended.10
The informational report must include an illustration of the difference in the tax owed as a result of filing on a unitary combined basis compared to the tax owed in Virginia by the taxpayer under their original filing method utilized in 2019. Failure to timely file the report, or for making a material omission or misstatement on the report, will result in a $10,000 penalty.11
It should be noted that the Virginia Tax Commissioner may waive the penalty upon written request if the requirement is determined to cause the taxpayer an undue hardship.
The budget bill defines a “unitary business” to mean:
. . . a single economic enterprise made up either of separate parts of a single business entity or of a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts. A “unitary business” includes that part of the business that meets the definition in this section and is conducted by a taxpayer through the taxpayer's interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through entities. A “unitary business” shall not include persons subject to, or that would be subject to if doing business in the Commonwealth, the insurance premiums license tax . . . or the bank franchise tax . . . .12
Certain companies based primarily outside the United States are excluded from the definition of a “unitary business,” including:
. . . corporation[s] incorporated in a foreign jurisdiction (a “foreign corporation”) if the average of its property, payroll and sales factors outside the United States is eighty percent (80%) or more. If a foreign corporation is includible as a member in the unitary combined group, to the extent that such foreign corporation's income is subject to the provisions of a federal income tax treaty, such income is not includible in the unitary combined group net income. Such member shall also not include in the unitary combined report any expenses or apportionment factors attributable to income that is subject to the provisions of a federal income tax treaty.13
According to initial guidance released by the Department, a designated member of the unitary group will be required to file the report, which is to include information about the unitary group’s income, apportionment computation, tax credits and tax liability calculations. Such information will need to be provided as if filing a unitary combined report under both the Joyce
methods, in addition to the tax information reported under current filing requirements for all members of the unitary group that have nexus with Virginia.14
With the advancement of Virginia’s IRC conformity date, taxpayers may have additional decoupling adjustments related to provisions in the CARES Act and the CAA, as well as partial exclusions for the Rebuild Virginia Grant funds. In particular, corporate and individual taxpayers are limited to a $100,000 deduction for expenses funded by forgiven PPP loan proceeds. The Virginia legislature considered but did not enact legislation enabling rolling conformity with the IRC, signaling their continuing preference for retaining a level of control over budgetary matters.
Corporate taxpayers that currently file separate entity income tax returns in Virginia and are also part of a unitary group will bear the brunt of the new unitary filing information requirement. Much of the details on how to implement this informational reporting requirement have been left to the Commissioner and the Department, which will be required to issue additional guidelines addressing the type and format in which the information must be presented. Some issues that the Department may need to address include how to report information if there are fiscal year 2019 returns not due by July 1 or short periods in the 2019 tax year, the treatment of net operating losses and credits on a separate or combined basis, and whether a water’s edge election may be applied. We anticipate that the Department will continue to move swiftly to implement the reporting requirements, and so taxpayers should monitor communications with respect to this issue.
Given the short period of time until the due date of the information report, taxpayers could struggle to properly comply with this requirement unless the Department provides definitive guidance on how to complete the report soon. This is especially important given the complexity of the three filing methods currently available to taxpayers in Virginia. Under this informational reporting regime, taxpayers will be required to convert the data traditionally used by taxpayers for their Virginia corporation income tax returns into a unitary combined reporting format.
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