Changes to tax law typically impact future returns, but the most recent one issued by the Virginia Department of Taxation will have some Virginians amending their 2017 state tax returns, too.
The IRS sets a date for states to comply with federal law. Virginia’s date of conformity changed from December 31, 2016, to February 9, 2018.This allows Virginia to incorporate provisions in the Disaster Tax Relief Airport and Airway Extension Act of 2017, Tax Cuts and Jobs Act (TCJVA) and the Bipartisan Budget Act of 2018 (BBA 2018) that effect the 2017 tax year.
Even though Virginia agreed to conform to some provisions for the 2017 tax year, they did not agree to conform to them all.
If You Claim Medical Expenses
One major area that Virginia will not conform to is the TCJA provision that temporarily increases the amount needed to take medical expense deductions.
Virginia taxpayers are allowed to claim medical expense deductions on both their state and federal return. This deduction amount was set to equal the amount of the taxpayer’s eligible expenses in excess of a deduction floor, previously set at 10 percent. However, the TCJA provision reduced the amount that could be deducted by temporarily reducing the floor to 7.5 percent. Taxpayers can still claim medical expenses, but state lawmakers are not conforming to the reduction of the floor.
If You Were Involved in a Natural Disaster
Virginia is also conforming to the provisions that help those individuals and businesses affected by Hurricanes Harvey and Irma. Those taxpayers are able to get the tax relief they are entitled to receive under the Disaster Relief Act.
If you include any of the following on your state return, Virginia will continue to deconform as it has in years past:
- Bonus depreciation allowed for certain assets under federal income taxation
- Five-year carry back of certain net operating losses (“NOLs”) generated in taxable years 2008 and 2009
- Tax exclusions related to cancellation of debt income
- Tax deductions related to the application of the applicable high yield debt obligation rules
To Your Benefit
Virginia will conform to the following TCJA provisions that are of benefit to state taxpayers since they affect the computation of federal adjusted gross income for individuals or federal taxable income for corporations for the 2017 tax year:
- Rollovers from 529 accounts to Achieving a Better Life Experience ("ABLE") accounts
- Modification of the treatment of S corporation conversions into C corporations
- Expensing of certain costs of replacing citrus plants lost by reason of a casualty
- Creation of qualified opportunity zones
- Denial of a deduction for settlements subject to a nondisclosure agreement paid in connection with sexual harassment
- Expansion of the provision relating to the non-deductibility of fines and penalties
- Repeal of the deduction for local lobbying expenses
- Revision of the treatment of contributions to capital
Also for the 2017 tax year, Virginia is conforming to the following provisions:
- The above-the-line deduction for qualified tuition and related expenses for higher education
- The exclusion from gross income of a discharge of qualified principal residence indebtedness
- The treatment of qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction
- Modifications to certain depreciation and cost recovery methods
- The eligibility of domestic gross receipts from Puerto Rico for the domestic production activities deduction
- The deduction for energy efficiency improvements to lighting, heating, cooling
Virginia plans to conform to the following TCJA provision in 2018 and years following
- Tax relief for specified 2016 disaster areas
- Extension of combat zone benefits to members of the armed forces performing services in the Sinai Peninsula of Egypt
Unless further conformity legislation is passed, the state does not plan to conform to any other provisions in the coming years.
What You Should Do
Talk with your tax advisor about these changes and what you can do to make adjustments to things like bonus depreciation, the carry back of certain NOLs, cancellation of debt income and applicable high yield discount obligation. Individual taxpayers should consider adjustments related to the deconformity from the increased medical expense deduction. If you have already filed your 2017 Virginia return, your tax advisor can help you make the necessary changes.
Make sure you know the latest changes in tax laws and policies and how they can impact your business’ bottom line. Contact PBMares tax advisors today to learn how the fixed date of conformity can be used to benefit for the 2017 tax year and in years to come.