Youngkin signs bill to conform tax code

This year’s tax season may be a little less complicated for businesses that were granted Paycheck Protection Program loans and Rebuild Virginia grants during the pandemic.

A bill that Gov. Glenn Youngkin signed into law Wednesday will ensure that the aid granted through those programs won’t be treated as taxable income.

Because Virginia state and federal tax guidelines don’t align and there are pandemic-specific financial issues to consider when filing returns, business taxes can be more complicated this year, bringing new questions and challenges.

Virginia is a static conformity (or fixed date) state for tax purposes, which means it is one of about 20 states that freeze conformity of state tax rules with federal tax code as of a particular date. The legislation that updated Virginia’s tax law to conform with the latest federal tax code was signed into law by Youngkin Wednesday.

“The COVID-19 pandemic was one of the most difficult times for Virginians since the Great Depression,” Youngkin said in a statement. “The federal government and the General Assembly came together to offer aid programs designed to keep businesses open and workers employed. While the worst parts of the COVID-19 pandemic are in the rearview mirror, many businesses are still struggling from the effects of unnecessary, forced economic shutdowns. This bill ensures programs designed to aid businesses don’t transform into tax liabilities that hinder Virginia’s economic recovery.” 

Emily Walker, vice president of advocacy for the Virginia Society of Certified Public Accountants, said the legislation is notable because Virginia did not fully conform for 2020.  “The way they did it for 2021 makes it easier on the accounting side,” Walker said. “It creates a really significant tax benefit for any business that was a recipient of those funding sources.” 

The conformity change is effective immediately. 

Normally, if a business takes a loan, it can deduct any business expenses paid with that loan from its taxable income. However, if the loan is forgiven or converted to a grant, that amount becomes part of the business’ taxable income, Walker explained. Forgiven PPP loans were unique because the federal government does not consider the forgiveness as taxable income, provided the funds were used correctly. 

VSCPA has advocated for state and federal tax conformity as much as possible to make for simpler filing. 

“We supported this bill and also advocated for [the General Assembly] to pass it as quick as possible,” Walker said. Tax season opened Jan. 24. 

Youngkin’s signing of the bill came about three weeks earlier than last year when then-Gov. Ralph Northam signed the tax conformity bill on the same day as the tax-filing deadline for businesses.

“Anybody that had a business tax return to file had to extend or choose to file with the rules not being finalized, meaning it’s a gamble,” said George Forsythe, managing partner of WellsColeman, and VSCPA chair-elect.

He has hundreds of returns waiting to be completed and is able to get moving on them now that the governor signed the conformity legislation.

“Selfishly, we want conformity because we can’t complete our work until the rules are known,” Forsythe said. 

The bill will save Virginia individual and business taxpayers $201 million in taxes, according to Youngkin’s office.