Update: The 2023 General Assembly passed legislation that conforms Virginia’s tax law to the federal tax code on a rolling basis, with certain exceptions. The legislation also sets guidelines for future federal law changes that Virginia law would not conform to. For further information, please see the 2023 Legislative Summary. 

Conformity refers to how closely Virginia follows definitions and other provisions of the federal tax code, most importantly, the definition of adjusted gross income.

What’s new? 

Virginia’s General Assembly recently passed legislation that advances our conformity to the federal tax code through the end of 2021, with some exceptions.  

Virginia is generally following the American Rescue Plan Act of 2021 (ARPA), meaning residents will benefit from federal provisions that were amended or included in that legislation when filing their Virginia taxes. Virginia modified how it’s conforming to certain COVID-19 business assistance programs for tax year 2021 and tax year 2019. No changes have been made to the Virginia income tax treatment for recipients of COVID-19 business assistance for tax year 2020. 

American Rescue Plan Act of 2021 

Virginia taxpayers will benefit from the following federal provisions when filing their Virginia taxes: 

  • Increasing the maximum amount of employment-related expenses families can use toward the federal Child and Dependent Care Tax Credit, which may benefit taxpayers claiming the Virginia Child and Dependent Care Deduction for tax year 2021 because it is determined based on the amount of such expenses.
  • Expanding eligibility for the federal Earned Income Tax Credit for certain taxpayers, which benefits taxpayers claiming the Virginia Earned Income Tax Credit for tax year 2021.
  • Increasing the amount families can contribute to their Child and Dependent Care Flexible Spending Accounts for tax year 2021. 
  • Excluding student loan forgiveness from gross income for tax year 2021 through tax year 2025. 
  • Allowing certain businesses to receive tax-free assistance under the Restaurant Revitalization and Targeted Economic Injury Disaster Loan Advance (EIDL) grant programs, while also deducting the business expenses paid with these tax-free funds. 

Because these provisions are already incorporated in federal and Virginia tax forms, no adjustment is necessary to benefit from these federal changes. 

COVID-19 Business Assistance Programs

Virginia modified how it’s conforming to certain COVID-19 business assistance programs for tax years 2021 and 2019: 

  • Tax year 2021: Virginia is generally conforming to the federal tax treatment of COVID-19 business assistance programs, so businesses will generally not need to make an adjustment on their 2021 Virginia income tax returns if they’ve benefited from Paycheck Protection Program (PPP) loan proceeds, EIDL program funding, and/or Restaurant Revitalization grants. 
  • Tax year 2019: Virginia retroactively extended our Virginia-specific deduction of up to $100,000 in business expenses funded by forgiven PPP loan proceeds and our Virginia-specific subtraction of up to $100,000 for Rebuild Virginia grant recipients to tax year 2019. As a result, businesses can deduct and subtract expenses and income received during calendar year 2020 that was reflected on their 2019 returns. 

For other exceptions and additional details, see Tax Bulletin 22-1.