How did Virginia's advance to December 31, 2011 federal conformity affect 2011 income tax returns?

Plain-English summary

Virginia advanced its fixed date of conformity to the Internal Revenue Code through December 31, 2011 for tax years beginning in 2011. The change came through House Bill 516, Chapter 2 of the 2012 Acts of Assembly.

The bulletin said Congress had enacted no major 2011 federal measure affecting Virginia income tax, but several Virginia exceptions continued. Taxpayers still had to account for Virginia's treatment of five-year net-operating-loss carrybacks, specified bonus depreciation, applicable high-yield discount obligations, cancellation-of-debt deferral, and the domestic production deduction.

For 2011, Virginia conformed to the temporary federal earned income tax credit increase under IRC § 32(b)(3) when computing the Virginia low-income tax credit. The bulletin warned that Virginia had not yet conformed to the federal extension for 2012.

Individuals and corporations that had already filed a 2011 return but needed a conformity adjustment were directed to the applicable amended-return instructions.

What this means for you

• This bulletin applies to 2011 returns and is historical guidance.
• Federal treatment did not automatically control every Virginia item.
• Several Virginia additions and partial deconformity rules remained in force.
• The EITC conformity statement covered 2011, not automatically 2012.

Citations and references

• 2012 Va. Acts ch. 2 (House Bill 516).
• IRC §§ 32(b)(3), 108(i), 163(e)(5)(F), 168(k), 168(l), 168(m), 168(n), 1400L, 1400N, and 199.
• Virginia Tax Bulletin 12-1.

Subject

Virginia Income Tax Fixed - Date conformity Advanced to December 31, 2011

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-5

Original ruling text

TAX BULLETIN 12-1

Virginia Department of Taxation February 9, 2012

IMPORTANT INFORMATION REGARDING

2011 VIRGINIA INCOME TAX RETURNS

VIRGINIA INCOME TAX FIXED-DATE CONFORMITY ADVANCED TO DECEMBER 31, 2011

Under emergency legislation (House Bill 516; Chapter 2 of the 2012 Acts of Assembly) passed by the 2012 General Assembly and signed by Governor McDonnell on February 7, 2012, Virginia's fixed-date of conformity to the terms of the Internal Revenue Code will advance from December 31, 2010, to December 31, 2011. This notice is intended to provide taxpayers with directions on how to reconcile this legislation with their 2011 Virginia income tax returns. This legislation extends the temporary increase in the federal earned income tax credit (EITC) benefit to taxable year 2011.

Virginia Income Tax

For approximately thirty years, Virginia conformed to federal income tax law. Whenever federal income tax law changed, the changes automatically affected Virginia income taxes, unless otherwise exempted. In 2003, Virginia began conforming to the IRC as of a specific, fixed date, moving the date each year. The Governor has just signed legislation advancing the date as of which Virginia conforms to the IRC from December 31, 2010, to December 31, 2011. This bulletin informs taxpayers about which fixed-date conformity adjustments are still necessary for their 2011 income tax returns, if applicable.

Impact of Federal Legislation on 2011 Virginia Income Tax Returns

Congress did not enact any major tax measures in 2011 that would affect income taxation in Virginia.

Conformity to the Internal Revenue Code for Taxable Year 2011

Effective for taxable years beginning on and after January 1, 2011, Virginia’s fixed-date of conformity to the terms of the Internal Revenue Code (“IRC”) will advance from December 31, 2010, to December 31, 2011, with limited exceptions. Virginia will continue to disallow any 5-year carry-back of net operating losses (“NOL”) allowed for NOLs generated in either taxable year 2008 or 2009.

Bonus Depreciation

Virginia will continue to disallow any bonus depreciation allowed for certain assets under Internal Revenue Code (“IRC”) § 168(k). The fixed-date conformity will not include any bonus depreciation that is allowed under IRC §§ 168(l), 168(m), 1400L, and 1400N. These sections allow bonus depreciations in limited circumstances and were designed to benefit the following:

Cellulosic biofuel plant property – IRC § 168(l);

Reuse and recycling property – IRC § 168(m);

New York Liberty Zone property – IRC § 1400L; and

Gulf Opportunity Zone property – IRC § 1400N.

Virginia’ fixed-date conformity will allow any bonus depreciation that is allowed under IRC § 168(n), which is designed to benefit qualified disaster assistance property.

When reporting any adjustments related to bonus depreciation, the adjustments for all of the categories of bonus depreciation should be grouped together on the applicable line of the taxpayer’s income tax return.

Applicable High Yield Discount Obligations

Virginia will continue to disallow the income tax deductions related to applicable high yield discount obligations under IRC § 163(e)(5)(F). The American Recovery and Reinvestment Act (“ARRA”) established a provision that suspends the application of the applicable high yield debt obligation (AHYDO) rules for certain debts issued after September 30, 2008, and before January 1, 2010. Virginia will continue not to conform to this federal tax provision.

Cancellation of Debt Income

Virginia will continue to disallow the income tax exclusions related to cancellation of debt income realized in connection with a reacquisition of business debt at a discount after December 31, 2008, and before January 1, 2011. Under IRC § 108(i), the income realized upon the reacquisition of certain business debt during 2009 and 2010 may be deferred and reported in taxable years 2014 through 2018.

For taxable year 2009, taxpayers were allowed to elect a partial deferral of these exclusions for specified debt reacquired in taxable year 2009. Taxpayers that deferred cancellation of debt income from transactions in 2009 on their federal returns were allowed to elect to report the addition required by conformity in equal amounts over three taxable years: 2009, 2010 and 2011. Taxpayers who elected in 2009 to report this addition over three years must continue to report the addition for taxable year 2011.

For taxable year 2010, Virginia extended the treatment of deferral of cancellation of debt to transactions completed on or before the adoption of the Appropriations Act on April 21, 2010 (Chapter 874 of the 2010 Acts of Assembly). Because the change to the Virginia treatment of this income was not fully known until the Appropriations Act was passed by the General Assembly at its reconvened session on April 21, 2010, the treatment adopted for transactions that occurred in 2009 was extended to transactions that were completed on or before April 21, 2010. Taxpayers who elected in 2010 to report this addition over three years must continue to report the income from qualified transactions in three equal amounts for taxable years 2010, 2011 and 2012.

Domestic Production Deduction

Virginia will continue to partially deconform from the domestic production deduction allowed under IRC § 199 for taxable years 2010 and thereafter. The federal domestic production deduction is equal to 9% of qualified production activities income of the taxpayer in 2010 and thereafter. Instead of allowing the full amount of this deduction to flow through, Virginia will allow a deduction equal to two-thirds of the federal deduction. This is equivalent to allowing a deduction of 6% of the qualifying income, as had been allowed in taxable years 2008 through 2010.

(The General Assembly is considering House Bill 1153 and Senate Bill 462, which would allow taxpayers to claim the full amount of the domestic production deduction for Virginia income tax purposes for taxable year 2012 only. At the time this Tax Bulletin was published, those bills were still under consideration.)

Earned Income Tax Credit

Under House Bill 516, signed by Governor McDonnell, for purposes of computing the Virginia low-income tax credit, Virginia will conform to the temporary increase in the federal earned income tax credit (EITC) under IRC § 32(b)(3) for taxable year 2011. Although the EITC increase was extended to taxable year 2012 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Virginia law does not presently conform to this change for taxable year 2012. Since individual returns for taxable year 2012 are not due until May 1, 2013, the General Assembly would be able to consider conforming to the extension during the 2013 session.

Instructions for Taxpayers

Individuals and corporations should consult the instructions for the appropriate 2011 Virginia income tax return for information about how to properly add back income related to bonus depreciation, applicable high yield discount obligations, cancellation of debt income and domestic production expenses that are deducted for federal income tax purposes. In addition, individuals and corporations who have already filed a 2011 Virginia income tax return but need to make a fixed-date conformity adjustment should consult the instructions for the appropriate income tax return for further information about filing an amended return.

Further Instructions

If you have additional questions, please visit our website at http://www.tax.virginia.gov ,

or contact us at (804) 367-8031 for individual income tax questions or (804) 367-8037

for corporate income tax questions.