What does Virginia Ruling of the Tax Commissioner P.D. 21-40 conclude about Net Operating Loss (NOL) : NOL Deduction (NOLD) - Amendments to Carryback Provisions - Tax Cuts and Jobs Act (TCJA) - Coronavirus Aid, Relief and Economic Security Act (CARES Act)?

Plain-English summary

A corporation filed a 2018 Form 500 NOLD (Corporate Application for Refund Carryback of Net Operating Loss), asking for a refund of 2016 Virginia corporate income tax by carrying back a net operating loss (NOL) that arose in the 2018 tax year. The Department denied the refund, reasoning that Virginia's conformity to the federal Tax Cuts and Jobs Act (TCJA), P.L. 115-97, meant the taxpayer could not carry back a 2018 NOL. The taxpayer appealed, pointing to the later federal CARES Act, P.L. 116-136, which it argued allowed the carryback.

The Department upheld the denial. Virginia does not separately spell out its own NOL deduction (NOLD) rules; instead, Va. Code § 58.1-301 generally conforms Virginia tax terminology to the Internal Revenue Code (IRC), and because Virginia starts its corporate income tax computation from federal taxable income (FTI), the Department allows an NOLD to the extent it is allowable in computing FTI. For NOLs arising in tax years beginning after December 31, 2017, the TCJA repealed the prior two-year NOL carryback (TCJA § 13302(b)(1)(A)), leaving only a carryforward. The CARES Act later reinstated a five-year carryback for NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 (CARES Act § 2303(b)); both laws amended IRC § 172, which governs the NOLD generally, including carryback periods.

The key problem for the taxpayer is that Virginia's conformity to the IRC is not automatically rolling or current -- it is fixed to the IRC "as it existed" as of a specific conformity date set by Va. Code § 58.1-301 B, which at the time of this ruling was December 31, 2019. The CARES Act was enacted March 27, 2020, after that conformity date, so Virginia had not yet conformed to the CARES Act's five-year carryback reinstatement. As a result, for Virginia purposes the TCJA's earlier repeal of the two-year carryback remained controlling law, even though the taxpayer could carry back its 2018 NOL to 2016 for federal purposes under the CARES Act. The Department noted the taxpayer should watch for future action by the Virginia General Assembly that might update the conformity date to cover the CARES Act, and could potentially re-file its claim if that happens.

What this means for you

Corporate tax directors and accountants handling NOL carrybacks

Do not assume that a federal NOL carryback automatically produces a matching Virginia refund. Virginia's IRC conformity is anchored to a fixed date under Va. Code § 58.1-301 B, and a federal law change enacted after that date -- like the CARES Act's five-year carryback -- is not automatically picked up by Virginia, even though Virginia generally "conforms" to the IRC. Check the conformity date in effect for the tax year at issue before assuming a federal carryback election will work at the state level.

Businesses navigating federal vs. state conformity to COVID-era relief

The CARES Act reinstated a five-year NOL carryback for losses arising in tax years beginning after December 31, 2017 and before January 1, 2021, reversing the TCJA's repeal of the old two-year carryback. That reinstatement is real and effective for federal tax purposes. But a state that "conforms" to the IRC as of a fixed historical date -- rather than on a rolling, up-to-date basis -- can still be following the TCJA's repeal rather than the CARES Act's later fix, producing a federal/state mismatch on the same NOL.

Multistate corporations

Because states vary in how and when they update their IRC conformity dates, an NOL carryback strategy that works federally, or even in some conforming states, may fail in a state whose conformity date has not yet caught up to the relevant federal law change. Track each state's specific conformity date and any pending legislation that might update it, since the Department here flagged that the Virginia General Assembly could later advance the date and potentially allow a re-filed claim.

Common questions

Q: If Virginia generally conforms to the Internal Revenue Code, why didn't it allow this carryback?
A: Virginia's conformity under Va. Code § 58.1-301 is fixed to the IRC as it existed on a specific date -- December 31, 2019, at the time of this ruling -- under Va. Code § 58.1-301 B. The CARES Act was enacted March 27, 2020, after that date, so Virginia had not yet conformed to its five-year carryback reinstatement.

Q: Could this taxpayer carry back its 2018 NOL for federal purposes?
A: Yes. The CARES Act reinstated a five-year carryback for NOLs arising in tax years beginning after December 31, 2017 and before January 1, 2021 (CARES Act § 2303(b)), which covered this taxpayer's 2018 NOL for federal purposes. The mismatch arose only because Virginia's fixed conformity date predated that federal change.

Q: Is there anything the taxpayer can do now?
A: The Department suggested watching for future action by the Virginia General Assembly that could advance Virginia's IRC conformity date to reach the CARES Act. If that happens, the taxpayer may be able to re-file its claim.

Q: Does Virginia have its own separate rules for the NOL deduction?
A: Not really. Virginia income tax law generally does not separately address the NOLD; instead, it relies on Va. Code § 58.1-301's conformity to the IRC and on Virginia's use of federal taxable income as the starting point for corporate income tax, so an NOLD is allowed only to the extent it is allowable in computing FTI as calculated for Virginia purposes.

Citations and references

Statutes:

• Va. Code § 58.1-301 (Virginia's conformity to the Internal Revenue Code)
• Va. Code § 58.1-301 B (fixed IRC conformity date, December 31, 2019 at the time of this ruling)
• IRC § 172 (net operating loss deduction, including carryback periods)
• TCJA § 13302(b)(1)(A) (repeal of the two-year NOL carryback for losses arising in tax years beginning after December 31, 2017)
• CARES Act § 2303(b) (reinstatement of a five-year NOL carryback for losses arising in tax years beginning after December 31, 2017 and before January 1, 2021)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-40

Original ruling text

March 16, 2021

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you appeal the denial of a refund of corporate income tax paid by * (the “Taxpayer”), for the taxable year ended December 31, 2016.

FACTS

The Taxpayer filed a 2018 Corporate Application for Refund Carryback of Net Operating Loss (Form 500 NOLD), claiming a net operating loss deduction (NOLD) for the 2016 taxable year by carrying back a net operating loss (NOL) attributable to the 2018 taxable year. The Department denied the corresponding refund on the grounds that the Taxpayer could not carry back a 2018 NOL because of Virginia’s conformity with the federal Tax Cuts and Jobs Act, P.L. 115-97 (12/22/2017) (the “TCJA”). The Taxpayer appealed, contending that it is allowed to carry back the 2018 NOL under the subsequent Coronavirus Aid, Relief and Economic Security Act, P.L. 116-136 (3/27/2020) (the “CARES Act”).

DETERMINATION

Generally, Virginia income tax law does not address the NOLD. Nonetheless, Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. Because Virginia starts its computation of corporate income tax with federal taxable income (FTI), the Department allows a NOLD to the extent it is allowable in computing FTI as calculated for Virginia income tax purposes.

For NOLs attributable to taxable years beginning after December 31, 2017, the TCJA repealed the two-year carryback period. See TCJA § 13302(b)(1)(A). The CARES Act, however, reintroduced a five year carryback for NOLs attributable to taxable years beginning after December 31, 2017, and before January 1, 2021. See CARES Act § 2303(b). In each case, the legislation amended IRC § 172 which provides for the NOLD generally, including the carryback periods.

Currently, however, Virginia’s conformity with the IRC extends only to such laws as they existed on December 31, 2019. See Virginia Code § 58.1-301 B. Because the CARES Act was enacted after this date, Virginia has not conformed to the five year carryback period. Therefore, the TCJA’s repeal of the two-year carryback period remained in place. Accordingly, the Department was correct in denying the NOLD the Taxpayer carried back to the 2016 taxable year from an NOL attributable to the 2018 taxable year.

The Taxpayer should await further legislative developments by the General Assembly that may affect Virginia’s conformity with the IRC. The Taxpayer may be able to re-file its claim in the future depending on such developments.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules and Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3557.M