Virginia’s budget legislation includes multiple tax changes

The Virginia Governor signed budget bill, H.B. 29, (the Legislation) which included multiple tax changes, some of which are outlined below.

Internal Revenue Code (IRC) conformity date

The Legislation updated Virginia’s conformity to the IRC from rolling conformity to a fixed conformity date of Dec. 31, 2025, including “any amendment thereafter that extends the expiration date of a federal tax provision to which Virginia conforms or has previously conformed,” with the exception of specific enumerated IRC code sections.

Due to the recent federal tax reform enacted on July 4, 2025, often referred to as the One Big Beautiful Bill Act (OBBBA), a state's conformity date with the IRC (e.g. fixed vs. rolling conformity) will generally be the starting point to understand how a state will adopt any federal changes to the IRC. For Virginia, the new IRC conformity date enacted by the Legislation allows Virginia to follow the provisions of OBBBA, as the IRC conformity date falls after July 4, 2025. However, the Legislation specifically decouples from certain provisions of OBBBA despite its updated IRC Conformity date. Specifically:

OBBBA conformity

The Legislation specifically decouples from:

• IRC section 168(n): The immediate expensing of qualified production property;
• IRC section 174A: The immediate expensing of domestic research and experimental expenditures, including retroactive and catchup provisions;
• IRC section 179: Increases to the expensing limits for certain depreciable business assets.

Virginia will continue to decouple from bonus depreciation under IRC section 168(k).

IRC section 163(j) deduction changes

Due to the updated IRC conformity date, Virginia will conform to the changes to the federal limitation on the deduction of business interest expenses under IRC section 163(j) as enacted by OBBBA.

However, the Legislation details “there shall be deducted to the extent included in and not otherwise subtracted from federal taxable income a percentage of the business interest disallowed as a deduction pursuant to section 163(j) of the IRC in the amount of 20% for taxable years beginning on and after Jan. 1, 2025.” This is a reduction from the 50% allowed for tax years beginning on and after Jan. 1, 2024, but before Jan. 1, 2025.