Virginia Tax Law Update: What Businesses and Individuals Need to Know

 Through recent budget legislation, Virginia has moved from rolling conformity with the Internal Revenue Code (IRC) to static conformity, clarified its treatment of key federal tax provisions, and extended important pass-through entity tax benefits.

Virginia Moves to Static IRC Conformity

Effective February 20, 2026, Virginia now conforms to the Internal Revenue Code as it existed on December 31, 2025. Previously, Virginia followed a rolling conformity system, automatically adopting most federal tax changes as they occurred. Under the new static conformity approach, Virginia must specifically adopt future federal changes.

This shift provides greater control at the state level but also creates the possibility of more differences between federal and Virginia taxable income. While Virginia will continue to conform to many federal provisions—including most changes under the One Big Beautiful Bill Act, the state has chosen to decouple from certain significant business provisions.

Key Business Tax Changes

Virginia will not conform to the following federal expensing provisions:

• Immediate expensing of domestic research and development/experimental (R&D) expenditures,
• Increased expensing limits under IRC §179 ($1,220,000 limitation with a phase-out of$3,050,000 vs $2,500,000 limit and $4,000,000 phase-out under the OBBBA),
• Immediate expensing of all bonus depreciation provisions, including the new qualified production property under IRC §168(n)

Importantly, the first two items listed above represent new areas of disconformity for Virginia. While the state has historically required separate treatment in certain depreciation areas, the decision not to adopt the expanded federal R&D expensing and the increased expensing limits under IRC §179 creates additional state-level complexity beginning in 2025 and will result in federal and state timing differences that will require careful tracking.

Virginia will conform to federal changes to the business interest expense limitation under IRC §163(j). Virginia will follow the federal rules for limiting business interest deductions under IRC Section 163(j). However, starting January 1, 2025, Virginia will allow businesses to subtract only 20% of the interest that was not allowed for federal taxes (instead of 50% before). Because of this change, some businesses may have higher taxable income in Virginia.

This change may increase Virginia taxable income for affected businesses.

Lastly, Virginia has repealed the sunset of its pass-through entity (PTE) tax election, effectively making the PTE credit permanent.

What These Changes Mean for Virginia Taxpayers

As Virginia transitions to a static conformity framework, taxpayers should expect continued divergence between federal and state tax rules in the coming years. Future federal tax legislation will no longer automatically flow through to Virginia, meaning additional state-level adjustments and planning opportunities—or challenges—may arise. Ongoing guidance from the Virginia Department of Taxation should be expected as these changes are implemented. Businesses and individuals alike should proactively review their tax strategies and consult with their CPA advisors.