Virginia Enacts Amended Budget That Increases IRC Sec. 163(j) Deduction, Increases Standard Deduction, Gives New Rebate, and Reinstates Sales Tax Holiday

by Rebecca A. Helmes

Virginia Governor Glenn Youngkin signed legislation on September 14, 2023, amending Virginia’s budget for the 2022-2024 biennium. Among the amendments are an increased corporate and individual income tax deduction for disallowed IRC § 163(j) business interest, an increased standard deduction for tax years 2024 through 2025 upon meeting certain contingencies, a new individual income tax rebate, provisions that extend availability of last year’s individual income tax rebate to those who filed returns on or before March 1, 2023, the removal of the age limitation to deduct military benefits, the reinstatement of Virginia’s sales tax holiday, and a clarification of how to value data center fixtures. (L. 2023, H6001 (1st S.S.) (c. 1), effective 09/14/2023.)

IRC § 163(j) business interest deduction increased.

Virginia will permit corporate and individual taxpayers to deduct more of the business interest disallowed as a deduction under IRC § 163(j). For taxable years beginning on and after January 1, 2024, taxpayers can deduct 50% of business interest disallowed as a deduction under IRC § 163(j). For taxable years beginning on and after January 1, 2022, but before January 1, 2024, taxpayers can deduct 30% of such disallowed interest. Previously, Virginia permitted deducting 30% of such disallowed business interest for taxable years beginning on and after January 1, 2022.

Standard deduction amounts increased.

Subject to certain contingencies, Virginia is increasing the standard deduction for individual income tax purposes. For taxable years beginning on and after January 1, 2022, but before January 1, 2024 (previously, January 1, 2026), the standard deduction is $8,000 for single individuals and $16,000 for married persons (one-half of such amounts for a married individual filing a separate return). For taxable years beginning on and after January 1, 2024, but before January 1, 2026, the standard deduction is $8,500 for single individuals and $17,000 for married persons (one-half of such amounts for a married individual filing a separate return).

For the 2023 tax year, the standard deduction increase is contingent on the Tax Department certifying annual revenue growth, adjusted for the impact of tax policy changes, of at least 5% for the 12-month period of July 2022 through June 2023. If the 5% growth rate is not met for this 12-month period, the standard deduction for taxable year 2023 will be $7,500 for single individuals and $15,000 for married persons.

For the 2024 tax year, the increased standard deduction amount is contingent upon the Auditor of Public Accounts certifying individual withholding growth of at least the growth rate in the official revenue estimate contained in the Virginia budget bill for the 6-month period of July 2023 through December 2023. The certification must be completed no later than January 22, 2024. If withholding collection growth is not met, the standard deduction for taxable years beginning on and after January 1, 2024, but before January 1, 2026 will be $8,000 for single individuals and $16,000 for married persons.

New individual income tax rebate.

In addition to any refund due by law, for taxable years beginning on and after January 1, 2022, but before January 1, 2023, persons filing a return on or before November 1, 2023, will be issued a refund in an amount up to $200 for an individual, or $400 for married persons filing a joint return. The refund will only be up to the amount of tax liability after the application of deductions, subtractions, or credits, and will be subject to collection under the provisions of the Setoff Debt Collection Act. For taxpayers who filed a return before July 1, 2023, refunds will be issued on or before November 30, 2023.

Filing deadline for last year’s individual income tax rebate extended to March 1, 2023.

In addition to any refund due by law, for taxable years beginning on and after January 1, 2021, but before January 1, 2022, an individual filing a return or married persons filing a joint return on or before March 1, 2023 (previously, November 1, 2022), will be issued a refund in an amount up to $250 for an individual, or $500 for married persons filing a joint return. The refund will only be up to the amount of tax liability after the application of any deductions, subtractions, or credits, and will be subject to collection under the provisions of the Setoff Debt Collection Act.

Age limitation removed for military benefits deduction.

Virginia’s income tax deduction of up to $30,000 of military benefits for taxable years beginning on and after January 1, 2024, and up to $40,000 of military benefits for taxable years beginning on and after January 1, 2025, is allowed for such benefits received by an individual of any age. Previously, it was allowed for military benefits received by an individual age 55 or older.

“Military benefits” means any military retirement income received for service in the Armed Forces of the United States, qualified military benefits received pursuant to IRC § 134, benefits paid to the surviving spouse of a veteran of the U.S. Armed Forces under the Survivor Benefit Plan program established by the U.S. Department of Defense, and military benefits paid to the surviving spouse of a veteran of the U.S. Armed Forces.

No subtraction will be allowed if a credit, exemption, subtraction, or deduction is claimed for the same income pursuant to any other provision of Virginia or federal law.

Sales tax holiday reinstatement.

Virginia’s sales tax holiday provisions, applicable to Energy Star or Watersense qualified products, school supplies, clothing and footwear, and certain hurricane preparedness equipment will be in effect through July 1, 2025. The sales tax holiday for calendar year 2023 will apply only to those sales occurring during the 3-day period that begins Friday, October 20, and ends at 11:59 p.m. on the following Sunday.

Valuation of data center fixtures.

Fixtures in a data center, when classified as real estate, must be valued by a locality based on the cost approach (cost less depreciation) rather than the income generated. Fixtures in a data center, when classified as real estate, must be assessed at 100% fair market value as determined by the cost approach and consistent with Virginia law.

Re-enacted provisions.

This budget amends the original budget enacted last year (see State Tax Update, 06/24/2022). Except for those tax items discussed above, tax items in the original budget generally were re-enacted without amendments.