Governor Abigail Spanberger signed House Bill 29 on February 20, establishing Virginia’s conformity to the Internal Revenue Code as of December 31, 2025. The legislation reverses the state’s three-year experiment with rolling conformity and strategically decouples from specific provisions of the One Big Beautiful Bill Act.
Virginia becomes the latest state to respond to OBBBA’s passage with targeted conformity decisions. The bill generated $200.3 million in increased general fund revenues for fiscal year 2026 by striking conformity language that would have automatically adopted certain federal tax changes.
The shift marks a return to Virginia’s historical approach of fixing conformity to a specific date rather than automatically incorporating federal tax law changes. This gives state lawmakers direct control over which federal provisions become part of Virginia tax law.
Virginia adopted rolling conformity in 2023 under Governor Glenn Youngkin. That system automatically incorporated federal tax changes with one exception—a temporary pause for provisions with significant fiscal impacts over a five-year window. The new law eliminates that automatic adoption mechanism entirely.
The legislation does allow for future amendments to extend benefits Virginia has previously adopted. This means lawmakers can selectively add federal provisions through separate legislation rather than accepting all changes automatically.
Virginia explicitly rejects OBBBA’s bonus depreciation provisions under Section 168(k) and the immediate expensing rules for qualified production property under Section 168(n). Businesses cannot claim these federal depreciation benefits on Virginia returns even though they remain available at the federal level.
The state also decouples from OBBBA changes to research and experimentation expense deductions found in Sections 174 and 174A. R&E expenses must continue following Virginia’s applicable amortization periods rather than the federal treatment under OBBBA.
Virginia will adopt OBBBA’s changes to adjusted taxable income calculations for business interest expense limits under Section 163(j). However, the state reduced its additional deduction for federally disallowed business interest from 50 percent to 20 percent for tax years beginning January 1, 2025, or later.
The depreciation decoupling creates immediate compliance burdens for Virginia businesses. Companies must now maintain separate depreciation schedules for federal and state purposes, tracking assets under different rules depending on when they were placed in service and which tax return they appear on.
Technology companies, manufacturers, and other capital-intensive businesses face the largest impact from the depreciation provisions. A company purchasing $1 million in qualifying equipment can claim significant first-year federal deductions under OBBBA but must depreciate that same equipment over multiple years for Virginia purposes.
The R&E expense treatment particularly affects pharmaceutical companies, technology firms, and advanced manufacturers with significant research operations. These businesses must amortize research costs for Virginia even as federal law may allow different treatment.
The business interest deduction change affects leveraged companies across all sectors. Reducing the Virginia add-back from 50 percent to 20 percent means businesses with significant debt financing will see higher Virginia tax liability compared to prior years.
Tax professionals must now track Virginia’s conformity date separately from federal law. This requires updated software, revised compliance procedures, and additional training for staff handling Virginia returns. The compliance cost increase affects both in-house tax departments and external accounting firms.
Unlike rolling conformity, which updated automatically, static conformity requires active monitoring of Virginia legislative activity. Tax departments should establish processes to track when the General Assembly updates the conformity date or modifies decoupling provisions.
Because decoupling provisions are written directly into statute, simply updating the conformity date would not change Virginia’s treatment of these items. The General Assembly would need to affirmatively amend the statutory language to recouple to any OBBBA provisions Virginia currently rejects.
The $200.3 million revenue increase from HB 29 reflects Virginia’s fiscal priorities. By maintaining decoupling from expensive federal provisions, the state preserves revenue that would otherwise be lost through reduced taxable income.
Static conformity provides Virginia with greater budget predictability. Major federal tax changes will not automatically reduce state revenues, supporting more accurate fiscal planning and appropriations decisions.
The bill also directs Virginia to rejoin the Regional Greenhouse Gas Initiative, with conservative estimates projecting $500 million per year in costs to families and businesses. Virginians were previously taxed $828 million over three years while participating in RGGI and saved $937 million after the previous administration’s withdrawal from the program.
Virginia’s data center tax exemption now approaches $2 billion annually. The departing governor’s budget extended this incentive from 2035 to 2050, representing a separate but significant tax policy decision affecting the state’s revenue base.
The Virginia Department of Taxation published Tax Bulletin 26-1 providing additional guidance for taxpayers navigating the conformity changes. The bulletin offers specific instructions for calculating Virginia modifications to federal taxable income based on the decoupling provisions.
Other states continue evaluating their own conformity positions following OBBBA’s passage. Virginia’s approach—static conformity with targeted decoupling—represents one model among several states are considering to balance administrative simplicity, fiscal responsibility, and economic competitiveness.
Multistate businesses must now track varying state positions on OBBBA provisions. A company operating in Virginia and neighboring states may face different depreciation rules, R&E expense treatment, and interest deduction calculations across jurisdictions.
The conformity date of December 31, 2025, means Virginia adopts federal tax law as it existed at the end of last year. Any federal changes enacted after that date will not apply in Virginia unless the General Assembly updates the conformity date or specifically adopts those provisions.
Future Virginia legislative sessions may revisit conformity decisions as fiscal conditions change. The statute’s language allowing for amendments to extend previously conformed benefits suggests lawmakers retained flexibility to selectively adopt OBBBA provisions if state revenues permit.
Taxpayers should review their Virginia tax positions considering the new conformity rules. The changes affect estimated tax payment calculations, extension filing strategies, and year-end planning for businesses with significant depreciation, R&E expenses, or interest deductions.
Source: Virginia Updates Tax Law in Response to One Big Beautiful Bill Act | Forvis Mazars