Does Virginia Allow Bonus Depreciation?

Federal tax law allows for bonus depreciation under Internal Revenue Code (IRC) Section 168, which permits an immediate deduction of a large percentage of an asset’s cost in its first year of service. The allowable percentage has varied, standing at 80% for property placed in service in 2023 and decreasing to 60% in 2024. However, Virginia does not conform to the federal bonus depreciation rules. This means taxpayers cannot claim the same accelerated deduction on their Virginia return that they claimed for federal purposes, leading to required adjustments.

Virginia’s Fixed-Date Tax Conformity

The reason for this difference lies in Virginia’s approach to tax law conformity. For many years, Virginia operated as a “fixed-date conformity” state. This meant its definition of taxable income was tied to the Internal Revenue Code as it existed on a specific date. Any amendments to the federal code enacted after that date were not automatically adopted and required the Virginia General Assembly to pass specific legislation.

Because of this system, Virginia has a history of “decoupling” from or disallowing federal bonus depreciation provisions. While Virginia has transitioned to a “rolling conformity” model for tax years beginning on or after January 1, 2023, it continues to decouple from this federal provision. This policy requires taxpayers to calculate depreciation differently for state and federal purposes.

Required Depreciation Adjustments on Virginia Returns

The difference between federal and Virginia depreciation rules requires specific adjustments on the state income tax return. In an asset’s first year of service, a taxpayer must make an “addition” modification by adding back the entire amount of bonus depreciation claimed on the federal return. This adjustment increases Virginia taxable income for the initial year.

For every subsequent year of the asset’s life, the taxpayer takes a “subtraction” modification. This subtraction is the amount of regular depreciation that would have been allowed for that year if bonus depreciation had not been claimed. These adjustments are reported on a supporting schedule that reconciles federal and state taxable income, such as Schedule 502A for corporations.

For example, a business buys a $100,000 piece of equipment with a five-year life in 2024. Federally, it claims 60% bonus depreciation ($60,000). On its 2024 Virginia return, the business must add back that $60,000. In subsequent years, it will calculate the depreciation it would have claimed on the full $100,000 basis and take that amount as a subtraction on its Virginia return.

Handling the Sale of Depreciated Assets

The different depreciation schedules also affect how a gain or loss is calculated when the asset is sold. Because more depreciation is taken upfront for federal purposes, an asset’s adjusted basis will be lower for federal tax than for Virginia tax. A lower federal basis results in a larger taxable gain or a smaller loss on the federal return compared to the Virginia return.

To reconcile this in the year of sale, a final adjustment is required on the Virginia tax return. If the sale results in a larger gain for federal purposes than for Virginia, the taxpayer makes a subtraction modification for the difference. Conversely, if the sale results in a smaller gain or a larger loss federally, an addition modification is needed.

Continuing the previous example, assume the $100,000 asset is sold. For federal purposes, the adjusted basis will be very low due to the large initial bonus depreciation deduction. For Virginia purposes, the adjusted basis will be significantly higher because depreciation has been taken more slowly. This higher Virginia basis leads to a smaller calculated gain on the sale, and the difference between the federal gain and the Virginia gain is taken as a final subtraction on the Virginia return, ensuring the total depreciation claimed over the asset’s life matches for state purposes.