Does Virginia Allow Section 179 Depreciation?

Section 179 depreciation offers businesses a valuable opportunity to deduct the full purchase price of qualifying equipment in the year it is placed in service, rather than spreading the deduction over several years. This accelerated deduction can significantly reduce a business’s taxable income, improving cash flow and encouraging investment. However, understanding how state tax laws interact with federal depreciation rules is important, as states often have their own unique approaches to such deductions. This can lead to differences in the allowable deduction amounts between federal and state tax returns.

Virginia’s General Approach to Federal Tax Law

Virginia generally aligns its tax laws with the federal Internal Revenue Code (IRC) through a system of conformity. Historically, Virginia operated on a “fixed-date conformity” basis, meaning its tax code conformed to the IRC as it existed on a specific, legislated date. This approach required the Virginia General Assembly to proactively advance the conformity date each year to incorporate federal tax law changes, which could sometimes lead to delays or inconsistencies.

Beginning with tax years on or after January 1, 2023, Virginia transitioned to an “automatic” or “rolling conformity” system with the IRC. This shift means Virginia generally adopts federal tax changes as they occur, streamlining the process and reducing annual legislative hurdles. Despite this rolling conformity, there are specific exceptions where Virginia may deconform from certain federal provisions. These exceptions often require taxpayers to make adjustments on their Virginia tax returns to account for the differences between federal and state taxable income.

Virginia’s Specific Section 179 Treatment

Virginia does allow businesses to claim a depreciation deduction under Section 179 of the Internal Revenue Code, generally mirroring the federal provisions. The ability to immediately expense the cost of qualifying assets, such as machinery, equipment, and off-the-shelf software, is available for Virginia income tax purposes. For the 2024 tax year, the maximum Section 179 expense deduction is $1,220,000, with a phase-out beginning when the cost of qualifying property placed in service exceeds $3,050,000. The deduction is completely phased out once the investment reaches $4,270,000. For tax years beginning in 2025, the maximum deduction increases to $1,250,000, and the phase-out threshold rises to $3,130,000.

While Virginia conforms to Section 179, it generally does not conform to federal bonus depreciation rules. Bonus depreciation allows for an additional accelerated deduction on qualifying property after the Section 179 limits have been applied. Since Virginia deconforms from bonus depreciation, businesses that claim it on their federal returns must make an adjustment on their Virginia tax return.

Reporting Section 179 on Virginia Tax Forms

Businesses in Virginia must account for differences between federal and state depreciation deductions, particularly regarding bonus depreciation, when filing their state income tax returns. The primary form for these adjustments is Virginia Schedule 500ADJ, “Schedule of Adjustments,” for corporations, or similar schedules for other entity types. This schedule reconciles a business’s federal taxable income with its Virginia taxable income.

On Schedule 500ADJ, any bonus depreciation taken on the federal return must be entered as a “Conformity addition – Depreciation” in Section A. This addition increases the Virginia taxable income to negate the federal bonus depreciation benefit. Conversely, the normal Modified Accelerated Cost Recovery System (MACRS) depreciation that would have been allowed for Virginia purposes on the asset is entered as a “Conformity subtraction – Depreciation” in Section B. These adjustments ensure that while Section 179 is generally recognized, the state’s non-conformity to bonus depreciation is properly reflected.