HR1 provisions pose multi‑year revenue decisions for Virginia; tax department urges early conformity decision

Kristen Collins of the Virginia Department of Taxation told the Senate Finance and Appropriations Committee that HR1 — the federal bill enacted July 4 — contains a mix of tax extenders and substantive changes that could affect Virginia if the General Assembly elects to conform.

Collins said many high‑profile individual provisions are “below the line” on federal returns and therefore would not automatically change Virginia returns, but several business provisions — notably the special depreciation (bonus depreciation) and a change restoring immediate domestic research expense deductions — would have meaningful state revenue effects.

The nut graf: The department presented preliminary fiscal estimates showing most near‑term negative revenue impacts flow from business provisions and from the retroactive nature of some changes; the agency warned that failing to decide conformity early could complicate the 2026 filing season for taxpayers and software vendors.

Collins explained Virginia’s current conformity posture: the state had reverted to fixed conformity for calendar years 2025–26 by legislative action, with limited automatic adoption for certain extenders. She outlined four categories of HR1 impacts: (1) true extenders that the state’s forecast already assumes, (2) business items that change federal taxable income and thus Virginia taxable income, (3) below‑the‑line individual items that would require separate state action to mirror, and (4) indirect drivers that affect taxpayer itemize/standard deduction choices.

Her preliminary modeling showed the largest state revenue effects coming from two items: bonus depreciation (special depreciation allowances) and restored immediate deduction for domestic research expenses. Collins noted the research deduction change is retroactive and estimated roughly $320 million of the larger fiscal‑year‑2026 revenue impact is attributable to the retroactivity; she said fiscal‑year‑2028 could see another significant negative effect (she identified roughly $79 million for FY28 tied to that provision).

Committee members asked technical questions. Senator Evans and others probed whether bonus depreciation applies to tangible property purchases and how a decision not to conform would create a timing mismatch where businesses take federal deductions but Virginia requires different treatment. Linda Boyzko asked for details on the restructuring of opportunity‑zone rules; Collins said she would follow up with technical materials.

Collins emphasized operational risk: the Department of Taxation needs early legislative guidance so it can provide clear filing instructions to taxpayers and electronic filing vendors and avoid an administrative cycle of amended returns. “Not making a decision early in the process could result in administrative issues for taxpayers including delaying tax season potentially, requiring them to make numerous complex adjustments on the returns and or filing amended returns,” she said.

The Department offered to provide staff with model assumptions and more detailed workings of the FY26–FY28 estimates as the General Assembly considers whether to adopt all, some, or none of HR1 provisions for Virginia law.