Virginia Tax Conformity: What Businesses Need to Know

Virginia lawmakers are preparing to decide whether the Commonwealth should update its tax code to align with recent federal tax changes adopted by Congress in the One Big Beautiful Bill Act (OBBBA). While the issue is technical, the impact on businesses, employees, and the broader economy is straightforward. According to the Tax Foundation, full conformity could save Virginia families and businesses as much as $1.4 billion annually. Choosing not to conform would result in higher state tax bills than many taxpayers expect and a more complicated tax environment for employers.

Virginia has historically aligned its tax code with federal definitions and deductions because conformity simplifies compliance and reduces administrative burdens. Today, Virginia operates under “static conformity,” meaning federal tax changes do not automatically apply at the state level. The General Assembly must decide which provisions to adopt, creating uncertainty for businesses planning investments, payroll, and growth.

Several new federal deductions affect workers directly, including deductions for overtime pay, tip income, auto loan interest, and an enhanced standard deduction for older taxpayers. If Virginia does not adopt these provisions, many employees would owe more in state income taxes despite receiving federal relief. That mismatch complicates payroll withholding, employee communications, and tax planning for employers.

The largest financial impact of conformity, however, involves business tax provisions. The OBBBA allows immediate expensing of major capital investments rather than spreading deductions over time, a change estimated to save Virginia businesses hundreds of millions of dollars annually. The law also restores immediate deductions for research and development expenses, increases small business expensing limits, and introduces new incentives for manufacturing and production facilities. These provisions directly affect decisions about equipment purchases, facility expansion, and job creation.

Unlike previous federal tax reforms, the OBBBA does not create a state revenue windfall if Virginia does nothing. In practical terms, failing to conform functions as a tax increase relative to federal expectations. With Virginia closing the fiscal year with a budget surplus, policymakers will weigh tax relief, economic competitiveness, and simplicity for taxpayers and employers alike.

Businesses should closely watch the Governor’s upcoming budget proposal and legislative action in the 2026 General Assembly, as these decisions will shape Virginia’s tax climate for years to come.

Why This Matters to Employers

Tax conformity affects employee take-home pay, payroll administration, investment decisions, and Virginia’s competitiveness with other states. Alignment with federal rules reduces compliance costs, improves predictability, and helps businesses attract and retain workers while encouraging reinvestment and growth.