Income/Franchise:
Virginia: New Law Increases IRC §163(j) Deduction and Allows Intangible Expense “Addback” Statutes to Remain in Effect

Ch. 1 (H.B. 6001), Laws 2023, Special Session I, signed by gov. 9/14/23; 2023 Legislative Summary, Vir. Dept. of Tax. (updated 9/15/23). Applicable for taxable years beginning on and after January 1, 2024, Virginia’s recently enacted budget bill increases the Virginia individual and corporate income tax deduction for business interest expense to 50%, rather than 30%, of the business interest disallowed as a deduction under the federal business interest limitation pursuant to Internal Revenue Code section 163(j). Moreover, similar to state budget bills enacted in previous years (since 2014), applicable retroactively for taxable years beginning on and after January 1, 2004, Virginia’s new budget includes non-codified provisions that limit the “subject to tax” statutory exception to Virginia’s intercompany intangible expense addback statute – regarding income that is subject to a tax based on or measured by net income or capital imposed by Virginia, another state, or a foreign government – to the portion of intercompany expense payments to the related member that owns the intangible property that corresponds to the portion of the related member’s income where it has sufficient nexus to be subject to taxes based on or measured by net income or capital in other states – i.e., on a post-apportionment basis. Also retroactively for taxable years beginning on and after January 1, 2004, the new budget includes non-codified provisions that limit the unrelated party “safe harbor” statutory exception to Virginia’s intercompany intangible expense addback statute to the portion of such income derived from licensing agreements for which the rates and terms are comparable to the rates and terms of agreements that the related member that owns the intangible property has entered into with unrelated entities. In this respect, these various non-codified provisions are essentially being continued with this most recent budget legislation enactment. Please contact us with any questions.