Virginia — Corporate Income / Franchise Tax

Virginia imposes a corporate income tax at a flat rate of 6 percent on the Virginia taxable income of every corporation organized under Virginia law and every foreign corporation with income from Virginia sources. The tax is imposed annually for each taxable year.

Virginia taxable income generally means federal taxable income (and any other income taxable under federal law) adjusted by specific additions and subtractions set forth in the Virginia Code. Corporations with income from both within and outside Virginia must allocate and apportion their income under the rules in Va. Code §§ 58.1-407 through 58.1-420.

Certain corporations are exempt from the corporate income tax, including those paying alternative franchise or gross receipts taxes (public service corporations, banks, insurance companies), S corporations that have elected to be taxed under Subchapter S of the Internal Revenue Code, and charitable corporations exempt under IRC § 501(c).

Source: Va. Code § 58.1-400, Va. Code § 58.1-402, 23 Va. Admin. Code § 10-120-90

Virginia requires every corporation organized under Virginia law, or having income from Virginia sources, to file a return by the fifteenth day of the fourth month following the close of its taxable year. In addition, every foreign corporation registered with the State Corporation Commission to do business in Virginia must file a return even if it has no income from Virginia sources and no income tax is due.

A corporation has income from Virginia sources if it has sufficient business activity within Virginia to produce a positive apportionment factor under Virginia's allocation and apportionment rules. This includes income, gain, loss, or deduction from property located in Virginia or a business, trade, profession, or occupation carried on in Virginia.

Source: Va. Code § 58.1-441, 23 Va. Admin. Code § 10-120-310

Virginia taxable income for a corporation starts with federal taxable income (FTI) and any other income taxable to the corporation under federal law for the taxable year, then applies Virginia-specific additions, subtractions, and exemptions set forth in Va. Code § 58.1-402. For regulated investment companies and real estate investment trusts, the starting point is "investment company taxable income" and "real estate investment trust taxable income," respectively. This federal-conformity structure means that most federal tax rules flow through to Virginia unless a specific Virginia modification overrides the federal treatment.

Fixed-date conformity and the Internal Revenue Code

Virginia uses a fixed-date conformity system under Va. Code § 58.1-301. Virginia conforms to the Internal Revenue Code of 1954 and amendments thereto, and other provisions of federal income tax law, as they existed on a specific fixed date, with enumerated exceptions. The General Assembly advances the conformity date periodically by legislation. Beginning in 2023, Virginia law provides automatic conformity to federal amendments enacted during legislative recesses, with a revenue-impact threshold: amendments enacted between legislative sessions that would increase or decrease general fund revenues by more than $75 million over a five-year window are not automatically adopted unless subsequently enacted by the General Assembly. Federal tax extenders (amendments that extend expiration dates of provisions to which Virginia already conforms) and amendments enacted before the $75 million threshold is met are automatically adopted.

This means that IRC changes enacted after the current conformity date—and not within the automatic-conformity safe harbor—do not apply for Virginia purposes unless and until the General Assembly affirmatively adopts them. Corporations must track whether post-conformity-date federal changes have been adopted by Virginia.

Key permanent exceptions to federal conformity

Even when Virginia updates its conformity date, certain federal provisions are permanently decoupled. The most consequential is IRC § 168(k) bonus depreciation. Virginia does not allow the special depreciation allowance for property eligible for bonus depreciation under IRC § 168(k). Taxpayers must add back bonus depreciation claimed for federal purposes and then compute regular depreciation over the recovery period under pre-bonus-depreciation federal rules; in later years, when federal depreciation is lower than Virginia depreciation, the corporation takes a corresponding subtraction. These are referred to as "fixed-date conformity" (FDC) adjustments and are computed as recomputations of FTI itself, not as modifications under § 58.1-402. Virginia returns start with FTI as reported federally, then reconcile via FDC additions and subtractions to arrive at the Virginia-adjusted FTI. Other permanent exceptions include certain net operating loss carryback rules.

Additions to federal taxable income under § 58.1-402(B)

Virginia requires corporations to add back to FTI certain items deducted or excluded for federal purposes. Key additions include:

• State and local income taxes. Net income taxes and other taxes (including franchise and excise taxes) based on, measured by, or computed with reference to net income, imposed by Virginia or any other taxing jurisdiction, to the extent deducted in determining FTI. Va. Code § 58.1-402(B)(4).

• Out-of-state municipal-bond interest. Interest (less related expenses to the extent not deducted in determining FTI) on obligations of any state other than Virginia or of a political subdivision of any other state, unless the obligation was created by a compact or agreement to which Virginia is a party. Va. Code § 58.1-402(B)(1).

• Foreign dividend gross-up (IRC § 78). Any amount included in FTI by operation of IRC § 78 (deemed-paid foreign tax credit gross-up). Va. Code § 58.1-402(C)(5) (subtraction provision cross-referenced for context).

• Subpart F income (IRC § 951) and GILTI (IRC § 951A). Any amount included in FTI by operation of IRC § 951 (Subpart F income) or, for taxable years beginning on or after January 1, 2018, IRC § 951A (Global Intangible Low-Taxed Income). Va. Code § 58.1-402(C)(7) (subtraction provision).

• Related-party intangible and interest expenses (addback provisions). Virginia has detailed addback rules for intangible expenses and interest expenses paid to related members under specified circumstances, subject to exceptions and a valid-business-purpose safe harbor. Va. Code § 58.1-402(B)(8) and (B)(9).

Subtractions from federal taxable income under § 58.1-402(C)

Key subtractions include:

• U.S. and Virginia obligations. Interest and dividends on obligations of the United States or Virginia (or their political subdivisions and authorities), to the extent included in FTI. Va. Code § 58.1-402(C)(1) and (C)(2).

• State and local income tax refunds. The amount of any refund or credit for overpayment of income taxes imposed by Virginia or any other taxing jurisdiction, to the extent included in FTI. Va. Code § 58.1-402(C)(4).

• Foreign dividend gross-up and Subpart F / GILTI. Virginia allows a subtraction for amounts included in FTI under IRC § 78 (foreign dividend gross-up), IRC § 951 (Subpart F income), and IRC § 951A (GILTI), effectively decoupling from these international tax provisions. Va. Code § 58.1-402(C)(5) and (C)(7).

• Dividends-received deduction for 50%-or-more ownership. To the extent included in FTI, dividends received from a corporation in which the taxpaying corporation owns 50 percent or more of the voting power of all classes of stock, beyond the federal dividends-received deduction. Va. Code § 58.1-402(C)(10).

• IRC § 163(j) business interest limitation. For taxable years beginning on or after January 1, 2021, Virginia allows a subtraction for 20 percent (increased to 50 percent for taxable years beginning on or after January 1, 2023, by appropriations-act amendment) of the business interest disallowed as a deduction under IRC § 163(j). This partial decoupling provides relief from the federal interest limitation, though not a full exclusion.

• Related-party amounts (matching subtraction). Amounts of intangible expenses and costs or interest expenses added back under § 58.1-402(B)(8) or (B)(9) are subtracted by the related member that received the payment, if that related member is subject to Virginia income tax on the amount. Va. Code § 58.1-402(C)(21).

The full list of additions and subtractions is set forth in Va. Code § 58.1-402(B) and (C), and detailed further in regulations 23 Va. Admin. Code §§ 10-120-101 and 10-120-102. Corporations must review each subdivision to determine applicability.

Sequencing and computational note

The Virginia corporate income tax computation proceeds in this sequence: (1) start with federal taxable income as reported on the federal return; (2) apply fixed-date conformity adjustments (FDC additions/subtractions for items like bonus depreciation that Virginia does not conform to); (3) apply the § 58.1-402 additions and subtractions; (4) apply allocation and apportionment under §§ 58.1-406 through 58.1-420 if the corporation has income from both within and outside Virginia; (5) apply the 6 percent rate. Practitioners must track both the FDC layer and the § 58.1-402 modification layer, as they serve distinct functions and are administered differently by the Virginia Department of Taxation.

Source: Va. Code § 58.1-402, Va. Code § 58.1-301, 23 Va. Admin. Code § 10-120-101, 23 Va. Admin. Code § 10-120-102

A corporation has nexus with Virginia for corporate income tax if it has income from Virginia sources. Under Virginia law, "income and deductions from Virginia sources" includes items of income, gain, loss, and deduction attributable to ownership of any interest in real or tangible personal property in Virginia, or a business, trade, profession, or occupation carried on in Virginia. A corporation has income from Virginia sources if there is sufficient business activity within Virginia to produce a positive apportionment factor. Foreign corporations registered with the State Corporation Commission to do business in Virginia must file a return even if they have no Virginia source income and no tax is due.

Source: Va. Code § 58.1-302, 23 Va. Admin. Code § 10-120-90

Virginia apportions corporate income using a three-factor formula with double-weighted sales. Apportionable income is multiplied by a fraction: the numerator is the property factor plus the payroll factor plus twice the sales factor; the denominator is four. If the sales factor does not exist, the denominator is the number of existing factors. If the sales factor exists but the property or payroll factor does not exist, the denominator is the number of existing factors plus one. Motor carriers (§ 58.1-417), financial corporations (§ 58.1-418), construction corporations (§ 58.1-419), and railway companies (§ 58.1-420) use specialized apportionment formulas.

Source: Va. Code § 58.1-408

Virginia's sales factor sourcing rules differ depending on whether the sale involves tangible personal property or other types of sales (services and intangible property). For multistate corporations, these sourcing rules determine which sales are included in the numerator of the Virginia sales factor.

Tangible personal property

Sales of tangible personal property are sourced to Virginia using destination-based (market-based) sourcing. Under Va. Code § 58.1-415, a sale is attributed to Virginia if the property is delivered or shipped to a purchaser within Virginia, regardless of the f.o.b. point or other conditions of sale. If the property is shipped from an office, store, warehouse, factory, or other place of storage in Virginia and either the purchaser is the United States government or the taxpayer is not taxable in the state of the purchaser, the sale is attributed to Virginia.

Services and intangible property

Sales other than sales of tangible personal property—including services and intangible property—are sourced to Virginia using cost-of-performance rules under Va. Code § 58.1-416. A sale is in Virginia if (1) the income-producing activity is performed in Virginia, or (2) the income-producing activity is performed both in and outside Virginia and a greater proportion of the income-producing activity is performed in Virginia than in any other state, based on costs of performance.

"Income-producing activity" means the acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned; indirect expenses such as interest or activities produced by independent contractors are included in the cost-of-performance analysis. 23 Va. Admin. Code § 10-120-230; see also General Motors Corp. v. Commonwealth, 268 Va. 289, 602 S.E.2d 123 (2004) (regulation limiting costs to direct costs is inconsistent with statute). The costs of performance are deemed performed at the location of the corporation's real and tangible property and its employees.

Virginia has used the cost-of-performance method for services and intangibles since 1960, modeled on § 17 of the Uniform Division of Income for Tax Purposes Act (UDITPA). CEB Inc. v. Commonwealth, 299 Va. 194 (2020). This approach differs from the market-based sourcing rules adopted by a majority of states. The 2025 General Assembly studied but did not enact market-based sourcing legislation; HB1866, which would have implemented market-based sourcing for taxable years beginning on or after January 1, 2026, was tabled by the House Finance Committee. The 2024–2026 Appropriation Act (Item 257(E)) directs the Department of Taxation to study market-based sourcing and submit recommendations by November 15, 2025.

Special sourcing rules

Certain industries are subject to specialized sales factor sourcing rules. Qualifying property information and analytics firms with a memorandum of understanding with the Virginia Economic Development Partnership Authority may use a hybrid sales factor that applies market-based sourcing for sales of services and cost-of-performance for other non-tangible sales. Va. Code § 58.1-422.4; see also Va. Code § 58.1-422.3 (debt buyers).

Source: Va. Code § 58.1-414, Va. Code § 58.1-415, Va. Code § 58.1-416, 23 Va. Admin. Code § 10-120-230