No, Virginia does not allow bonus depreciation. The state decouples from IRC Section 168(k), which means any bonus depreciation you claimed on your federal return has to be added back when you compute Virginia taxable income.1Virginia Code Commission. Virginia Code 58.1-301 – Conformity to Internal Revenue Code You eventually recover the disallowed amount through subtractions over the asset’s standard MACRS life, so the deduction is delayed rather than lost. But in the first year, your Virginia tax bill can be noticeably higher than your federal numbers suggest.
The gap matters more now than it used to. The One Big Beautiful Bill Act permanently restored 100 percent bonus depreciation for qualified property placed in service after January 19, 2025.2Internal Revenue Service. Treasury, IRS Issue Guidance on the Additional First Year Depreciation Deduction Amended as Part of the One Big Beautiful Bill Because the full federal deduction hits in year one, the Virginia add-back is now as large as it can be.
The Year-One Add-Back
Virginia’s rule is to recompute depreciation as if bonus had never been claimed, using standard MACRS. The difference between your federal bonus deduction and that recomputed Virginia MACRS deduction is an addition to income on your Virginia return.
Take a $50,000 asset with a five-year MACRS life placed in service in 2026, fully expensed on your federal return under 100 percent bonus:
- Federal year-one deduction: $50,000.
- Virginia year-one deduction: $10,000 (20 percent first-year MACRS, half-year convention).
- Virginia addition: $40,000.
On a $50,000 asset, that addition can raise your Virginia tax by roughly $2,300 at the top individual rate, money you would not have owed if Virginia conformed.
Recovering the Deduction in Later Years
The add-back is a timing difference. In every later year where your recomputed Virginia MACRS depreciation exceeds the federal depreciation on that asset, the difference is a subtraction on your Virginia return.3Virginia Department of Taxation. Instructions for Preparing 2025 Form 500 Because you fully expensed the asset federally in year one, federal depreciation in years two through six is zero, and the full MACRS amount flows through as a Virginia subtraction each year:
- Year two: $16,000 subtraction (32 percent).
- Year three: $9,600 subtraction (19.20 percent).
- Year four: $5,760 subtraction (11.52 percent).
- Year five: $5,760 subtraction (11.52 percent).
- Year six: $2,880 subtraction (5.76 percent, half-year convention).
Those subtractions add up to $40,000, exactly matching the year-one addition. By the end of the recovery period, cumulative Virginia depreciation equals cumulative federal depreciation.
The Form 500 instructions apply this recomputation to any asset that ever received bonus depreciation federally from 2001 through the current year, not just assets placed in service in the current year.3Virginia Department of Taxation. Instructions for Preparing 2025 Form 500 If you still own an asset you bonus-depreciated in 2019, the subtraction continues to appear on your return until that asset is fully depreciated for Virginia purposes or disposed of.
Basis When You Sell the Asset
Running two depreciation schedules means two different adjusted bases for the same asset. After 100 percent bonus, the federal basis is zero. The Virginia basis is whatever MACRS has left it at. If you sell before Virginia depreciation finishes, those bases will not match, and you recompute gain or loss for Virginia as if bonus had never been taken.4Virginia Tax. Ruling 23-39
Because the Virginia basis is higher, a sale usually produces a smaller taxable gain or a larger deductible loss on the Virginia side than on the federal side. The difference is reported as a subtraction on your Virginia return.
Section 179 as a Workaround
Virginia does conform to the base federal Section 179 expensing deduction. Section 179 is not inside the 58.1-301(B) exceptions, so a Section 179 deduction flows through to your Virginia return with no add-back.
One boundary matters here. Virginia deconforms from the Section 179 limit increases enacted by the One Big Beautiful Bill Act.5Virginia Department of Taxation. Tax Bulletin 26-1 – Conformity For Virginia, you use the pre-OBBBA Section 179 ceilings. Qualifying purchases above the Virginia ceiling need an addition adjustment for the excess, the same mechanic as bonus depreciation.
For capital purchases that fit under the pre-OBBBA Section 179 limits, electing Section 179 instead of bonus depreciation on your federal return eliminates the Virginia timing difference. The election is made federally and controls whether the Virginia adjustment is needed, so it is worth deciding before you place the asset in service.
Where to Report the Adjustments
- Individual filers: addition and subtraction go on Schedule ADJ, attached to Form 760.
- Corporate filers: addition on Schedule 500ADJ, Section A, Line 1; subtraction on Schedule 500ADJ, Section B, Line 1, attached to Form 500.3Virginia Department of Taxation. Instructions for Preparing 2025 Form 500
- Pass-through entities: S corporations and partnerships report adjustments on Form 502, and owners pick up their share on their own Schedule ADJ.
Penalties and the Overpayment Risk
Skipping the add-back understates your Virginia taxable income. The IRS accuracy-related framework gives a sense of the scale: a 20 percent penalty applies to the portion of tax attributable to a substantial understatement, defined for individuals as the greater of 10 percent of the tax due or $5,000.6Internal Revenue Service. Accuracy-Related Penalty Virginia imposes its own accuracy-related penalties on similar terms. With 100 percent bonus permanent, a single large asset purchase can easily push an understatement past those thresholds.
The subtraction side has its own risk. Forgetting the annual Virginia subtraction means you are overpaying, and Virginia does not send a reminder. Taxpayers who lose track of dual schedules after a few years often leave money on the table. A single reconciliation document that tracks every asset’s federal basis, Virginia basis, annual addition, and annual subtraction is the cleanest way to avoid both problems.
Recordkeeping
Virginia’s Tax Bulletin 26-1 makes the obligation explicit: taxpayers using federal provisions that Virginia deconforms from must keep separate Virginia records and compute depreciation, amortization, carryforwards, and adjustments as if the federal changes had not been enacted.5Virginia Department of Taxation. Tax Bulletin 26-1 – Conformity In practice, that means a parallel depreciation schedule for every bonus-depreciated asset from the day it is placed in service until it is fully depreciated or sold.
Most commercial tax software handles this once you flag that bonus was claimed federally. If you do it yourself, track each asset’s original cost, date placed in service, MACRS class life, annual federal depreciation, annual Virginia depreciation, the cumulative difference, and the addition or subtraction reported each year. When the asset is sold, record the basis difference and the gain or loss adjustment. A missing year cascades into errors for every year after it.