diff --git a/azure/converters/vm.go b/azure/converters/vm.go
index acc8f1f38ee..f6379d7eed7 100644
--- a/azure/converters/vm.go
+++ b/azure/converters/vm.go
@@ -44,7 +44,7 @@ type VM struct {
 }
 
 // SDKToVM converts an Azure SDK VirtualMachine to the CAPZ VM type.
-func SDKToVM(v compute.VirtualMachine) (*VM, error) {
+func SDKToVM(v compute.VirtualMachine) *VM {
 	vm := &VM{
 		ID:    to.String(v.ID),
 		Name:  to.String(v.Name),
@@ -63,5 +63,5 @@ func SDKToVM(v compute.VirtualMachine) (*VM, error) {
 		vm.Tags = MapToTags(v.Tags)
 	}
 
-	return vm, nil
+	return vm
 }
diff --git a/azure/converters/vm_test.go b/azure/converters/vm_test.go
new file mode 100644
index 00000000000..7c5b845907c
--- /dev/null
+++ b/azure/converters/vm_test.go
@@ -0,0 +1,137 @@
+/*
+Copyright 2022 The Kubernetes Authors.
+
+Licensed under the Apache License, Version 2.0 (the "License");
+you may not use this file except in compliance with the License.
+You may obtain a copy of the License at
+
+    http://www.apache.org/licenses/LICENSE-2.0
+
+Unless required by applicable law or agreed to in writing, software
+distributed under the License is distributed on an "AS IS" BASIS,
+WITHOUT WARRANTIES OR CONDITIONS OF ANY KIND, either express or implied.
+See the License for the specific language governing permissions and
+limitations under the License.
+*/
+
+package converters
+
+import (
+	"reflect"
+	"testing"
+
+	"github.com/Azure/azure-sdk-for-go/services/compute/mgmt/2021-11-01/compute"
+	"github.com/Azure/go-autorest/autorest/to"
+	"github.com/google/go-cmp/cmp"
+	infrav1 "sigs.k8s.io/cluster-api-provider-azure/api/v1beta1"
+)
+
+func TestSDKToVM(t *testing.T) {
+	tests := []struct {
+		name string
+		sdk  compute.VirtualMachine
+		want *VM
+	}{
+		{
+			name: "Basic conversion with required fields",
+			sdk: compute.VirtualMachine{
+				ID:   to.StringPtr("test-vm-id"),
+				Name: to.StringPtr("test-vm-name"),
+				VirtualMachineProperties: &compute.VirtualMachineProperties{
+					ProvisioningState: to.StringPtr("Succeeded"),
+				},
+			},
+			want: &VM{
+				ID:    "test-vm-id",
+				Name:  "test-vm-name",
+				State: infrav1.ProvisioningState(compute.ProvisioningStateSucceeded),
+			},
+		},
+		{
+			name: "Should convert and populate with VMSize",
+			sdk: compute.VirtualMachine{
+				ID:   to.StringPtr("test-vm-id"),
+				Name: to.StringPtr("test-vm-name"),
+				VirtualMachineProperties: &compute.VirtualMachineProperties{
+					ProvisioningState: to.StringPtr("Succeeded"),
+					HardwareProfile: &compute.HardwareProfile{
+						VMSize: compute.VirtualMachineSizeTypesStandardA1,
+					},
+				},
+			},
+			want: &VM{
+				ID:     "test-vm-id",
+				Name:   "test-vm-name",
+				State:  infrav1.ProvisioningState(compute.ProvisioningStateSucceeded),
+				VMSize: "Standard_A1",
+			},
+		},
+		{
+			name: "Should convert and populate with availability zones",
+			sdk: compute.VirtualMachine{
+				ID:   to.StringPtr("test-vm-id"),
+				Name: to.StringPtr("test-vm-name"),
+				VirtualMachineProperties: &compute.VirtualMachineProperties{
+					ProvisioningState: to.StringPtr("Succeeded"),
+				},
+				Zones: &[]string{"1", "2"},
+			},
+			want: &VM{
+				ID:               "test-vm-id",
+				Name:             "test-vm-name",
+				State:            infrav1.ProvisioningState(compute.ProvisioningStateSucceeded),
+				AvailabilityZone: "1",
+			},
+		},
+		{
+			name: "Should convert and populate with tags",
+			sdk: compute.VirtualMachine{
+				ID:   to.StringPtr("test-vm-id"),
+				Name: to.StringPtr("test-vm-name"),
+				VirtualMachineProperties: &compute.VirtualMachineProperties{
+					ProvisioningState: to.StringPtr("Succeeded"),
+				},
+				Tags: map[string]*string{"foo": to.StringPtr("bar")},
+			},
+			want: &VM{
+				ID:    "test-vm-id",
+				Name:  "test-vm-name",
+				State: infrav1.ProvisioningState(compute.ProvisioningStateSucceeded),
+				Tags:  infrav1.Tags{"foo": "bar"},
+			},
+		},
+		{
+			name: "Should convert and populate with all fields",
+			sdk: compute.VirtualMachine{
+				ID:   to.StringPtr("test-vm-id"),
+				Name: to.StringPtr("test-vm-name"),
+				VirtualMachineProperties: &compute.VirtualMachineProperties{
+					ProvisioningState: to.StringPtr("Succeeded"),
+					HardwareProfile: &compute.HardwareProfile{
+						VMSize: compute.VirtualMachineSizeTypesStandardA1,
+					},
+				},
+				Zones: &[]string{"1"},
+				Tags:  map[string]*string{"foo": to.StringPtr("bar")},
+			},
+			want: &VM{
+				ID:               "test-vm-id",
+				Name:             "test-vm-name",
+				State:            infrav1.ProvisioningState(compute.ProvisioningStateSucceeded),
+				VMSize:           "Standard_A1",
+				AvailabilityZone: "1",
+				Tags:             infrav1.Tags{"foo": "bar"},
+			},
+		},
+	}
+	for _, tt := range tests {
+		tt := tt
+		t.Run(tt.name, func(t *testing.T) {
+			t.Parallel()
+			got := SDKToVM(tt.sdk)
+			if !reflect.DeepEqual(got, tt.want) {
+				t.Errorf("Diff between expected result and actual result:\n%s", cmp.Diff(tt.want, got))
+			}
+		})
+	}
+}
diff --git a/azure/services/virtualmachines/virtualmachines.go b/azure/services/virtualmachines/virtualmachines.go
index 0379514f107..443c05b8148 100644
--- a/azure/services/virtualmachines/virtualmachines.go
+++ b/azure/services/virtualmachines/virtualmachines.go
@@ -95,10 +95,7 @@ func (s *Service) Reconcile(ctx context.Context) error {
 		if !ok {
 			return errors.Errorf("%T is not a compute.VirtualMachine", result)
 		}
-		infraVM, err := converters.SDKToVM(vm)
-		if err != nil {
-			return err
-		}
+		infraVM := converters.SDKToVM(vm)
 		// Transform the VM resource representation to conform to the cloud-provider-azure representation
 		providerID, err := azureutil.ConvertResourceGroupNameToLower(azure.ProviderIDPrefix + infraVM.ID)
 		if err != nil {