23 Va. Admin. Code § 10-110-221

Current through Register Vol. 41, No. 8, December 2, 2024

Section 23VAC10-110-221 - Credit for income taxes paid to another state; residents

A. Generally. Any resident of Virginia who has become liable for and paid income tax to another state may be eligible for a credit against his Virginia income tax liability for all or a portion of the liability to the other state, subject to the qualifications set forth in subsections B through D of this section.

B. Qualifying income.

1. Generally. Only an income tax paid to another state on earned or business income from sources outside of Virginia qualifies for the credit.

2. Earned income. For purposes of this credit, the term "earned income" shall mean wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. Earned income does not include interest or dividend income, capital gains, income from investments, or similar types of passive income.

3. Business income. For purposes of this credit, the term "business income" shall mean income derived from an activity which constitutes a "business" for federal income tax purposes for which a federal Schedule C, E, or F must be filed. For example a sole proprietorship, provided that if the business incurred a loss such loss would be allowable under federal law. Thus income from hobbies and other activities not engaged in primarily for profit is not business income even though a Schedule C, E, or F may be filed for such activities.

C. Nature of tax imposed by other state. The credit may be claimed with respect to an income tax liability incurred on non-Virginia source income to another state. A credit may not be claimed by an individual for tax imposed by another state on a distributing entity e.g., an estate, regulated investment company, a partnership or a trust in which the individual is a beneficiary or shareholder.

1. S corporation. Effective for taxable years beginning of the Code of Virginia, the amount of state income tax paid by an electing small business corporation (S corporation), paid to a state that does not recognize the federal S election, shall be attributable to the individual shareholders. The amount of tax paid, to such state shall be allocated to each shareholder in proportion to his share of ownership of the S corporation stock.

D. Limitations.

1. Amount. The amount of this tax credit is limited to the lesser of:

(i) the tax actually paid to another state on non-Virginia source income; or

(ii) the amount of tax actually paid to another state which is equivalent to the proportion of income taxable in such state to Virginia taxable income (computed prior to the credit). The following examples illustrate this concept.

EXAMPLE 1: Taxpayer A, a Virginia resident, has taxable income of $25,000 derived from the operation of a sole proprietorship business in State W, upon which tax is paid to State W in the amount of $1,750. A's Virginia taxable income is $50,000, resulting in a tax liability, before computation of the credit, of $2,655. A may claim a credit for tax paid to State W of $1,327.50 computed as follows:

Income on which tax computed in State W	=	25,000	=	50%
Virginia taxable income		50,000

Ratio (above) x Va. tax liability = 2,655 x 50% = $1,327.50

Since the amount computed proportionally is less than the tax actually paid to State W, the credit is limited to $1,327.50.

EXAMPLE 2: Taxpayer B, a Virginia resident, has taxable income of $18,000 from wages earned in State Z, upon which tax is paid to State Z of $630. B's Virginia taxable income is $20,000 resulting in a Virginia tax liability, before computing this credit, of $930. B may claim a credit for tax paid to State Z of $630, computed as follows:

Income on which tax computed in State Z	=	18,000	=	90%
Virginia taxable income		20,000

Ratio (above) x Va. tax liability = $930 x 90% = $837

Since the tax actually paid to State Z is less than the amount computed proportionally, B is entitled to a credit for the full amount of tax paid to State Z.

EXAMPLE 3: XYZ Corporation is a corporation incorporated under the laws of Virginia. It has elected S corporation status under the provisions of IRC § 1372. XYZ Corporation does business in Virginia and State X; therefore, it has both Virginia source income and State X source income. Since State X does not recognize the federal S election, XYZ Corporation apportions its state income as required by State X to determine the amount of income tax it owes to State X. Because Virginia recognizes the federal S election, XYZ Corporation pays no corporate income tax to Virginia.

Taxpayers A, B and C, all Virginia residents, own all of the shares of stock in XYZ Corporation. They own 45, 30 and 25 shares of stock in XYZ Corporation respectively. Their share of the income on which the State X income tax is computed and their share of the credit for income tax paid to another state, is computed as follows:

Total ordinary income of S corporation	$10,000
Income on which State X tax is computed	$4,000
Tax paid State X by XYZ Corporation @ 6%	$240

	Taxpayer A	Taxpayer B	Taxpayer C
Share of ownership	45/100	30/100	25/100
Share of income on which State X tax is computed	45/100 x $4000 = $1800	30/100 x $4000 = $1200	25/100 x $4000 = $1000
Share of State X tax	45/100 x $240 = $108	30/100 x $240 = $72	25/100 x $140 = $60

2. Nonresident credit granted by other state. No credit is allowable to a resident for any tax paid to another state if such state allows the taxpayer a credit against his tax liability for tax paid to Virginia and such credit is similar to that afforded to nonresidents by Virginia.

NOTE: As of September 19, 1984, Virginia residents may not claim a credit against Virginia income tax for tax paid to Arizona, California, District of Columbia, Maryland, New Mexico or West Virginia since these states allow Virginia residents a nonresident credit for tax paid to Virginia.

23 Va. Admin. Code § 10-110-221

Derived from VR630-2-332 § 2; adopted September 19, 1984; revised, eff. January 1, 1985; amended, eff. January 21, 1987.

Statutory Authority

§§ 58.1-203 and 58.1-332 of the Code of Virginia.