23 Va. Admin. Code § 10-120-102

Current through Register Vol. 41, No. 10, December 30, 2024

Section 23VAC10-120-102 - Virginia taxable income; subtractions

The purpose of the subtractions specified in § 58.1-402 of the Code of Virginia is to subtract from Virginia taxable income certain items included in federal taxable income. If an item was partially excluded or deducted in determining federal taxable income, then it shall be subtracted from Virginia taxable income only to the extent that it was included in federal taxable income. If an item has already been excluded from Virginia taxable income under this chapter, then it shall not be subtracted again under this section. The subtractions are:

A. Interest or dividends on obligations of the United States or Virginia.

1. "Obligation" means a debt obligation or security issued by the United States or any authority, commission or instrumentality of the United States of by the Commonwealth of Virginia or any of its political subdivisions, which obligation or security is issued in the exercise of the borrowing power of the United States or Virginia and is backed by the full faith and credit of the United States or Virginia.

2. Guarantees by the United States or Virginia of obligations of private individuals or corporations are merely contingent obligations of the United States or Virginia even though the guarantees may be backed by the full faith and credit of the United States or Virginia. The obligation does not become an obligation of the United States or Virginia because the guarantee and interest and dividends paid on such guaranteed obligations do not qualify for the subtraction unless specified exempted by statute.

3. Specific statutory exemptions exist for certain securities issued by particular federal or Virginia agencies or political subdivisions. If a federal or Virginia statute exempts from state taxation the interest or dividends on specific securities of a particular agency or political subdivision then such interest or dividends qualify for the subtraction.

For examples of specific statutory exemptions see § 15.1-1383 of the Code of Virginia and 12 USC § 2055.

4. Repurchase agreements are usually obligations issued by financial institutions which are secured by U.S. obligations exempt from Virginia income taxation under subparagraphs a or c above. In such cases the interest paid by the financial institutions to purchasers of repurchase agreements does not qualify for the subtraction. Repurchase agreements issued following current commercial practice will be regarded as obligations of the issuing financial institution. However, if the purchaser is regarded as the true owner of the underlying exempt obligation, the interest will qualify for the subtraction even though collected by the seller and distributed to the purchaser. Any claim of such ownership must be substantiated by a taxpayer claiming a subtraction.

B. Interest or dividends from pass-through entities.

1. Under federal law certain income received by a partnership, estate, trust or regulated investment company (pass-through entity) and distributed to a partner, beneficiary or shareholder (recipient) retains the same character in the hands of the recipient. If a pass-through entity receives interest or dividends on U.S. or Virginia obligations which are distributed to the recipients in a manner that the distributions retain their character in the hands of the recipients under federal law, then such interest or dividends may be subtracted by the recipients in computing Virginia taxable income.

2. A pass-through entity may invest in several types of securities, some of which are U.S. or Virginia obligations. When taxable income is commingled with exempt income all income is presumed taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. The determination must be made for each distribution to each shareholder. For example, if distributions are made monthly then the determination must be made monthly. As a particular matter, only pass-through entities which invest exclusively in U.S. or Virginia obligations, or which have extremely stable investment portfolios, will be likely to make such determinations.

3. Examples:

(i) ABC Fund, a regulated investment company, invests exclusively in U.S. Treasury notes and bills which are exempt from state taxation under 31 USC § 3124. All distributions are considered to be interest on U.S. obligations and may be subtracted by the recipient.

(ii) Virginia Fund, a regulated investment company, invests exclusively in obligations of Virginia and its political subdivisions. Distributions are considered to be interest on Virginia obligations and qualify for the subtraction to the extent that such distributions are included in the recipient's federal taxable income.

(iii) XYZ Fund, a regulated investment company, invests in a variety of securities including obligations of the U.S., Virginia, other states, corporations and financial institutions (repurchase agreements). Due to the commingling of taxable and exempt income, the turnover in XYZ Fund's investments and the fluctuation in a shareholder's investment in XYZ Fund, all distributions are considered taxable income and do not qualify for the subtraction unless XYZ Fund determines the portion of distributions which is interest and dividends from U.S. and Virginia obligations for each distribution to each shareholder. Note that any portion of XYZ Fund's distributions which are excluded from federal taxable income as interest on obligations of other states must be added to Virginia taxable income.

C. DISC dividends.

1. A domestic international sales corporation (DISC) is exempt from the federal income tax under IRC § 991. Virginia law does not provide a similar exemption. Therefore a DISC is subject to Virginia tax if it is a domestic corporation or doing business in Virginia.

2. IRC § 995 imputes certain earnings of a DISC to the DISC's shareholders as a distribution taxable as a dividend. Subsequent actual distributions are excluded from the shareholder's income as being first made out of previously taxed income. IRC § 996(a)(1). The deemed distributions will be considered dividends pursuant to § 58.1-407 of the Code of Virginia (relating to allocation of dividend income). However, the provisions of § 58.1-446 may apply to a DISC.

3. If 50% or more of the income of a DISC was assessable in Virginia for the preceding year, or the last year in which the DISC had income, then to the extent that deemed distributions from such DISC were included in taxpayer's federal taxable income, such amounts shall be subtracted from federal taxable income. For the purpose of this subtraction, 50% or more of the income of a DISC shall be deemed assessable in Virginia if the DISC filed a Virginia income tax return for the preceding year, or the last year in which the DISC had gross income, and such return shows either that all income was taxable in Virginia or that 50% or more of the income was allocated or apportioned to Virginia.

D. State tax refunds. If federal taxable income included a refund or credit for overpayment of income taxes to this state or any other state, the amount of such refund or credit shall be subtracted from Virginia taxable income.

E. Foreign dividend gross up. IRC § 78 requires corporations electing to claim a credit for taxes paid to a foreign government by a subsidiary to deem the amount of such taxes a dividend and includes such amount in federal taxable income. If IRC § 78 requires the inclusion of an amount of federal taxable income then such amount, net of any expenses attributable to such amount, shall be subtracted from Virginia taxable income. A copy of I.R.S. form 1118, or similar form, shall be attached to the return to substantiate the subtraction.

F. WIN or Targeted Jobs credit. Federal law permits a taxpayer to claim a credit based upon certain wages paid. IRC §§ 40 and 44B. If a WIN or Targeted Jobs credit is elected IRC § 280C bars the deduction of the wages on which the credit is based. To the extent such wages were not deducted from federal taxable income, they shall be subtracted from Virginia taxable income.

G. Subpart F income. If IRC § 951 requires an amount to be included in federal taxable income, then such amount, net of any expenses attributable to such amount, shall be subtracted from Virginia taxable income.

H. Foreign source income. If federal taxable income includes any amount that is "foreign source income," as that term is defined in § 58.1-302 of the Code of Virginia, and the provisions thereunder, such amount may be subtracted.

I. Excess cost recovery. If the taxpayer included any excess cost recovery in its additions for taxable years beginning after December 31, 1981, then taxpayer may subtract a portion of such excess cost recovery in returns for taxable years beginning after December 31, 1983. See regulation 23VAC10-120-50.

J. Dividends received. To the extent included in federal taxable income there shall be subtracted from Virginia taxable income the dividends received from a corporation when the taxpaying corporation owns 50% or more of the voting power of all classes of stock of the payer.

K. ESOP contributions. Federal law allows employers to claim a credit for contributions made to an Employee Stock Ownership Plan (ESOP), and further provides that any ESOP contributions for which a credit is allowed may not be deducted in computing federal taxable income. IRC § 44G. If any ESOP contributions are not deducted in computing federal taxable income because of the provisions of IRC § 44G, such contributions may be subtracted in computing Virginia taxable income.

L. Qualified agricultural contributions.

1. Generally. The amount of any qualified agricultural contribution shall be subtracted from federal taxable income in determining Virginia taxable income.

2. Qualified contributions. Contributions that qualify for subtraction from federal taxable income are contributions of agricultural products made between January 1, 1985, and December 31, 1987, by a corporation engaged in the trade or business of growing or raising such products.

To be subtractible, a contribution must be made to an organization exempt from federal income taxation under IRC § 501(c)(3) and must meet the following tests:

(i) the product contributed must be fit for human consumption, i.e., edible products;

(ii) the use of the product by the donee must be related to the purpose or function for which the donee was granted exemption under IRC § 501(c)(3) (for instance, contributions of crops to a foundation organized for scientific or literary purposes would not qualify, but contributions of crops to a nonprofit food bank would qualify);

(iii) the contribution is not made in exchange for money, property, or service; and

(iv) the donor must obtain from the donee a written statement representing that the donee's use and disposition of the product will be in accordance with its charitable mission. Such written statements also must list the type and quantity or volume of products contributed, state that the products donated are fit for human consumption, and state the use to which the donations will be put. Such written statements must be filed with the corporation's income tax return when the subtraction for qualified agricultural contributions is claimed.

To be subtractible from federal taxable income under the above tests, the donee must make us of the agricultural products donated to it consistent with the purpose for which it was granted exemption under IRC § 501(c)(3). Therefore, contributions of crops to a charitable organization that provides food to the needy would qualify. However, contributions of crops to an organization that does not itself provide food to the needy would not qualify, even if the donee in turn contributes the crops to an organization that provides food to the needy.

3. Agricultural products. Crops are the only agricultural products eligible for subtraction when donated. Thus, the subtraction is limited to contributions of products of the soil and does not include contributions of animal products.

4. Computation of subtraction. The subtraction for qualified agricultural contributions is equal to the lowest wholesale market price in the nearest regional market of the type of product(s) donated during the month(s) in which donations are made.

For the purposes of determining the lowest wholesale market price for a particular product, a corporation must use the lowest wholesale market price, regardless of grade or quality, published in the month of subtraction by the U.S. Department of Agriculture Market News Services on Fruits, Vegetables, Ornamentals, and Specialty Crops for the regional market nearest to the corporation's place of business.

5. Limitation on subtraction. The subtraction for qualified agricultural contributions shall be reduced by the amount of any other charitable deductions under IRC § 170 relating to qualified agricultural contributions if the deductions are claimed on a corporation's federal return for the taxable year in which the contribution is made, or if the deductions are eligible for carryover to subsequent taxable years under IRC § 170. For example, a corporation which deducts charitable contributions of qualified agricultural products for federal and state income tax purposes must reduce its Virginia subtraction for qualified agricultural contributions by the amount of its charitable deductions for the same products. If the corporation's total charitable contributions of qualified agricultural products exceed the deduction ceiling set by federal law and the corporation is eligible to carryover deductions to subsequent years, the corporation must also subtract the deductions available for carryover from the value of its qualified agricultural contributions.

EXAMPLE: Corporation contributes one thousand 50-pound sacks of round white potatoes to a local nonprofit food bank. The corporation's basis in the contributed property is $200, of which it claims $100 as a charitable contribution on its 1986 federal income tax return and will carryover $100 as a charitable deduction in its taxable year 1987 federal income tax return. During the month in which the contribution was made, the lowest wholesale market price for a 50-pound sack of round white potatoes published by the U.S. Department of Agriculture Market News Service in the regional market nearest the corporation's place of business was $2. The corporation's deduction for its qualified agricultural contribution would be computed as follows:

Units contributed	1,000
Lowest wholesale market price of unit	x	$2
$2,000
Charitable deduction claimed on contribution Charitable deduction carried over Deduction for qualified agricultural contribution	($100) ($100) $1,800

23 Va. Admin. Code § 10-120-102

Derived from VR630-3-402 § 3, eff. January 1, 1985; amended, eff. January 21, 1987.

Statutory Authority

§§ 58.1-203 and 58.1-402 of the Code of Virginia.