23 Va. Admin. Code § 10-120-325

Current through Register Vol. 40, No. 22, June 17, 2024

Section 23VAC10-120-325 - Consolidated and combined returns; carryovers

A. Carryovers

1. Double benefit prohibited. When any corporation elects to file, or is granted permission to file, a consolidated or combined return and subsequently incurs a net operating loss or net capital loss for federal income tax purposes, such loss may be carried back to specified prior years or carried over to specified subsequent years under federal law. To the extent a federal net operating loss is used to offset income of other members of the affiliated group in a Virginia combined or consolidated return in the year of the loss, it may not be used to reduce income for Virginia purposes of the loss corporation or other members of the group in any other years via the federal net operating loss deduction.

2. Net operating losses before December 31, 1992. If an affiliate has incurred and utilized a federal net operating loss in a taxable year beginning before December 31, 1992, and the amount of loss and Virginia modification utilized was not computed in accordance with IRC § 172 et seq.; 23VAC10-120-320 D et seq. and subdivision D of this section, an adjustment will be made within the applicable statutory period for any double benefit received.

3. Net operating losses incurred before and utilized after December 31, 1992. All affiliates having net operating losses incurred in taxable years beginning before December 31, 1992, and carried to taxable years beginning after December 31, 1992, must recompute the carryforward amount of federal net operating loss, and accompanying Virginia modification, as if all provisions of this regulation had been in effect when the federal net operating loss was first incurred. If an affiliate utilized an amount of federal net operating loss greater than would have been allowed under the provisions of this regulation, the affiliate's federal net operating loss carryforward for Virginia purposes shall be reduced by the excess amount utilized. The affiliate's Virginia modification to the federal net operating loss shall be adjusted proportionately.

B. No Virginia carrybacks or carryovers.

1. Virginia does not have any provisions in the law permitting the deduction of net operating losses, net capital losses, or charitable contributions carried back or carried over from other taxable years except when allowable as a deduction in computing federal taxable income (See 23VAC10-120-100 B 5). When a loss is incurred in a year in which a consolidated or combined Virginia return is filed, the amount of the net Virginia modifications that follow the federal net operating loss deduction shall be computed in accordance with subdivision C (consolidated loss year return) or subdivision D (combined loss year return) of this section. No Virginia modifications follow a net capital loss or charitable contribution carryover.

2. A corporation or an affiliated group of corporations may elect to forgo carryback of a net operating loss or net capital loss for Virginia purposes independent of any such election for federal purposes if, and only if, the affiliated group files its Virginia and federal returns on a different basis, or files a federal consolidated return including corporations which are not subject to Virginia income tax. The election for Virginia purposes shall be made by filing a statement with the Virginia return for the loss year in the same manner as prescribed by federal law and regulations.

3. Virginia does not have any provisions in the law permitting the deduction of charitable contributions for the current year or carried over from other taxable years except when allowable as a deduction in computing federal taxable income. If federal and Virginia returns are filed on a different basis, or including different members, then federal taxable income, including federal limitations on the allowable deduction for charitable contributions and the interaction between contribution carryovers and loss carryovers, shall be computed in accordance with 23VAC10-120-320 D.

C. Loss incurred in a consolidated Virginia return

1. When the consolidated federal taxable income (computed in accordance with 23VAC10-120-320 D for purposes of a consolidated Virginia return) includes a federal net operating loss deduction from a loss year in which a consolidated Virginia return was filed, and which is not a separate return limitation year (as defined in § 1.1502-1(f) of the Internal Revenue Code) with respect to any affiliate for Virginia or federal tax purposes, the consolidated Virginia additions and subtractions from the loss year shall modify the consolidated federal net operating loss by being carried back or over to other years in the same proportion as the net operating loss deduction absorbed for any year for federal purposes.

2. When the separate federal taxable income of an affiliate (whether computed for purposes of a separate or combined Virginia return, or for a consolidated Virginia return affected by a separate return limitation year for federal or Virginia tax purposes) includes a net operating loss deduction from a loss year in which a consolidated Virginia return was filed then the federal net operating loss deduction shall be deemed to carry with it a Virginia modification from the loss year computed in the following manner:

a. If the consolidated Virginia return of the affiliated group for the loss year shows a consolidated Virginia taxable income that is not a loss, then all of the loss corporation's federal loss and Virginia subtractions have been offset by its own additions and the income, additions and subtractions of other members of the affiliated group. Therefore a net Virginia modification equal to 100% of any federal net operating loss deduction attributable to such loss year shall be added to the Virginia taxable income of the corporation claiming it.

b. If the consolidated Virginia return of the affiliated group for the loss year shows a Virginia taxable income that is a loss, then the net Virginia modification is computed as follows:

(1) Identify the affiliates in the consolidated Virginia return for the loss year which have incurred a federal net operating loss for the year ("loss affiliates").

(2) Apply the procedures of U.S. Treasury Regulation § 1.1502-79 to divide the consolidated federal net operating loss among the loss affiliates in proportion to each affiliate's separate federal net operating loss.

(3) Apply the procedures of U.S. Treasury Regulation § 1.1502-79 to divide the consolidated Virginia taxable income (with Virginia additions and subtractions, but before allocation and apportionment) among the loss affiliates. The consolidated taxable income is divided between loss affiliates by taking the proportion of each affiliate's separate Virginia taxable income to the total separate Virginia taxable income for all loss affiliates. This amount is the tentative Virginia loss.

(4) For each loss affiliate identified in step (1) above, the net Virginia modification is the difference between its share of the consolidated federal net operating loss computed in step (2) and its share of the consolidated Virginia taxable loss computed in step (3). If the federal loss computed in step (2) is greater than the Virginia loss computed in step (3), then the net modification will be an addition. If the federal loss computed in step (2) is less than the Virginia loss computed in step (3), then the net modification will be a subtraction. Such amount shall modify the net operating loss and shall be carried back or over to other years in the same proportion as the net operating loss deduction absorbed for any year.

D. Loss incurred in a combined Virginia return.

1. When the separate federal taxable income of an affiliate (computed for purposes of any Virginia return) includes a net operating loss deduction from a loss year in which a combined Virginia return was filed, then the federal net operating loss deduction shall be deemed to carry with it a net Virginia NOLD modification from the loss year that includes its own additions and subtractions plus an amount representing the income of other affiliates offset by the loss in the combined return. The net Virginia NOLD modification is computed in the following manner:

a. If the combined Virginia taxable income after allocation and apportionment is not a loss, then each affiliate's federal net operating loss and Virginia subtractions for the taxable year have been entirely offset by its own additions and the income, additions, and subtractions of other members of the affiliated group. Therefore, each affiliate's net Virginia modification shall be an addition equal to the amount of its federal net operating loss. This prevents a federal net operating loss (incurred under this scenario) from reducing Virginia taxable income in any other year to which the loss may be carried for federal purposes.

b. If a combined group's Virginia taxable income after allocation and apportionment is a loss, but the separate Virginia taxable income after allocation and apportionment is not a loss for any affiliate with a federal net operating loss (incurred in the year at issue), then all of such affiliate's federal net operating loss and Virginia subtractions have been entirely offset by its own additions and the income allocated and apportioned to Virginia. Therefore, such affiliate's net Virginia NOLD modification shall be an addition equal to the amount of its federal net operating loss.

c. If the combined Virginia taxable income after allocation and apportionment is a loss, then the net Virginia NOLD modification is computed as follows for each affiliate which has both a federal net operating loss and a loss after allocation and apportionment:

(1) Compute the amount of income offset in combination by using the summation method. If all members of the combined group have a loss after allocation and apportionment, then no income has been offset in the combined return and no computations are required under subdivisions (2) and (3). Therefore, each affiliate's net Virginia modification will be its own additions and subtractions as provided in subdivision (4).

Summation method: Compute the total Virginia taxable income of nonloss combined group members offset in combination, by summing the Virginia taxable income or loss (after allocation and apportionment) for each affiliate not having both a federal net operating loss and a Virginia taxable loss after allocation and apportionment, including affiliates subject to subdivision D 1 b of this section. Note that the resulting amount is decreased by an affiliate's loss created solely by Virginia subtractions and allocable income. Please see Example 6, which demonstrates the summation method.

(2) Apply the procedure outlined in U.S. Treasury Regulation § 1.1502-79 to allocate the income offset in combination determined under subdivision (1) to those affiliates having both a federal and Virginia loss, in proportion to their losses after allocation and apportionment.

(3) For each affiliate to which an amount has been allocated pursuant to subdivision (2), convert the allocated amount to an amount equivalent to an addition before allocation and apportionment. To accomplish this, add the amount derived in subdivision (2) above to each affiliate's income allocated to Virginia (if any), and divide the resulting sum by its apportionment factor. From this grossed up amount, subtract the income allocated before apportionment. The result is the addition equivalent to the income of other affiliates that has been offset by a federal net operating loss in the combined Virginia return in the year of the loss.

(4) The net Virginia NOLD modification for each affected affiliate is the sum of its separate additions and subtractions plus the addition equivalent computed pursuant to subdivision (3).

23 Va. Admin. Code § 10-120-325

Derived from VR630-3-442 § 6, eff. January 1, 1985; amended, eff. March 10, 1993.

Statutory Authority

§§ 58.1-203 and 58.1-442 of the Code of Virginia.