Virginia Administrative Code
Title 23 - TAXATION
Agency 10 - DEPARTMENT OF TAXATION
Chapter 110 - INDIVIDUAL INCOME TAX
Section 23VAC10-110-225 - Qualified Equity and Subordinated Debt Investments Tax Credit; Definitions
Current through Register Vol. 41, No. 3, September 23, 2024
The following words and terms when used in this regulation shall have the following meanings, unless the context clearly indicates otherwise:
"Affiliated" means a direct or indirect ownership interest of at least 80% in an entity. An indirect ownership interest includes, but is not limited to, direct ownership interests held by a taxpayer's family members or an entity affiliated with such taxpayer or family members, or any combination of these.
"Equity" means common stock or preferred stock, regardless of class or series, of a corporation; a partnership interest in a limited partnership; or a membership interest in a limited liability company, any of which is not required, or subject to an option on the part of the taxpayer, to be redeemed by the issuer within five years from the date of issuance.
"Family member" means, when applied with respect to an individual taxpayer, (i) spouse, (ii) children, (iii) grandchildren, (iv) parents, (v) spouse's parents, and (vi) grandparents.
"Primarily engaged in business in the Commonwealth" means 50% or more of the entity's gross receipts are derived from sources within Virginia.
"Qualified business" means a business which (i) has annual gross revenues of no more than $5 million in its most recently completed taxable year, (ii) is commercially domiciled in the Commonwealth, (iii) is primarily engaged in business or does substantially all of its production in the Commonwealth, and (iv) is not primarily engaged, or is not primarily organized to engage, in any of the following types of businesses:
1. Banks;
2. Savings and loan institutions;
3. Credit or finance;
4. Financial, broker or investment;
5. Businesses organized for the primary purpose of rendering professional services as defined in Chapter 7 (§ 13.1-542 et seq.) of Title 13.1 of the Code of Virginia;
6. Accounting;
7. Government, charitable, religious or trade institutions or organizations;
8. Conventional coal, oil and gas, and mineral exploration;
9. Insurance;
10. Real estate design or engineering;
11. Construction or construction contracting;
12. Business consulting or business brokering;
13. Residential housing, real estate brokerage, sale or leasing businesses, or real estate development; or
14. Any business that is in violation of the law, and such others as the Department of Taxation may designate.
A business in its first taxable year of operation will be deemed to have annual gross revenues of no more than $5 million and be primarily engaged in business and do substantially all of its production in the Commonwealth if the commercial domicile pursuant to 23VAC10-120-140 of such business is within the Commonwealth.
"Qualified investment" means a cash investment in a qualified business in the form of equity or subordinated debt. An investment shall not be qualified, however, if the taxpayer who holds such investment, or any of such taxpayer's family members, or any entity affiliated with such taxpayer, receives or has received compensation, as defined in § 58.1-302 of the Code of Virginia, from the qualified business in exchange for services provided to such business as an employee, officer, director, manager, consultant, independent contractor or otherwise in connection with or within one year before or after the date of such investment. For purposes hereof, reimbursement of reasonable expenses incurred shall not be deemed to be compensation. A qualified investment shall not include existing investments or instruments that have been purchased, transferred, or otherwise obtained without providing new capital to a qualified business.
A subordinated debt instrument that is convertible into equity would qualify if (i) the subordinated debt would otherwise meet the definition under this section, (ii) the equity would otherwise meet the definition under this section, and (iii) the subordinated debt does not include a provision by which the issuer may compel the conversion into equity before the end of the required holding period of the subordinated debt.
An investment which would otherwise qualify for this credit will not be allowed if 50% or more of the proceeds resulting from the investment are used within one year of the cash investment to retire or reduce debt or equity of a qualified business that was incurred prior to the investment.
"Subordinated debt" means indebtedness of a corporation, general or limited partnership, or limited liability company that (i) by its terms requires no repayment of principal for the first three years after issuance; (ii) is not guaranteed by any other person or entity or secured by any assets of the issuer or any other person or entity; and (iii) is subordinated to all indebtedness and obligations of the issuer to national or state-chartered banking or savings and loan institutions. Except as provided for under 23VAC10-110-229, any transaction that results in the extinguishment or reduces outstanding principal of a subordinated debt instrument used to qualify for this credit shall be deemed as a repayment of principal. Such transactions, include, but are not limited to:
"Substantially all of its production in the Commonwealth" means 80% or more of the entity's expenses are incurred within Virginia.
Statutory Authority
§§ 58.1-203 and 58.1-339.4 of the Code of Virginia.
