Current through Register Vol. 41, No. 3, September 23, 2024
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 |
Statutory Authority
§§ 58.1-203 and 58.1-402 of the Code of Virginia.
