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Virginia Administrative Code
Title 23. Taxation
Agency 10. Department of Taxation
Chapter 120. Corporation Income Tax
1/27/2023

23VAC10-120-100. Virginia taxable income; definitions; exceptions.

A. Federal taxable income. A Virginia income tax is imposed on all income from Virginia sources which is defined as federal taxable income with certain specified additions, subtractions and exemptions. For the purpose of determining Virginia taxable income, the term "federal taxable income" means all income from whatever source derived and however named on which a federal income tax is imposed.

B. For most corporations "federal taxable income" for Virginia income tax purposes will be the amount shown on the line of federal form 1120 designated "taxable income" (after net operating loss deduction and special deductions). However, there are some exceptions, including, but not limited to, the following:

1. Regulated investment companies file federal form 1120 but do not follow normal corporate rules for computing the tax. Separate taxes are imposed on investment company taxable income and on capital gains. The federal taxable income of a regulated investment company for Virginia purposes is the sum of: (i) "investment company taxable income" defined in IRC § 852(b) and (ii) the amount of capital gains defined in IRC § 852(b).

2. Real estate investment trusts file federal form 1120 but do not follow normal corporate rules for computing the tax. Separate taxes are imposed on "real estate investment trust taxable income," capital gains, "income from foreclosure property" and "income from prohibited transactions."

The federal taxable income of a real estate investment trust for Virginia income tax purposes is the sum of: (i) "real estate investment trust income" as defined in IRC § 857(b)(2); (ii) "capital gains" as defined in IRC § 857(b)(3); (iii) "income from foreclosure property" as defined in IRC § 857(b)(4); and (iv) "income from prohibited transaction" as defined in IRC § 857(b)(6).

3. Organizations exempt from federal tax under subchapter F of the Internal Revenue Code which have unrelated business income are required to file Federal Form 990-T. For such organizations, federal taxable income means "unrelated business taxable income" as defined in IRC § 512.

4. Corporations organized under the laws of a foreign country and doing business within the U.S. pay the regular corporate tax on net income effectively connected with the conduct of a trade or business within the U.S. and, in the absence of a treaty between the U.S. and the foreign country, a separate tax of 30% on the gross income from dividends, interest and certain other income from U.S. sources. For Virginia purposes the federal taxable income of such foreign corporations is either the taxable income under the terms of any applicable treaty, or the sum of: (i) the gross income defined in IRC § 881, and (ii) the net income defined in IRC § 882.

5. Net operating loss deductions.

(i) Corporations incurring a net operating loss are allowed under federal law to carry such loss back to specified years and over to specified subsequent years. Virginia law has no provision for a net operating loss deduction (NOLD). Therefore, an NOLD is allowable for Virginia purposes only to the extent that the NOLD is allowed as a deduction in computing federal taxable income.

(ii) When a net operating loss is carried back to a prior year, the NOLD is treated as a change in federal taxable income for the year to which the loss is carried. The corporation may file an amended Virginia return claiming a refund due to the NOLD. A copy of federal form 1139, 1120X or similar form must be attached to the amended Virginia return. See §§ 58.1-823 (amended returns), 58.1-1823 (interest on overpayments attributable to an NOLD), 58,1-403 (special rules for railway companies), and 58.1-442 (special rules for consolidated and combined Virginia returns) of the Code of Virginia.

(iii) The Virginia additions and subtractions of the loss year follow the loss to the year the NOLD is claimed. For example, if 50% of the 1983 federal net operating loss is carried back to 1980, then 50% of the 1983 Virginia additions and subtractions will also be carried back to 1980.

(iv) Under federal law an NOLD may be used only to reduce federal taxable income. An NOLD may not create or increase a federal net operating loss. Because an NOLD cannot reduce federal taxable income below zero, it is possible that a corporation with substantial Virginia additions will owe Virginia income tax even though its federal taxable income is reduced to zero by an NOLD.

(v) Members of an affiliated group of corporations which file a consolidated federal return and separate or combined Virginia returns must compute federal taxable income and the NOLD as if each corporations had filed a separate federal return for all affected years. If the group files a Virginia consolidated return which does not include all of the corporations included in the federal consolidated return then the federal taxable income and NOLD group shall not be applied in computing the separate federal taxable income in this situation. See regulation 23VAC10-120-320 et seq.

6. Certain corporations may be required to redetermine Virginia taxable income to properly reflect the business done in Virginia. (§ 58.1-446 of the Code of Virginia.)

Statutory Authority

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

Historical Notes

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

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