Administrative Code

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

23VAC10-120-101. Virginia taxable income; additions.

The purpose of the additions specified in § 58.1-402 of the Code of Virginia is to add to Virginia taxable income certain items excluded or deducted from federal taxable income. If an item was fully included in federal taxable income, then it will not be added to Virginia taxable income by this section. If an item was only partially included in federal taxable income, then the item will be added to Virginia taxable income only to the extent it was excluded or deducted from federal taxable income. If an item excluded or deducted from federal taxable income has already been included in Virginia taxable income by operation of some other section of the Code of Virginia, then the item will not be added again under this section. The additions are:

A. Interest on obligations of other states.

1. Interest on the obligations of any state other than Virginia or on the obligations of a political subdivision of such other state must be added to federal taxable income.

2. IRC § 265 prohibits the deduction of expenses allocable to or interest on indebtedness incurred or continued to purchase or carry obligations exempt from federal income tax. If a corporation has interest income on obligations of other states and also has expenses or interest which were not deducted by operation of IRC § 265, then the addition shall be reduced by the portion of such expenses or interest which is attributable to the interest income on obligations of other states.

EXAMPLE: Taxpayer has $3,000 of income exempt from federal income tax of which $1,000 is on obligations of a political subdivision of Virginia and $2,000 on obligations of political subdivisions of states other than Virginia. Application of IRC § 265 barred deduction of $300 from federal taxable income. The addition is $1,800 calculated as follows:

2,000 –

[300 x 2,000]

= 1,800

3,000

3. If the interest is on an obligation created by a compact or agreement to which Virginia is a party, such interest shall not be added to Virginia taxable income.

B. Interest or dividends from the United States.

1. Interest or dividends on obligations or securities of any authority, commission or instrumentality of the United States, exempt from federal income tax but not from state income tax, must be added to federal taxable income.

2. If any related expenses were not deducted from federal taxable income by reason of IRC § 265, then the addition shall be reduced by the portion of such expenses attributable to federal interest or dividends exempt from federal income tax.

C. Excess cost recovery. If any deduction was claimed on taxpayer's federal return under the accelerated cost recovery system (ACRS) for taxable years beginning after December 31, 1981, 30% of such deduction must be added to federal taxable income. See 23VAC10-120-50.

D. State income taxes. If any Virginia income tax imposed by this chapter was deducted in determining federal taxable income, such amount shall be added to federal taxable income. If any net income taxes and other taxes, including franchise and excise taxes which are based on, measured by, or computed with reference to net income, imposed by any other taxing jurisdiction were deducted in determining federal taxable income. To determine if a particular tax imposed by another taxing jurisdiction is a net income tax see 23VAC10-120-120.

E. Unrelated business taxable income. Organizations described in IRC § 501(c) are exempt from federal income tax unless they have unrelated business income, in which case a tax is imposed on "unrelated business taxable income" defined in IRC § 512. The unrelated business taxable income of such organization must be added to Virginia taxable income if it has not already been included in federal taxable income.

F. ESOP credit carryover. Federal law allows employers to claim a credit for contributions to an Employee Stock Ownership Plan (ESOP) and further provides that the amount of such contributions may not be deducted in computing federal taxable income. IRC § 44G. Virginia law allows a subtraction for such contributions. (See 23VAC10-120-102 K). Federal law allows the ESOP credit to be carried over to subsequent years and, if any ESOP credit remains unused at the end of the carryover period, the unused credit may be deducted. If any ESOP credit carryover is deducted in computing federal taxable income under IRC § 404(i) such amount shall be added to federal taxable income in computing Virginia taxable income.

Statutory Authority

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

Historical Notes

Derived from VR630-3-402 § 2, eff. January 1, 1985; amended, eff. January 21, 1987.

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