Virginia Law

Chapter 120. Corporation Income Tax

23VAC10-120-10. Conformity of terms to IRC (Internal Revenue Code).

A. In general.

1. Chapter 3 of Title 58.1 of the Code of Virginia imposes an income tax upon Virginia income. Generally, Virginia taxable income is federal taxable income under the laws of the United States with certain adjustments and modifications set forth in detail elsewhere in this chapter and the regulations thereunder.

2. The words and expressions used in the chapter shall have the same meaning as the same words or expressions used in comparable context in the laws of the United States unless the context of the words or expressions in this chapter clearly requires a different meaning. The meaning of a word or expression is clearly required to be different from the meaning of such word or expression in the laws of the United States if:

a. Chapter 3 of Title 58.1 expressly defines such word or expression, or

b. if required to prevent an item from being subject to double taxation or double deduction in a single return, or

c. if the Commissioner determines that a different meaning is required because the word or expression is not used in a comparable context in the laws of the United States and publishes such determination by regulation.

B. Laws of the United States.

1. Whenever used in this chapter, the term "laws of the United States" means the provisions of the Internal Revenue Code of 1954, as amended (sometimes abbreviated IRC) as interpreted by Treasury regulations, rulings and other material of the Internal Revenue Service, by the courts of the United States and by the courts of Virginia.

2. Whenever the meaning of words or expressions used in the laws of the United States is changed by amendment, regulation, court decision or otherwise, the meaning of such words or expressions shall be similarly changed for application to this chapter.

3. Any such changes shall be effective for purposes of this chapter to the same extent, at the same time and for the same taxable years as such changes are effective for federal purposes.

Statutory Authority

§§ 58.1-203 and 58.1-301 of the Code of Virginia.

Historical Notes

Derived from VR630-3-301, eff. January 1, 1985.

23VAC10-120-20. Definitions.

The following words and terms, when used in this chapter, shall have the following meanings unless the context clearly indicates otherwise:

"Affiliated" means a group of corporations each of which is itself subject to Virginia income tax and in which (i) one corporation owns at least 80% of the voting stock of the other or others, or (ii) at least 80% of the voting stock of two or more corporations is owned by the same interests.

For the purpose of § 58.1-442 of the Code of Virginia, it is not necessary for all members of a controlled group to be subject to Virginia income tax in order for some of the members, otherwise eligible, to file a consolidated or combined return. For example, two or more corporations subject to Virginia income tax may be 80% owned by a foreign corporation not subject to Virginia income tax. All of the subsidiaries subject to Virginia income tax may file a consolidated or combined return without the foreign parent corporation.

"Compensation" means, for the purpose of allocation and apportionment under § 58.1-406 of the Code of Virginia as used in computing the payroll factor under § 58.1-412 of the Code of Virginia, all remuneration or wages for employment as defined in IRC § 3121(a) except that compensation includes the excess wages over the contribution base defined in IRC § 3121(a)(1).

1. Generally compensation will be the gross wages, salaries, tips, commissions and other remuneration paid to employees and reported to the Internal Revenue Service. The department will accept the gross amounts reported to the IRS on Forms W-2/W-3, Form 940 or the accounting records of the corporation provided that all of the employees of the corporation are included in such reports or records.

2. If the corporation has any employees who are not subject to the F.I.C.A. and F.U.T.A. payroll taxes or are not subject to U.S. income tax because they are nonresident aliens, compensation includes all wages, salaries, tips, commissions and other remuneration paid to or for such employees in addition to the compensation in subdivision 1 above.

3. The corporation shall determine compensation on a consistent basis so as not to distort the compensation paid to employees located within and without Virginia. In the event the corporation is not consistent in its reporting, it shall disclose in its return to Virginia the nature and extent of such inconsistency.

4. The terms "employees" and "personal services" shall have the same meaning as used in the context of employment in IRC § 3121(b).

5. The term "paid or accrued" means either (i) cash or property paid to employees and reported to the IRS as in subdivision 1 above, or (ii) amounts properly accrued on the books of the corporation under its accounting method for federal income tax purposes, but not both.

"Corporation" means any entity created as such under the laws of the United States, any state, territory or possession thereof, the District of Columbia, or any foreign country or any political subdivision of any of the foregoing, or any association, joint stock company, partnership or any other entity subject to corporation income taxes under the United States Internal Revenue Code. See IRC § 7701.

"Domestic corporation" means a corporation, as defined above, organized, created or existing under the applicable laws of the Commonwealth of Virginia. Compare IRC § 7701(a)(4).

"Foreign corporation" means a corporation, as defined above, which is not a domestic corporation. Registration of a foreign corporation with the State Corporation Commission for the privilege of doing business in Virginia shall not make a corporation a domestic corporation.

"Foreign source income" means income computed in accordance with the following principles:

1. The federal taxable income of corporations organized under the laws of the United States, any of the 50 states or the District of Columbia (U.S. domestic corporations) includes their worldwide income. Virginia law provides a subtraction for "foreign source income" if any is included in federal taxable income. Corporations that are not U.S. domestic corporations include in federal taxable income only income from U.S. sources or income effectively connected with a U.S. trade or business. Such corporations will not have any "foreign source income" included in federal taxable income.

2. Foreign source income does not include all income from sources without the United States but is limited to specified types of income and is also limited by the federal source rules in IRC §§ 861 et seq. and the regulations thereunder in determining the source of a particular item of income.

3. Corporations having foreign source income determine the amount of the subtraction by the following procedure:

a. The specified types of gross income included in federal taxable income are segregated. The types of income are: interest, dividends, rents, royalties, license and technical fees, also gains, profits and other income from the sale of intangible or real property.

b. The federal source rules are applied to determine the source of each item, particularly whether or not the item is effectively connected with the conduct of a U.S. trade or business.

c. The federal procedure in Treasury Reg. § 1.861-8 is applied to allocate and apportion expenses to income derived from U.S. and foreign sources.

d. The gross income from sources without the U.S. from subdivision 3 b less the expenses allocated and apportioned to such income in subdivision 3 c is the foreign source income for purposes of the Virginia subtraction.

4. All income and expenses included in foreign source income and property or other activity associated with such income and expenses shall be excluded from the factors in the Virginia formula for allocating and apportioning Virginia taxable income to sources within and without Virginia.

"Income and deductions from Virginia sources" means items of income, gain, loss and deduction attributable to the ownership, sale, exchange or other disposition of any interest in real or tangible personal property in Virginia or attributable to a business, trade, profession or occupation carried on in Virginia or attributable to intangible personal property employed in a business, trade, profession or occupation carried on in Virginia.

A. If the entire business of a corporation is not deemed to have been transacted or conducted within this Commonwealth by § 58.1-405 of the Code of Virginia, then the "income from Virginia sources" means that portion of the corporation's Virginia taxable income resulting from the allocation and apportionment formulas set forth in §§ 58.1-406 through 58.1-421 of the Code of Virginia.

1. Allocable income is limited to certain dividends. See § 58.1-407 of the Code of Virginia.

2. Apportionable income is Virginia taxable income less allocable income. Apportionment formulas are then applied to determine the part of apportionable income that is income from Virginia sources. Generally, a corporation will have income from Virginia sources if there is sufficient business activity within Virginia to make any one or more of the following apportionment factors positive: (i) vehicle miles (for motor carriers); (ii) cost of performance (for financial corporations); (iii) completed contracts (for certain construction corporations); (iv) revenue car miles (for railway companies); and (v) property, payroll or sales (for all other corporations).

3. See §§ 58.1-408 through 58.1-421 of the Code of Virginia and the regulations thereunder for details. Accordingly, a foreign corporation may be subject to Virginia income tax on the portion of its income deemed to be derived from Virginia sources under apportionment formulas even though no specific portion of its gross or net income may be separately identified as being derived directly from Virginia.

B. Certificate of authority.

1. §§ 13.1-757 and 13.1-919 of the Code of Virginia provide that if a corporation's only activity in Virginia is limited to certain activity in connection with investment in notes, bonds or other instruments secured by the deeds of trust on property located in Virginia, such corporations shall not be deemed to be transacting business in Virginia for purposes of §§ 13.1-757 and 13.1-919 of the Code of Virginia which require foreign corporations to obtain a certificate of authority from the State Corporation Commission before transacting business in Virginia. All corporations having income from Virginia sources are subject to Virginia income tax regardless of whether or not they are required to obtain a certificate of authority.

2. A foreign corporation whose only connection with Virginia is the receipt of interest on notes, bonds or other instruments secured by deeds of trust on property located in Virginia will have no payroll or real or tangible personal property located in Virginia. Although the interest may be paid by a Virginia resident, for purposes of the sales factor the gross receipts will not be assigned to Virginia because there is no income producing activity in Virginia. See § 58.1-416 of the Code of Virginia. If the corporation is a financial corporation as defined in § 58.1-418 of the Code of Virginia there would be no costs of performance in Virginia. Therefore, such a corporation would have no income from Virginia sources and, since such a corporation is not required to obtain a certificate of authority, it would not be required to file a Virginia income tax return. See 23VAC10-120-310. However, if such a corporation acquires real or tangible personal property in Virginia by foreclosure or any other means the corporation will have property (or cost of performance) in Virginia. Therefore the corporation will have income from Virginia sources and be required to file a Virginia income tax return.

C. In the course of computing income from Virginia sources a corporation may be required to make computations solely for that purpose or maintain records used only for that purpose. The effects on tax liability of a method used to determine any components of income from Virginia sources and the burden of maintaining records not otherwise maintained and of making computations not otherwise made shall be taken into consideration in determining whether such method is sufficiently precise.

D. Example. Corporation A is a manufacturer of paper products conducting all of its manufacturing, selling and shipping operations outside Virginia. It makes no sales to customers in Virginia. It therefore has no gross income which may be identified as being derived directly from Virginia. However, the corporation does operate a facility in Virginia solely for the purchase of pulpwood for shipment to its manufacturing plants in other states.

While corporation A has no gross income derived directly from Virginia, it has property and payroll in this state. Accordingly, Corporation A has income from Virginia sources based on apportionment factors.

"Sales" means the gross receipts of the corporation from all sources not allocated under § 58.1-407 of the Code of Virginia (dividends) whether or not such gross receipts are generally considered as sales. In the case of the sale or other disposition of intangible property, gross receipts shall be disregarded and only the net gain from the transaction shall be included.

A. Manufacturing sales. In the case of a taxpayer whose business activity consists of manufacturing and selling, or purchasing and reselling goods or other property of a kind which would properly be included in the inventory of the taxpayer primarily for sale to customers in the ordinary course of its trade or business, gross receipts means gross sales, less returns and allowances, and includes service charges, carrying charges, or time-price differential charges incidental to such sales.

B. Sales made in other types of business activity.

1. If the business activity consists of providing services such as the operation of an advertising agency, or the performance of equipment service contracts, "sales" includes the receipts from performance of such service including fees, commissions, and similar items.

2. In the case of cost plus fixed fee contracts, such as the operation of a government owned plant for a fee, "sales" include the entire reimbursed cost, plus the fee.

3. In the case of the sale, assignment, or licensing of intangible property such as patents and copyrights, "sales" includes only the net gain from the sale or disposition.

4. In the case of the sale of real or personal property, "sales" includes the gross proceeds from such sales.

5. The term "sales" does not include amounts required by federal law to be included in federal taxable income as recapture of items deducted in prior years.

"State" means any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, a territory or possession of the United States, and any foreign country. Note that this definition applies only within the allocation and apportionment section of this chapter. When used elsewhere in the chapter the term "state" may or may not include foreign countries and U.S. possessions, depending on the context.

Statutory Authority

§§ 58.1-203 and 58.1-302 of the Code of Virginia.

Historical Notes

Derived from VR630-3-302; adopted December 12, 1990, eff. January 30, 1991.

23VAC10-120-30. (Repealed.)

Historical Notes

Derived from VR630-3-311, eff. January 1, 1985; repealed, Virginia Register Volume 33, Issue 6, eff. February 1, 2017.

23VAC10-120-40. Limitations on assessments.

A. In general. Except as otherwise provided, the department must assess any tax deficiency within three years from the date the tax was due and payable. See § 58.1-104 of the Code of Virginia.

B. Exceptions. The three-year statute of limitations for assessment shall not be applicable to the situations set forth below.

1. Failure to file a return. When any corporation fails to file a return as required by law, an assessment may be made at any time.

2. False or fraudulent return. If any corporation files a false or fraudulent return with intent to evade the tax legally due, an assessment may be made at any time.

3. Failure to report change in federal income. When any corporation fails to report a change or correction which increases its federal taxable income as required by § 58.1-311 of the Code of Virginia, fails to report a change or correction in federal taxable income which is treated as a deficiency for federal purposes, or fails to file an amended return as required by law, the tax may be assessed at any time.

4. Waiver. When the Department and the taxpayer, before the expiration of the statute of limitations, agree to extend the period for assessing the tax beyond such statute, the tax may be assessed at any time prior to the expiration date of such agreement. Subsequent agreements further extending the period of assessment may be executed prior to the expiration date of the previous agreement. Any agreement waiving and extending the statutory assessment period must be in writing and must clearly specify the date to which the assessment period has been extended. Any such extension will also extend the period in which a taxpayer may file an amended return claiming a refund. See §§ 58.1-101, 58.1-1823 of the Code of Virginia.

5. Report of change or correction in federal income. When any taxpayer reports a change or correction or files an amended return pursuant to an increase in federal taxable income pursuant to § 58.1-311 of the Code of Virginia, or reports a change or correction in federal taxable income which is treated as a deficiency for federal purposes, an assessment may be made at any time within one year after such report, correction, or amended return is filed. Any additional tax assessed pursuant to this provision may not exceed the amount of additional Virginia tax due as a result of the federal change or correction. However, an assessment for additional amounts due which is not attributable to the federal change or correction may be made provided such assessment is made within the otherwise applicable statute of limitations. Further, if any other provision of law allows the assessment of tax during a period which exceeds the one-year period specified in this subsection, e.g., filing of a false or fraudulent return, such other provision shall prevail.

6. Carryback deficiencies. Any deficiency which is attributable to the carryback of a net operating loss or net capital loss may be assessed at any time an assessment may be made for the taxable year in which the loss occurred. For example, if a taxpayer incurs a net operating loss in taxable year 1983 and a portion of the loss is carried back to taxable year 1980 resulting in a refund for taxable year 1980, and a subsequent audit reduces or eliminates the loss which was carried back to 1980, an assessment relative to such deficiency may be assessed within the statute of limitations applicable to taxable year 1983.

7. Recovery of erroneous refund.

a. An erroneous refund of tax shall be considered an underpayment of tax on the date the refund is made. An assessment for recovery of the erroneous refund may be made within two years of the date such refund is made except that recovery may be made within five years if any part of the refund was the result of fraud or misrepresentation of a material fact.

b. Erroneous refund defined. As used in this chapter, the term "erroneous refund" means the issuance of a refund to which a taxpayer is not entitled. Where a taxpayer provides complete and current information and an erroneous refund results from a departmental error, such as a clerical error, the department is limited to recovery within the two year statute of limitations.

However, the department may make an assessment for recovery of the amount erroneously refunded within five years from the date of the refund if the issuance of the erroneous refund results from a misrepresentation of a material fact by the taxpayer, including inadvertent taxpayer error, e.g., the omission of information or the incorrect listing of information which has a direct bearing on the computation of Virginia taxable income or tax liability.

Statutory Authority

§§ 58.1-203 and 58.1-312 of the Code of Virginia.

Historical Notes

Derived from VR630-3-312, eff. January 1, 1985.

23VAC10-120-50. (Repealed.)

Historical Notes

Derived from VR630-3-323; eff. January 1, 1985; VR630-3-323.1 §§ 1 to 8, eff. July 5, 1989; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-70. (Repealed.)

Historical Notes

Derived from VR630-3-400, eff. January 1, 1985; repealed, Virginia Register Volume 40, Issue 24, eff. September 28, 2024.

23VAC10-120-80. Telecommunications companies; definitions.

The following words and terms, when used in this chapter, shall have the following meanings unless the context clearly indicates otherwise:

"Calendar year" means a 12-month period beginning on January 1 and ending on December 31.

"Company" means a telecommunications company as certified by the State Corporation Commission to the Department of Taxation.

"Department" means the Department of Taxation.

"Gross receipts" means the amount of "gross receipts" certified to the Department of Taxation by the State Corporation Commission. This amount is defined in § 58.1-400.1 of the Code of Virginia to mean "all revenue from business done within the Commonwealth, including the proportionate share of interstate revenue attributable to the Commonwealth, if such inclusion will result in annual gross receipts exceeding $5 million, with the following deductions:

1. Revenue billed on behalf of another such telephone company or person to the extent such revenues are later paid over to or settled with that telephone company or person; and

2. Revenues from carrier access charges received from a telephone company which is holding a certificate of public convenience and necessity from the State Corporation Commission or from a telephone utility company providing interstate communications service, together with all revenue from billing and collection amounting to less than $500,000 per year, and all revenues from shared network facilities agreements established under federal court order and like revenue received by other local exchange carriers."

"License tax" means the tax imposed on a telecommunications company under Article 2 of Chapter 26 (§ 58.1-2600 et seq.) of the Code of Virginia.

"Minimum tax on telecommunications companies" or "minimum tax" means an amount of tax computed as a specified percent of the gross receipts of a telecommunications company pursuant to § 58.1-400.1 of the Code of Virginia.

"NOL" means net operating loss.

"NOLD" means net operating loss deductions.

"SCC" means the State Corporation Commission

"Sales" means the gross receipts of the telecommunications company from all sources not allocated under § 58.1-407 of the Code of Virginia regardless of whether or not such receipts are included in the amount of gross receipts, as defined above.

"Taxable year" means the calendar or fiscal year for federal income tax purposes.

"Telecommunications company" means a company certified to the Department of Taxation by the State Corporation Commission as a telecommunications company. Such a company is defined in § 58.1-400.1 of the Code of Virginia to mean a telephone company or other person holding a certificate of convenience and necessity granted by the State Corporation Commission authorizing local exchange telephone service, interexchange service, radio common carrier system or a cellular mobile radio communications system, or holding a certificate issued pursuant to § 214 of the Communications Act of 1934, as amended, authorizing telephone service; or a telegraph company or other person operating the apparatus necessary to communicate by telegraph.

"Telecommunications company income tax credit" means an amount computed with regard to the gross receipts of a telecommunications company available to offset the corporate income tax imposed on such company under § 58.1-400 of the Code of Virginia.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 1, eff. January 3, 1990.

23VAC10-120-81. Telecommunications companies; tax administration.

A. Generally. Effective for taxable years beginning on and after January 1, 1989, telecommunications companies formerly subject to the license tax on gross receipts, administered by the State Corporation Commission (SCC), will be subject to the Virginia corporation income tax. This change is the result of legislation enacted by the 1988 Virginia General Assembly (1988 Acts, Chapter 899).

B. State Corporation Commission. While no longer subject to the state license tax on gross receipts or to the state pole line tax, telecommunications companies will still pay regulatory revenue taxes to the SCC based on gross receipts (§§ 58.1-2660 through 58.1-2665 of the Code of Virginia). The SCC will continue to be the central state agency responsible for the assessment of all property of telecommunications companies.

The SCC will make all determinations regarding a company's status as a telecommunications company. The SCC will determine and certify the amount of gross receipts, as defined by law, to the department annually.

Telecommunications companies may petition the SCC for review and correction of the company's status or the amount of gross receipts certified. The petition should be in compliance with the Rules of Practice and Procedures of the SCC.

C. Department of Taxation. For taxable years beginning on and after January 1, 1989, telecommunications companies will be subject to the greater of the Virginia corporation income tax or to a minimum tax based on gross receipts. In order to minimize the effects of the transition from the license tax on gross receipts to the corporation income tax, the full corporate income tax will be phased in over a 10-year period from 1989 through 1998. During this phase in period, telecommunications companies, which pay the corporate income tax, may be allowed a credit against the tax under certain conditions. If a company is subject to the minimum tax, it will not be eligible for a credit.

D. Other regulations. Except as provided in this regulation, the provisions of all regulations adopted pursuant to § 58.1-203 of the Code of Virginia to interpret Title 58.1 of the Code of Virginia are applicable to the taxation of telecommunications companies by the Department of Taxation.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 2, eff. January 3, 1990.

23VAC10-120-82. Telecommunications companies; imposition of tax.

A. Generally. Telecommunications companies must calculate both their minimum tax as provided in 23VAC10-120-83 and their income tax liability as provided in 23VAC10-120-84 for each taxable year. For each taxable year, the tax liability of a telecommunications company will be the greater of its minimum tax or of its corporate income tax.

B. Amended return. If due to a change in federal taxable income, or for any other reason, the Virginia taxable income or gross receipts of a telecommunications company is changed, an amended return must be filed. The minimum tax and corporate income tax must be recomputed to determine which tax is applicable to the telecommunications company.

EXAMPLE 1: Telecommunications Company (TC) is a calendar year filer for federal income tax purposes. For calendar year 1990, it has $200,000 in gross receipts and Virginia taxable income equal to $35,000. TC's minimum tax liability is $2,400 ($200,000 X 1.2%) and its Virginia income tax is $2,100 ($35,000 X 6.0%). Because TC's minimum tax liability exceeds its income tax liability, it is subject to the minimum tax and must pay $2,400 in tax.

EXAMPLE 2: Same facts as in Example 1. In 1993 the Internal Revenue Service audits TC for calendar year 1990 and determines that the company overreported its wage expense by $6,000; thus TC's federal taxable income for calendar year 1990 was underreported by $6,000. TC subsequently amends its Virginia income tax return for calendar year 1990 to report the additional $6,000 in taxable income. The amended return still shows a minimum tax liability of $2,400 (no charge in gross receipts) and an income tax liability of $2,460, 6.0% of ($35,000 + 6,000). Since TC's income tax liability is now higher than its minimum tax liability, it is now subject to the income tax. TC owes the department $60 ($2,460 - $2,400).

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 3, eff. January 3, 1990.

23VAC10-120-83. Minimum tax on telecommunications companies.

A. Generally. Effective for any taxable year that includes January 1, 1989, or begins after January 1, 1989, a telecommunications company may be subject to a minimum tax. The minimum tax will be applicable when such tax exceeds the corporate income tax imposed under § 58.1-400 of the Code of Virginia.

B. Determination of gross receipts. For each taxable year, the minimum tax of a telecommunications company is computed on the gross receipts of such company for the calendar year which ends during the taxable year.

If a company files an income tax return for a period of less than 12 months, the minimum tax is computed on the gross receipts for the calendar year which ends during the taxable period. If no calendar year ends during the taxable period, the minimum tax is computed on the gross receipts of the most recent calendar year which ended before the taxable period.

For taxable years that begin before January 1, 1989, include January 1, 1989, and end before December 31, 1989, the minimum tax is computed on the gross receipts received during calendar year 1988. The minimum tax rate applicable to calendar year 1989 shall be used.

EXAMPLE 1: If Company A's taxable year begins on April 1, 1990, and ends March 30, 1991, the minimum tax would be computed on the gross receipts for calendar year 1990.

EXAMPLE 2: Company B, a calendar year filer, goes out of business on April 30, 1992. For income tax purposes, its taxable year begins on January 1, 1992, and ends on April 30, 1992. Its minimum tax would be computed on the gross receipts for calendar year 1991.

C. Minimum tax rate. In computing the minimum tax, a telecommunications company will use the minimum tax rate applicable to the calendar year as determined in subsection B above. The applicable minimum tax rate for each calendar year will be phased down in accordance with the rate schedule set forth in § 58.1-400.1 of the Code of Virginia, as follows:

  Gross Receipts Earned During          Minimum        

         Calender Year                  Tax Rate       

                 1989            1.2% of gross receipts

                 1990            1.2% of gross receipts

                 1991            1.0% of gross receipts

                 1992            0.9% of gross receipts

                 1993            0.8% of gross receipts

                 1994            0.7% of gross receipts

                 1995            0.6% of gross receipts

                 1996 and years  0.5% of gross receipts

                 thereafter                            

D. Computation of minimum tax.

1. Generally. For each taxable year, the minimum tax liability of a telecommunications company is computed by multiplying the gross receipts for the calendar year specified in subsection B by the minimum tax rate specified in subsection C.

EXAMPLE: For taxable year 1991, Telecommunications Company (TC) files its federal and Virginia income tax return on a fiscal year basis for the year beginning July 1, 1991, and ending June 30, 1992. For taxable year 1991, TC bases its minimum tax liability on its gross receipts earned during calendar year 1991, which is multiplied by the minimum tax rate for calendar 1991 (1.0%) to compute its minimum tax liability.

2. Short taxable periods. If the income tax return is filed for a taxable period of less than 12 months, the minimum tax should be computed as follows:

a. Compute the minimum tax as set forth in subsection D 1 above.

b. Prorate the tax by multiplying the minimum tax by the number of months in the short taxable period divided by 12.

EXAMPLE: The same facts as in the example above, except that TC goes out of business on December 31, 1991, and files a short taxable period return for the period beginning July 1, 1991, and ending December 31, 1991. TC bases its minimum tax liability on its gross receipts earned during calendar year 1991. The amount of gross receipts earned during calendar year 1991 is multiplied by the minimum tax rate for calendar year 1991 (1.0%) and the result is multiplied by 6/12 (the number of months in the short taxable period divided by 12) to compute its minimum tax liability.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 4, eff. January 3, 1990.

23VAC10-120-84. Telecommunications companies; corporation income tax.

A. Generally. With the exception of the differences set forth in these regulations, a telecommunications company shall compute its Virginia taxable income and corporation income tax in accordance with the requirements applicable to corporations generally.

B. Business entirely within Virginia.

1. Generally. For purposes of determining if the entire business of a telecommunications company is conducted within Virginia, the provisions of § 58.1-405 of the Code of Virginia and 23VAC10-120-120 shall be applicable.

2. Computation of income tax. If under the provisions of subdivision 1 of this section, it is determined that the entire business of a telecommunications company is conducted within Virginia, the tax imposed by § 58.1-400 of the Code of Virginia shall be upon the entire Virginia taxable income.

C. Allocation and apportionment.

1. Generally. The Virginia taxable income of a telecommunications company which is subject to taxation both within and without Virginia, as defined in § 58.1-405 of the Code of Virginia and 23VAC10-120-120, shall be allocated and apportioned its Virginia taxable income as provided in §§ 58.1-407 through 58.1-416 of the Code of Virginia and regulations adopted pursuant to these sections and subject to the special requirements set forth below.

2. When sales are deemed to be made in Virginia. In determining when a sale, other than a sale of tangible personal property, occurs in Virginia, the location of the income producing activity must be determined. (§ 58.1-416 of the Code of Virginia and 23VAC10-120-230.)

For purposes of this chapter, the income producing activity is presumed to occur in Virginia for any services or charges billed to a Virginia service address, except that with respect to charges for interstate communications services, more income producing activity will be presumed to occur in Virginia than in any other state if both:

a. Communications either originate or terminate within Virginia; and

b. The charge for the communication is billed to a service address within Virginia.

3. Computation of income tax. The corporation income tax of a telecommunications company subject to taxation both within and without Virginia shall be computed in the same manner as any other corporation subject to taxation both within and without Virginia.

D. Net operating loss modifications. In addition to the modifications applicable to corporations generally, telecommunications companies are required to make the following modifications to federal taxable income in the computation of Virginia taxable income:

1. Addition for net operating loss deduction. If federal taxable income for any taxable year has been reduced by a net operating loss deduction (NOLD) attributable to a net operating loss incurred in a taxable year beginning before January 1, 1989, then such NOLD must be added to federal taxable income.

2. Subtraction for net operating loss deduction. Because federal law required a NOLD to be carried back to the earliest year in which there is income to be offset, a telecommunications company incurring a net operating loss in a taxable year beginning on or after January 1, 1989, might be required to carry such loss back to taxable years beginning before January 1, 1989. Since a telecommunications company was not subject to Virginia income tax for years beginning before January 1, 1989, it would receive no Virginia benefit from such carryback, and the NOLD for other taxable years would be reduced or eliminated by the required federal carryback.

In this situation, telecommunications companies must add back the NOLD actually allowed on their federal returns for taxable years beginning before January 1, 1989, which is attributable to a loss occurring in a taxable year beginning on or after January 1, 1989. A new NOLD is computed for Virginia purposes following the federal law and regulations except that no such loss is carried back to a taxable year beginning before January 1, 1989.

EXAMPLE 1: XYZ Co. is a telecommunications company reporting on a calendar year basis. For the years 1986 - 1992 XYZ Co. had no additions or subtractions to federal taxable income except for an adjustment for net operating loss deductions. The income of XYZ is as follows:

 Federal taxable     1985      1986      1987      1988       1989  

 income before                                                      

 NOLD               50,000    50,000    25,000   (150,000)   75,000 

 NOLD              (50,000)  (50,000)  (25,000)      -      (25,000)

 Federal taxable                                                    

 income              -0-       -0-       -0-        -0-      50,000 

 Virginia NOL                                                       

 adjustment                                                  25,000 

  Virginia taxable                                                   

 income               (Virginia income tax not imposed)       75,000

Under federal law the 1988 net operating loss is first carried back to offset 1985, 1986 and 1987 income. There would be $25,000 of the NOL remaining to be carried forward and deducted on XYZ Co.'s 1989 federal return. Because the loss occurred in a taxable year beginning before January 1, 1989, the NOLD on the 1989 return must be added to federal taxable income to determine Virginia taxable income.

EXAMPLE 2: Same facts as Example 1 except that the loss occurred in 1990. The income of XYZ Co. is as follows:

 Federal taxable     1987       1988      1989      1990       1991  

 income before                                                       

 NOLD               25,000     25,000    75,000   (100,000)   75,000 

 NOLD              (25,000)   (25,000)  (50,000)      -        -0¢   

 Federal taxable                                                     

 income               -0-       -0-      25,000      -0-      75,000 

 Virginia NOL                           +50,000                      

 adjustment         (Virginia income)   (75,000)             (25,000)

  Virginia taxable                                                    

 income             (Tax not imposed)     -0-        -0-       50,000

Under federal law the 1990 net operating loss is first carried back to offset 1987 and 1988 income, The remaining $50,000 NOL is carried back to the 1989 federal return.

Because the loss occurred in a taxable year beginning on and after January 1, 1989, the entire NOL will be available to offset Virginia income reported in taxable years beginning on and after January 1, 1989. The federal NOLD of $50,000 is first added to the 1989 federal taxable income and then a new Virginia NOL carryback is computed and subtracted. The federal laws and regulations are followed except that no NOL shall be carried back further than 1989. The result is that the carryback to 1989 is $75,000 instead of $50,000and there is still $25,000 of the NOL left to carryover to the 1991 return.

3. In addition to the above modifications, since the carryback of a NOLD results in a change in federal taxable income, the minimum tax and corporate income tax must be recomputed to determine which tax is applicable to the telecommunications company. See 23VAC10-120-82 B.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 5, eff. January 3, 1990.

23VAC10-120-85. (Repealed.)

Historical Notes

Derived from VR630-3-400.1 § 6, eff. January 3, 1990; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-86. Telecommunications companies; separate, combined or consolidated returns of affiliated corporations.

A. Generally. The requirements set forth under § 58.1-442 of the Code of Virginia and 23VAC10-120-320 et seq. regarding the income tax filing status of affiliated corporations are applicable to telecommunications companies. Accordingly, if two or more affiliates of a telecommunications company previously elected to file separate returns or a consolidated or combined return, the telecommunications company must conform to the filing election previously made by other members of their affiliated group. If the first year in which a telecommunications company is subject to taxation by the Department of Taxation is the first year two or more members of an affiliated group of corporations, including the telecommunications company, are required to file Virginia income tax returns, the group may elect to file separate returns, a consolidated return or a combined return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department of Taxation.

B. Special computations required for consolidated and combined returns. When affiliated corporations file a consolidated or a combined income tax return the losses of one corporation may be used to offset the income of another corporation. The tax paid by the affiliated group on a consolidated or combined return is the net amount of tax due from the affiliated group after losses and gains are netted. Because of the minimum tax and tax credit requirements applicable only to telecommunications companies, a special computation is required to determine the portion of the tax of the affiliated group that is attributable to the telecommunications company or upon the amount of gross receipts of a telecommunications company will be acted upon by the Department of Taxation.

1. Determination of separate tax. To determine the portion of the tax liability shown on the consolidated or combined return that is attributable to the telecommunications company, each corporation included in the consolidated or combined filing must recompute its tax liability as if it was filing a separate return. The separate income tax liability of the telecommunications company is compared to the total tax liability shown on the consolidated or combined return.

The lesser amount is deemed to be the income tax imposed by § 58.1-400 of the Code of Virginia on the telecommunications company.

2. Minimum tax. If this amount is less than the minimum tax of the telecommunications company, as computed in 23VAC10-120-83, the company is subject to the minimum tax in lieu of the tax imposed under § 58.1-400 of the Code of Virginia. The portion of the tax imposed under § 58.1-400 of the Code of Virginia paid by the affiliated group shall be credited toward the company's minimum tax liability.

If the telecommunications company's portion of the consolidated or combined tax imposed under § 58.1-400 of the Code of Virginia (as computed above) exceeds the minimum tax of the telecommunications company, the company is not required to pay any amount of minimum tax.

3. Corporation income tax credit. It the telecommunications company's portion of the affiliated group's corporate income tax exceeds the minimum tax, the affiliated group may be allowed a credit against its tax. If the telecommunications company's separate tax, as computed above exceeds 1.3% of the gross receipts of the company, the affiliated group is eligible to claim a credit against the portion of the consolidated or combined tax attributable to the telecommunications company. In no case shall the amount of credit claimed exceed the lesser of the consolidated or combined income tax shown on the return or the amount of income tax deemed to be imposed on the telecommunications company.

EXAMPLE 1: In taxable year 1992 Telecommunications Company (TC) files a calendar year consolidated income tax return with three other affiliated corporations: A, B, and C. TC's calendar year 1992 gross receipts are $200,000 and its minimum tax is equal to $1,800 ($200,000 X .9%). The corporate income tax return shows a consolidated taxable income of $ 33,333 and the tax due on the consolidated return is $2,000. TC must make the following computations to determine if it is subject to the minimum tax.

Step 1: Determine TC's Portion of the Consolidated Tax.

TC's Portion of the Consolidated Tax = $1,200. The lesser of TC's separate tax ($1,200) or the consolidated tax ($2,000).

Step 2: Determine Whether the Minimum Tax is Due.

Since the minimum tax of $1,800 exceeds TC's portion of the affiliated corporate income tax ($1,200), the minimum tax is applicable.

Step 3: Compute Additional Tax Due.

EXAMPLE 2. In taxable year 1992 Telecommunications Company (TC) files a calendar year consolidated income tax return with three other affiliated corporations: A, B, and C. TC's calendar year 1992 gross receipts are $200,000 and its minimum tax is equal to $1,800 ($200,000 X .9%). The corporate income tax return shows a consolidated taxable income of $33,333 and the tax due on the consolidated return is $2,000. TC must make the following computations to determine if it is subject to the minimum tax.

Step 1: Determine TC's Portion of the Consolidated Tax.

TC's Portion of the Consolidated Tax = $2,000. The lesser of TC's separate tax ($2,400) or the consolidated tax ($2,000).

Step 2: Determine Whether the Minimum Tax is Due.

Since the minimum tax of $1,800 is less than TC's portion of the affiliated corporate income tax ($2,000), the minimum tax is not applicable and TC is subject to the income tax instead.

Step 3: Determine if Income Tax Credit is Allowable.

Since TC's separate tax ($2,400) is less than 1.3% of gross receipts, no credit is applicable.

EXAMPLE 3. In taxable year 1992 Telecommunications Company (TC) files a calendar year consolidated income tax return with three other affiliated corporations: A, B and C. TC's calendar year 1992 gross receipts are $200,000 and its minimum tax is equal to $1,800 ($200,000 X .9%). The corporate income tax return shows a consolidated taxable income of $83,333 and the tax due on the consolidated return is $5,000. TC must make the following computations to determine if it is subject to the minimum tax.

Step 1: Determine TC's Portion of the Consolidated Tax.

TC's Portion of the Consolidated Tax = $5,000. The lesser of TC's separate tax ($5,400) or the consolidated tax ($5,000).

Step 2: Determine Whether the Minimum Tax is Due.

Since the minimum tax of $1,800 is less than TC's portion of the affiliated corporate income tax ($5,000), the minimum tax is not applicable and TC is subject to the income tax instead.

Step 3: Determine if Income Tax Credit is Allowable.

Since TC's portion of the consolidated tax is more than the 1.3% of gross receipts, the credit is applicable.

Step 4: Determine Amount of Credit.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 7, eff. January 3, 1990.

23VAC10-120-87. (Repealed.)

Historical Notes

Derived from VR630-3-400.1 § 8, eff. January 3, 1990; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-88. Telecommunications companies; estimated taxes.

A. Generally. The requirements imposed under § 58.1-500 (et seq.) of the Code of Virginia regarding the filing of a declaration of estimated income taxes and the payment of estimated income taxes, shall be applicable to telecommunications companies regardless of whether such company expects to be subject to the minimum tax or to the corporate income tax.

B. Exceptions to the addition to tax.

1. For purposes of determining the applicability of the exceptions under which the addition to tax for the underpayment of any installment of estimated taxes will not be imposed, it is irrelevant whether the tax shown on the return for the preceding taxable year is corporate income tax, minimum tax or a license tax on gross receipts.

2. The addition to tax for the failure to pay estimated income tax (§ 58.1-504) will not be imposed on the tax liability resulting from the transitional short taxable year return required to be filed for the period that begins after December 31, 1988, and ends before the first day of a telecommunications company's 1989 taxable year.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 9, eff. January 3, 1990.

23VAC10-120-89. Noncorporate telecommunications companies.

A. Generally. Unless specifically exempt under § 58.1-401 of the Code of Virginia, every telecommunications company certified as such by the SCC is subject to the minimum tax even though it may be exempt from, or not subject to, the corporate income tax under § 58.1-400 of the Code of Virginia. To the extent that the income of a noncorporate telecommunications company is subject to Virginia income tax at the entity level or in the hands of a partner or other person for whom the income retains its character, the telecommunications company will be deemed to have paid corporate income tax for purposes of computing the minimum tax and credit under subsection B.

B. Computation of minimum tax and credit. A noncorporate telecommunications company must calculate its minimum tax liability as provided in 23VAC10-120-83. If the income of the noncorporate telecommunications company is deemed to be subject to Virginia income tax under subsection A, the minimum tax liability shall be compared to the income tax liability of the entity computed as if it were a corporation. The minimum tax, income tax, and credit provisions shall be applied as follows:

1. Minimum tax. If the income of the entity is not deemed to be subject to Virginia income tax under subsection A, the entity shall pay the minimum tax. If the income of the entity is deemed to be subject to Virginia income tax under subsection A, and if the minimum tax exceeds the entity's income tax computed as if it were a corporation, the entity must pay an amount equal to the difference between the minimum tax and the corporate income tax.

2. Income tax. If the income of the entity is deemed to be subject to Virginia income tax under subsection A, and if the minimum tax does not exceed the entity's income tax computed as if it were a corporation, the entity shall not be required to pay the corporate income tax under § 58.1-400 merely because it computes such a tax for comparison with the minimum tax liability.

3. Telecommunications company income tax credit. If the income of the entity is deemed to be subject to Virginia income tax under subsection A, and if the entity's income tax computed as if it were a corporation exceeds 1.3% of its gross receipts, then the entity is eligible for a credit under § 58.1-434. The credit shall be computed by the entity as if it were a corporation but shall be claimed by the entity, partner, or other person, as the case may be, in proportion to the portion of the entity's income included in each taxpayer's taxable income. In no case shall the credit allowable exceed the income tax liability of the entity, partner, or other person.

C. Return preparation. If the income of a telecommunications company is deemed to be subject to Virginia income tax under the provisions of subsection A, it must file a return, marked "RETURN BY NONCORPORATE TELECOMMUNICATIONS COMPANY," each taxable year which contains the following information:

1. The gross receipts for such taxable year;

2. The total amount of minimum tax for such taxable year;

3. The taxable income and income tax computed as if it were a corporation subject to the corporate income tax under § 58.1-400 of the Code of Virginia;

4. The amount of the telecommunications company's income tax credit; and

5. A schedule which includes the name, address, tax identification number and proportionate share of the telecommunications company's income and credit taxable to each entity, partner or other person under Virginia law.

Example 1. Telecommunications Company (TC) operates as a partnership with two corporate partners. TC is a calendar year filer for federal income tax purposes. For calendar year 1990, TC has $200,000 in gross receipts. Computing its taxable income as if a corporation, TC has a Virginia taxable income equal to $35,000. TC's minimum tax liability is $2,400 ($200,000 X 1.2%) and its Virginia income tax is $2,100 ($35,000 X 6.0%). Since TC's minimum tax liability exceeds its income tax liability, it is subject to the minimum tax and must pay $300 ($2,400 - 2,100). Because TC is a partnership, its income tax liability is deemed to be paid by its partners.

Example 2. Telecommunications Company (TC) operates as a partnership with two corporate partners. Corp A owns 60% of TC and Corp B owns 40% of TC. TC is a calendar year filer for federal income tax purposes. For calendar year 1990, TC has $200,000 in gross receipts. Computing its taxable income as if a corporation, TC has a Virginia taxable income equal to $50,000. TC's minimum tax liability is $2,400 ($200,000 X 1.2%) and its Virginia income tax is $3,000 ($50,000 X 6.0%). Since TC's income tax liability exceeds its minimum tax liability, it must determine the amount of income tax credit that would be allowable against the tax, if it paid the tax.

The credit is computed as follows:

TC would pay no tax and Corp A would be allowed a credit of $168 ($280 X 60%) against its separate tax liability and Corp B would be allowed a credit of $112 ($280 X 40%) against its separate tax liability.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 10, eff. January 3, 1990.

23VAC10-120-89.1. Telecommunications companies; administrative appeals.

A. State Corporation Commission. As set forth under 23VAC10-120-81, the SCC will make all determinations regarding a company's status as a telecommunications company and will determine and certify the amount of gross receipts, as defined in § 58.1-400.1 of the Code of Virginia, to the department annually.

Telecommunications companies may petition the SCC for review and correction of the company's status or the amount of gross receipts certified. The petition should be in compliance with the Rules of Practice and Procedures of the SCC.

B. Department of Taxation. Company status or gross receipts. Any application for correction of an erroneous assessment pursuant to § 58.1-1821 of the Code of Virginia that is contingent upon the status of a company as a telecommunications company or upon the amount of gross receipts of a telecommunications company, will be held without action until a final determination has been made by the SCC on a petition filed pursuant to the Rules of Practice and Procedures of the SCC.

Any application pursuant to § 58.1-1821 filed with the Department of Taxation that is not contingent upon the status of a company as a telecommunications company or upon the amount of gross receipts of a telecommunications company will be acted upon by the Department of Taxation.

Statutory Authority

§§ 58.1-203 and 58.1-400.1 of the Code of Virginia.

Historical Notes

Derived from VR630-3-400.1 § 11, eff. January 3, 1990.

23VAC10-120-90. Exemptions and exclusions.

A. In general. Generally, any corporation which is subject to federal income tax and has some income from Virginia sources (as defined in 23VAC10-120-20) will also be subject to Virginia income tax unless specifically exempted. Even though exempt from Virginia income tax such corporations may be required to file a return under Va. Code § 58.1-441.

B. Public service corporations. Public service corporations which pay a State franchise tax or license tax upon gross receipts under Chapter 26 (§ 58.1-2600 et seq.) of Title 58.1 of the Code of Virginia are exempt from the Virginia income tax. The tax levied must be based upon the gross receipts of the corporation and not solely on the value of the property in order for the corporation to be exempt from income tax.

1. Railway companies are specifically subject to income tax by Va. Code § 58.1-2608.

2. Pipeline distribution companies pay a franchise tax on gross receipts from sales to a consumer of natural or manufactured gas and are exempt from taxation on the net income from such sales. The net income of pipeline transmission companies from sales to those who are not consumers is specifically subject to income tax by Va. Code § 58.1-2627.1.

3. Water, heat, light and power companies are specifically exempted from income tax by § 58.1-2690 of the Code of Virginia.

4. Motor vehicle carriers pay a tax on property and fuel used within the state, but not on gross receipts, and therefore are subject to income tax. Va. Code § 58.1-2701.

5. Taxes on gross receipts imposed by Title 58.1, Chapter 26, Article 6, are special revenue taxes and do not exempt a corporation from income tax. Va. Code § 58.1-2660.

C. Insurance companies. Insurance companies and reciprocal or interinsurance exchanges which pay a license tax based on gross premiums, or a premium tax, under Title 58.1, Chapter 25, are exempt from income tax by Va. Code § 58.1-2508.

D. Banks, trust companies and credit unions.

1. State and national banks, banking associations and trust companies organized and conducted as such under Va. Code Title 6.1, Chapter 2, or similar laws of the United States and which pay an annual franchise tax imposed by Va. Code Title 58.1, Chapter 12 are exempt from income tax by Va. Code § 58.1-1202 to the extent that they are subject to the franchise tax.

2. Credit unions organized and conducted as such under Va. Code Title 6.1, Chapter 4, or similar laws of the United States are exempt from income tax.

E. Small business corporations. Electing small business corporations which avail themselves of the election under Subchapter S of the Internal Revenue Code to have the income of the corporation included in the income of the shareholders are exempt from corporate income tax. All such income then becomes income taxable to the shareholder under laws and regulations applicable to individuals. Such corporations are required to file a Virginia return even though exempt from income tax.

F. Charitable corporations. Religious, educational, benevolent and other corporations not organized or conducted for pecuniary profit which by reason of their purposes or activities are exempt from income tax under IRC § 501(c) are exempt from the Virginia income tax to the same extent that they are exempt from federal income tax. Such corporations having unrelated business taxable income as defined in IRC § 512 are subject to the Virginia income tax on such unrelated business taxable income. Corporations claiming to be exempt from the Virginia income tax must substantiate their exempt status under the federal income tax laws. Every corporation is presumed to be taxable unless appropriate substantiation is furnished.

G. Limitation on jurisdiction to tax.

1. Federal law prohibits any state from imposing a net income tax on a foreign corporation having no place of business within the state, whose sole activity within the state is solicitation of orders which are accepted and filled by shipment via common carrier from places outside the state. See Public Law 86-272 (15 USC §§ 381-384) for full details and definitions.

Accordingly, Virginia is prohibited by federal law from imposing a net income tax on certain foreign corporations which have income clearly derived from Virginia sources but have insufficient activity within Virginia. However, any additional business activities in Virginia which exceed the limitation of federal law (Public Law 86-272) may subject the corporation to the imposition of Virginia income tax on all of its income from Virginia sources. Whether or not additional activities are sufficient to subject a foreign corporation to the taxing jurisdiction of Virginia is determined by the facts of each case. Consideration is given to the nature, continuity, frequency, and regularity of the activities in Virginia, compared with the nature, continuity, frequency, and regularity of its activities elsewhere.

2. A corporation is not exempt from Virginia income tax on income earned on a U.S. government military base, National Park, or other federal enclave. 4 USC §§ 104 (Note), 105.

Statutory Authority

§§ 58.1-203 and 58.1-401 of the Code of Virginia.

Historical Notes

Derived from VR630-3-401, eff. January 1, 1985.

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.

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:

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.

23VAC10-120-102. Virginia taxable income; subtractions.

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:

Statutory Authority

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

Historical Notes

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

23VAC10-120-103. Subtraction for income attributable to an investment in a Virginia venture capital account.

A. To the extent included in federal taxable income, any income, including investment services partnership interest income, attributable to an investment made in a Virginia venture capital account on or after January 1, 2018, but before December 31, 2023, shall be subtracted from federal taxable income in determining Virginia taxable income. If such income was partially excluded or deducted in determining federal taxable income, it shall be subtracted from federal taxable income only to the extent included therein. If such income has already been excluded from Virginia taxable income, it shall not be subtracted again pursuant to this section.

B. The following words and terms when used for purposes of this section 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 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.

"Department" means the Virginia Department of Taxation.

"Investment services partnership interest income" means income from an investment partnership treated as carried interest income for federal income tax purposes.

"Professional experience" means full-time employment involving venture capital investment.

"Qualified portfolio company" means the same as that term is defined in subdivision C 25 of § 58.1-402 of the Code of Virginia.

"Substantially equivalent experience" means an undergraduate degree from an accredited college or university in economics, finance, or a similar field of study or a combination of professional experience totaling less than four years, professional training, and undergraduate education from an accredited college or university in economics, finance, or a similar field of study demonstrating competency in venture capital investing.

"Virginia venture capital account" means the same as that term is defined in subdivision C 25 of § 58.1-402 of the Code of Virginia.

C. The subtraction may not be claimed for an investment in a company that is owned or operated by an affiliate of the corporation. The subtraction may not be claimed for an investment that was used to claim the subtraction for certain long-term capital gains allowed pursuant to subdivision C 24 of § 58.1-402 of the Code of Virginia.

D. 1. Every investment fund desiring to be certified by the department as a Virginia venture capital account for purposes of this subtraction must first register with the department by submitting an application indicating that it intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies and currently employs at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience.

2. Each investment fund must include with its registration application documentation of the investor's work experience, training, and education adequately demonstrating that such individual meets the professional experience or substantially equivalent experience requirement. Such documentation may include proof of employment, certifications, and transcripts.

3. The registration application required by this subsection must be submitted before or at the time the application required by subsection E of this section is submitted.

4. Once the department determines that an investment fund intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies, has at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience, and has submitted the required attachments, it will provide certification to the investment fund stating that the registration application has been approved. Such certification shall be valid only for the calendar year for which it was issued. An investment fund may reapply for certification each calendar year.

E. 1. An investment fund that has invested at least 50% of the capital committed to its fund in qualified portfolio companies may then submit an application for certification as a Virginia venture capital account.

2. Each investment fund must include with its application documentation that it has invested at least 50% of the capital committed to its fund in qualified portfolio companies.

3. To receive certification for this subtraction, each investment fund may be required to submit certain information regarding its investors as required by the department.

4. Once the department determines that an investment fund has actually invested at least 50% of the capital committed to its fund in qualified portfolio companies and has submitted the required attachments, it will provide certification to the investment fund stating that it is a Virginia venture capital account for purposes of this subtraction. Such certification shall be valid only for the calendar year for which it was issued.

F. The applications in subsections D and E of this section and any necessary attachments must be made on the form prescribed by the department, postmarked no later than January 31 of the calendar year following the calendar year in which the investment fund is applying for certification as a Virginia venture capital account.

Statutory Authority

§ 58.1-203 of the Code of Virginia.

Historical Notes

Derived from Virginia Register Volume 34, Issue 26, eff. November 3, 2018.

23VAC10-120-110. Additional modifications.

A. In general. In addition to the modifications set forth in § 58.1-402 of the Code of Virginia for determining Virginia taxable income for corporations generally, the adjustments set forth in subsection B shall be made to the federal taxable income of savings and loan associations and as set forth in subsections C and D below for railway companies.

B. Addition for bad debts.

1. If the federal bad debt deduction is based on a percentage of income, such amount shall be added to federal taxable income. After federal taxable income has been adjusted by all of the additions and subtractions in § 58.1-402 of the Code of Virginia and the bad debt addition a new bad debt deduction is determined by applying to the adjusted federal taxable income the same percentage used to compute the federal bad debt deduction. The new bad debt deduction is then subtracted from the adjusted federal taxable income to arrive at Virginia taxable income.

2. If the federal bad debt deduction is computed by a method other than the percentage of net income (such as the experience method) then no addition or subtraction is required for the bad debt deduction.

C. Addition for NOLD. If federal taxable income for any taxable year has been reduced by a Net Operating Loss Deduction (NOLD) attributable to a net operating loss occurring in a taxable year beginning before January 1, 1979, then such NOLD must be added to federal taxable income.

D. Subtraction for NOLD.

1. Because federal law requires an NOLD to be carried back to the earliest year in which there is income to be offset, a railway company suffering a net operating loss in a taxable year beginning on or after January 1, 1979, might be required to carry such loss back to taxable years beginning before January 1, 1979. Since a railway company was not subject to Virginia income tax for years beginning before January 1, 1979, it would receive no Virginia benefit from such carryback, and the NOLD for other taxable years would be reduced or eliminated by the required federal carryback.

2. In this situation, railway companies must add back the NOLD actually allowed on their federal return for losses occurring in taxable years beginning on or after January 1, 1979. A new NOLD is computed for Virginia purposes following the federal law and regulations except that no such loss is carried back to a taxable year beginning before January 1, 1979.

3. Example A. XYZ Co. is a railway company reporting on a calendar year basis. For the years 1976-1982 XYZ Co. had no additions or subtractions to federal taxable income except for an adjustment for net operating loss deductions. The income of XYZ is as follows:

Under federal law the 1978 net operating loss is first carried back to offset 1975, 1976 and 1977 income. There would be $25,000 of the NOL remaining to be carried forward and deducted on XYZ Co.'s 1979 federal return. Because the loss occurred in a taxable year beginning before December 31, 1978, the NOLD on the 1979 return must be added to federal taxable income to determine Virginia taxable income.

4. Example B. Same facts as in Example A except that the loss occurred in 1980. The income of XYZ is as follows:

Under federal law the 1980 net operating loss is first carried back to offset income in 1977 and 1978. The remaining $50,000 NOL is carried back to the 1979 federal return.

Because the loss occurred in a taxable year beginning on or after January 1, 1979, the entire NOL will be available to offset Virginia income reported in taxable years beginning on or after January 1, 1979. The federal NOLD of $50,000 is first added to the 1979 federal taxable income and then a new Virginia NOL carryback is computed and subtracted. The federal laws and regulations are followed except that no NOL shall be carried back further than 1979. The result is that the carryback to 1979 is $75,000 instead of $50,000 and there is still $25,000 of the NOL left to carryover to the 1981 return.

Statutory Authority

§§ 58.1-203 and 58.1-403 of the Code of Virginia.

Historical Notes

Derived from VR630-3-403, eff. January 1, 1985.

23VAC10-120-120. Business entirely within Virginia.

A. In general. If the entire business of a corporation is conducted within Virginia, the tax imposed by § 58.1-400 of the Code of Virginia shall be upon the entire Virginia taxable income. A corporation is presumed to be doing business entirely within Virginia unless it is subject to one of the following taxes in another state:

1. A tax imposed on net income, or

2. A franchise tax measured by net income, or

3. A franchise tax for the privilege of doing business.

B. Definitions.

1. "State" is defined in § 58.1-302 of the Code of Virginia and includes foreign countries.

2. A corporation is "subject to" one of the taxes enumerated in subsection A above if it carries on sufficient business activity within any other state so that the other state has jurisdiction to impose one of the enumerated taxes, whether or not such other state actually imposes one of the enumerated taxes. For purposes of determining whether or not a state has sufficient jurisdiction to impose a tax the provisions of federal law (P.L. 86-272, 15 USC Sections 381-384) regulating state taxation of interstate commerce shall be applied even if the state in question is a foreign country provided that income from such foreign country is included in Virginia taxable income. If jurisdiction is otherwise present, a foreign country is not considered as without jurisdiction by reason of a treaty between the foreign country and the United States.

C. Voluntary payment of tax. The taxpayer is not "subject to" one of the specified taxes in another state if the taxpayer voluntarily files and pays one or more of such taxes when not required to do so by the laws of that state or pays a fee for qualification, organization or for the privilege of doing business in that state, but

1. does not actually engage in business activities in that state, or

2. does actually engage in some activity, not sufficient for nexus, and the tax bears no relation to the corporation's activities within such state.

D. Examples. These principles are illustrated by the following examples:

1. State A requires all nonresident corporations which qualify or register in State A to pay to the Secretary of State an annual license fee or tax for the privilege of doing business in the state regardless of whether the privilege is in fact exercised. The amount paid is determined according to the total authorized capital stock of the corporation; the rates are progressively higher by bracketed amounts. The statute sets a minimum fee of $50 and a maximum fee of $500. Failure to pay the tax bars a corporation from utilizing the state courts for enforcement of its rights. State A also imposes a corporation income tax. Nonresident Corporation X is qualified in State A and pays the required fee to the Secretary of State but does not carry on any activities in State A which exceed the limitations of P.L. 86-272. Corporation X is not subject to tax in State A.

2. Same facts as Example (1) except that Corporation X is subject to and pays the corporation income tax. Payment is prima facie evidence that Corporation X is "subject to" the net income tax of State A.

3. State B requires all nonresident corporations qualified or registered in State B to pay to the Secretary of State an annual permit fee or tax for doing business in the state. The base of the fee or tax is the sum of (1) outstanding capital stock, and (2) surplus and undivided profits. The fee or tax base attributable to State B is determined by a three factor apportionment formula. Nonresident Corporation X which operates a plant in State B, pays the required fee or tax to the Secretary of State. Corporation X is subject to tax.

4. State A has a corporation franchise tax measured by net income for the privilege of doing business in that state. Corporation X files a return based upon its business activities in the state but the amount of computed liability is less than the minimum tax. Corporation X pays the minimum tax. Corporation X is subject to State A's corporation franchise tax.

Statutory Authority

§§ 58.1-203 and 58.1-405 of the Code of Virginia.

Historical Notes

Derived from VR630-3-405, eff. January 1, 1985.

23VAC10-120-130. Allocation and apportionment.

A. In general.

1. If a corporation has income from business activity which is subject to taxation both within and without Virginia, as defined in 23VAC10-120-120, the corporation shall allocate and apportion its Virginia taxable income as provided in §§ 58.1-407 through 58.1-420 of the Code of Virginia.

2. Only corporations allocate and apportion income. Individuals and other taxpaying entities follow other rules.

B. Alternate method. If the statutory method of allocation and apportionment unfairly states the income from Virginia sources, a corporation may petition the Department of Taxation to allow an alternate method under § 58.1-421 of the Code of Virginia. See 23VAC10-120-280.

Statutory Authority

§§ 58.1-203 and 58.1-406 of the Code of Virginia.

Historical Notes

Derived from VR630-3-406, eff. January 1, 1985.

23VAC10-120-140. How dividends allocated.

A. In general. If a corporation is subject to tax in Virginia and at least one other state, as defined in § 58.1-405 of the Code of Virginia, it must allocate and apportion its Virginia taxable income. Dividends are allocated to the commercial domicile of the corporation. All other income is apportioned.

B. Definition of dividend. A distribution to the taxpaying corporation from another corporation shall be allocated if such distribution is treated as a dividend under IRC § 316.

C. Amount allocated. Dividends are allocated only to the extent that they are included in Virginia taxable income. Allocable dividends are gross dividends received reduced by the following:

1. Any dividends exempt from taxation under federal law.

2. The dividends received deduction allowed by federal law.

3. Dividends which are subtracted from federal taxable income in computing Virginia taxable income (e.g. 50% owned corporations, foreign source income, foreign dividend gross up, subpart F income). See 23VAC10-120-102 for details.

D. Commercial domicile. Commercial domicile means the state in which is located the principal office from which the business affairs of the corporation are normally directed or managed. The commercial domicile will normally be the location of the headquarters office of the corporation. If the corporation has no office then the commercial domicile may be where the officers, directors and shareholders regularly meet or where the principal officer or majority shareholder/officer conducts the affairs of the corporation, depending upon the facts and circumstances.

Statutory Authority

§§ 58.1-203 and 58.1-407 of the Code of Virginia.

Historical Notes

Derived from VR630-3-407, eff. January 1, 1985.

23VAC10-120-150. What income apportioned and how.

A. In general.

1. If a corporation is subject to taxation in Virginia and at least one other state (as determined by Va. Code § 58.1-405) then all Virginia taxable income, other than dividends allocable under Va. Code § 58.1-407, is apportioned by the appropriate formula. Each factor is a fraction (expressed as a decimal carried to 6 places) based on activity within Virginia divided by similar activity everywhere. (But see subsection B below. The activity must also be effectively connected with a trade or business in the United States and produce Virginia taxable income).

2. Except as noted below, all corporations are required to use a three factor formula based on the property, payroll and sales within Virginia. The formula is the average of the three factors, except that if the denominator of any fraction is zero, then that fraction is not included in the average.

The following types of corporations apportion income using special one-factor formulas:

a. Motor carriers according to vehicle miles. Va. Code § 58.1-417.

b. Financial corporations according to cost of performance. Va. Code § 58.1-418.

c. Construction corporations using the completed contract method according to business within and without Virginia. Va. Code § 58.1-419.

d. Railway companies according to revenue car miles. Va. Code § 58.1-420.

e. In exceptional circumstances any corporation may request permission to use an alternate method. Va. Code § 58.1-421.

B. Additional requirements. In order to be included in the numerator and denominator of each factor in the three-factor formula, property, payroll and sales must meet two requirements.

1. The property, payroll and sales must be used to produce Virginia taxable income. Income or gain produced by the property, payroll and sales must be included in federal taxable income and not subtracted in computing Virginia taxable income. In the alternative, deductions for expenses or losses associated with the property, payroll and sales must be both deducted in computing federal taxable income and not an addition in computing Virginia taxable income.

2. The property, payroll and sales must be effectively connected with the conduct of a trade or business within the United States and income therefrom must be includible in federal taxable income.

a. Reference is made to the Treasury regulations under IRC §§ 882, 861, 862, 863 and 864 for determining whether property, payroll and sales are effectively connected with the conduct of a trade or business within the United States. Attention is directed to the fact that under the regulations mentioned, particularly § 1.864-4, activity may be located in a foreign country and still be effectively connected with the conduct of a trade or business within the United States.

b. The property, payroll and sales of a corporation which are used to produce income qualifying for the subtraction for foreign dividend gross up, subpart F income and foreign source income shall not be included in the denominator of the fractions.

C. Examples. The principles of this section may be illustrated by the following examples.

1. Corporation C is organized under the laws of Delaware and has its commercial domicile in New York. C manufactures goods in New York and sells them through its sales offices located throughout the world, including Virginia. C also owns stock in a corporation which pays dividends. After the dividends-received deduction, $10,000 is included in C's federal taxable income of $10,000,000. Under federal law all of C's foreign sales are effectively connected with a trade or business within the United States. The property, payroll and sales factors are as follows:

The apportionable income is $9,990,000 (total income less allocable dividends of $10,000). The income from Virginia sources on which Virginia income tax is imposed is $199,800, computed as follows:

2. Same facts as in example 1 except that C only recently opened its Virginia office and made no sales in Virginia during the taxable year. The income from Virginia sources is $133,200 computed as follows:

Statutory Authority

§§ 58.1-203 and 58.1-408 of the Code of Virginia.

Historical Notes

Derived from VR630-3-408, eff. January 1, 1985.

23VAC10-120-160. Property factor.

A. In general.

1. The property factor is a fraction. The numerator is the average value of real and tangible personal property which is used in Virginia. The denominator is the average value of real and tangible personal property which is used everywhere. Property shall be included in the property factor if it is:

a. owned or rented by taxpayer, and

b. used by taxpayer, and

c. effectively connected with the taxpayer's trade or business within the United States and the income from such trade or business is includible in both Virginia taxable income and federal taxable income.

2. "Property."

a. "Property" means all real and tangible personal property including land, mineral rights, buildings, machinery, inventory and any other real or tangible personal property in which the corporation has any right of use or possession. For valuation of property see 23VAC10-120-170. For explanation of "average value" see 23VAC10-120-180.

b. Partnership property. For purposes of the property factor each item of partnership property shall have the same character for a corporate general partner as if direct corporate ownership of the property existed. However, if the inclusion of partnership property in the property factor does not materially affect the factor and information is difficult to obtain then partnership property may be treated as intangible property and excluded from the property factor provided that such treatment is adequately disclosed. See 23VAC10-120-20.

c. Leasehold improvements. For purposes of the property factor leasehold improvements are deemed to be owned by the lessee of the property to which the improvements are made regardless of any right the landlord may have to the improvements at the end of the lease term.

d. Mining property. A corporation engaged in the business of mining mineral ore, oil, gas or other natural resources or cutting timber may own or lease the real estate on which such operations are conducted or it may own or lease only the mineral rights to such property or some other interest in the operations. For purposes of the property factor the corporation is deemed to own or lease the property, mineral rights or other interest in such property and the value, as determined under 23VAC10-120-170, will be included in the property factor.

3. "Owned or rented." Property will be included in the property factor regardless of whether the corporation owns, rents or leases the property. Ownership or rental affects only the method used to determine the value of the property. See 23VAC10-120-170.

4. "Used."

a. Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor.

b. Property under construction during the taxable year (except inventoriable goods in process) shall be excluded from the factor until such property is actually used. If the property is partially used while under construction, the value of the property to the extent used shall be included in the property factor.

c. Mineral rights are used when placed in production or developed to the point where they could be placed in production but are held as reserves. Exploration and development do not place mineral rights in use for the property factor. But see 23VAC10-120-170 for valuation.

d. Once used or available for use, property shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its sale. The fact that taxpayer ceases to actively use property does not, of itself, remove the property from the property factor because it is still available to be used.

e. Property is not permanently withdrawn from use by merely offering it for sale. Property offered for sale shall be deemed available for use unless other circumstances clearly show that use of the property has been permanently abandoned.

f. Property which the corporation ceases to actively use in its operations but leases to others is still being used by the corporation to produce income and shall be included in the factor.

5. Property is effectively connected with the taxpayer's business within the United States if it is actually used or available to be used in taxpayer's trade or business. Generally any use of property which produces income, including rental income, is income from a trade or business. A taxpayer may have more than one trade or business. See Treasury Reg. § 1.861-4 for definition of "effectively connected. . . ."

6. Safe harbor leases. The Economic Recovery Tax Act of 1981 (ERTA) allows corporations to treat certain financial agreements concerning property as leases for federal income tax purposes even though such agreements would not be recognized as leases under the general property law of a state. Such agreements are treated as leases for purposes of the Virginia income tax to the same extent that they are treated as leases for federal income tax. Thus the "lessee" will be treated as a corporation renting property, and the value of the property will be included in the property factor. The "lessor" will be treated as a corporation owning property and the value of the property will be included in the property factor.

B. Examples. These principles are illustrated by the following examples:

Example 1: On June 30, 1981, taxpayer shutdown its manufacturing operations in State X and announced its intention to sell the land, buildings and machinery. The property was sold on October 31, 1982. The value of the manufacturing plant is included in the property factor until November 1, 1982.

Example 2: Same as example 1 except that in addition to closing the plant taxpayer removed all equipment from the plant, relocated key employees and awarded severance pay to other employees. The plant is included in the property factor until July 1, 1981.

Example 3: Same as example 1 except that the plant was rented on a month to month basis until the plant was sold. The plant is included in the property factor until November 1, 1982.

Example 4: On June 30, 1981, taxpayer closed its manufacturing plant and leased the building under a 5-year lease on October 1, 1981. The plant is included in the property factor for all of 1981 and subsequent years.

Example 5: The taxpayer operates a chain of retail grocery stores. On June 30, 1981, taxpayer closes Store A which is then remodeled into three small retail stores such as a dress shop, dry cleaner, and barber shop. The new stores are advertised for lease on November 1, 1981. The property remains in the property factor for all of 1981 and subsequent years.

Example 6: Taxpayer, a retailer, owns a 10 story building. The first floor is used by taxpayer as a retail store. The remaining floors are rented to various businesses as offices. The entire building is included in the property factor.

Statutory Authority

§§ 58.1-203 and 58.1-409 of the Code of Virginia.

Historical Notes

Derived from VR630-3-409, eff. January 1, 1985.

23VAC10-120-170. Valuation of property owned or rented.

A. In general. The taxpayer shall be consistent in the valuation of property and in excluding or including property in the property factor in filing returns or reports to all income tax states to which the taxpayer reports to the extent that the laws of the other states are similar to Virginia's laws. In the event the taxpayer is not consistent in its reporting it shall disclose in its return to Virginia the nature and extent of the inconsistency.

B. Owned property.

1. Property owned by the taxpayer shall be valued at its original cost. As a general rule, "original cost" is deemed to be the basis of the property for federal income tax purposes at the time of acquisition by the corporation and adjusted by subsequent capital additions and improvements thereto and partial disposition thereof, by reason of sale, exchange, abandonment, etc. The original cost shall not be reduced by amounts allowed or allowable for depreciation, amortization, depletion, accelerated cost recovery or similar allowances.

2. Inventory of stock of goods shall be included in the factor in accordance with the valuation method used for federal income tax purposes.

3. Property acquired by gift or inheritance shall be included in the property factor at its basis for determining depreciation for federal income tax purposes.

C. Rental property.

1. The property factor includes the average value of property rented by the taxpayer valued at eight times the net annual rental rate. Net annual rental rate is the annual rental rate paid by the corporation.

2. Annual rental rate.

a. The "annual rental rate" is the amount paid as rental for the property for a 12-month period, or the "annual rent."

b. Where property is rented for less than a 12-month period, the net rent paid for the actual period of rental shall be annualized to determine the annual rental rate. For example, if equipment is rented for 3 months at $100 per month the annual rental rate is $1,200.

c. "Annual rent" is the actual sum of money or other consideration payable, directly or indirectly, by the taxpayer or for its benefit for the use of the property and includes any amount payable for the use of real or tangible personal property, or any part thereof, whether designated as a fixed sum of money or as a percentage of sales, profits, or otherwise and any amount payable as additional rent or in lieu of rents, such as interest, taxes, insurance, repairs or any other items which are required to be paid by the terms of the lease or other arrangement. However, rent does not include amounts paid as service charges, such as utilities, janitor services, etc. If a payment includes rent and other charges unsegregated, the amount of rent shall be determined by consideration of the relative values of the rent and other items.

d. "Annual rent" does not include incidental day-to-day expenses such as hotel or motel accommodations, daily rental of automobiles, etc.

3. Leasehold improvements shall, for the purpose of the property factor, be treated as property owned by the lessee regardless of whether the lessee is entitled to remove the improvements or the improvements revert to the lessor upon expiration of the lease. Hence, the original cost of leasehold improvements shall be included in the factor of the lessee.

D. Movable tangible personal property.

1. The value of movable tangible personal property shall be included in the numerator to the extent of its utilization in this state. The extent of such utilization shall be determined by multiplying the total value of such property by a fraction, the numerator of which is the number of days of physical location of the property in Virginia during the taxable period and the denominator is the number of days of physical location of the property everywhere during the taxable period.

2. An automobile assigned to a traveling employee may be included in the numerator of the property factor of the state to which the employee's compensation is assigned under the payroll factor.

3. Motor carriers apportion income entirely by vehicle miles. Va. Code § 58.1-417.

4. In the case of a contractor who has elected to use the completed contract method of accounting for Federal income tax purposes the contractor shall apportion income in accordance with Va. Code § 58.1-419.

E. Mineral rights.

1. Mineral rights involve ownership of less than the entire fee simple interest in land. If the mineral rights consist of ownership of all minerals in place with no payments in the nature of rents or royalties required and no time limitations imposed then the mineral rights will be valued as owned property.

2. Most mineral rights involve several types of expenditures variously called "bonus," "rental," "delay rental," "royalty," etc. The value of such mineral rights is the sum of:

a. Acquisition cost, bonus payments and other substantial, nonrecurring items valued at original cost, and

b. Exploration and development costs and other leasehold improvements valued at original cost.

F. Examples. The principles of this section are illustrated by the following examples.

Example 1: On January 1, 1970 X corporation acquired a factory building in this State at a cost of $500,000 and on July 1, 1971, expended $100,000 for major remodeling of the building. The book value of the building on December 31, 1982 is $456,000 (cost less accumulated depreciation). The value of the building for purposes of the numerator and denominator of the property factor is $600,000.

Example 2: In 1980, X corporation is merged into Y corporation in a tax free reorganization under the Internal Revenue Code. At the time of merger, X corporation owns a factory which X built in 1975 at a cost of $1,000,000. X has been depreciating the factory at the rate of two percent per year, and its adjusted basis (cost less depreciation) in X's hands at the time of merger is $900,000. The property is acquired by Y in a transaction in which, under the Internal Revenue Code, its basis in Y's hands is the same as its basis in X's. Y includes the property in its property factor at X's original cost, without adjustment for depreciation, i.e., $1,000,000.

Example 3: Corporation Y acquires the assets of corporation X in liquidation by which Y is entitled to use its stock cost as the basis of the X assets. Under these circumstances, Y's cost of the assets is the purchase price of the X stock, prorated to the assets acquired in the liquidation of X.

Example 4: A taxpayer, pursuant to the terms of a lease, pays a lessor $1,000 per month as a base rental and at the end of the year pays the lessor one percent of its gross sales of $100,000. The annual rent is $13,000 ($12,000 plus one percent of $100,000 or $1,000).

Example 5: A taxpayer, pursuant to the terms of a lease, pays the lessor $12,000 a year rent plus taxes in the amount of $2,000 and interest on a mortgage in the amount of $1,000. The annual rent is $15,000.

Example 6: Taxpayer leases a 40,000 sq. ft. warehouse for 5 years but only uses 20,000 sq. ft. in its operations. The lease provides for an annual rental of $200,000 and taxpayer is to pay utilities and taxes. The local taxes are $12,000 per year. Within a few months taxpayer subleases 10,000 sq. ft. to another corporation for the remainder of the 5 years at an annual rental of $75,000 but taxpayer will furnish utilities and pay the taxes. The balance of the warehouse space is rented to various businesses and individuals on a month-to-month basis. The annual rental rate for the warehouse is $212,000 (200,000 rent plus 12,000 taxes). The entire property is included in the property factor because the entire warehouse is actually used or available for use on short notice or used to produce rental income.

Statutory Authority

§§ 58.1-203 and 58.1-410 of the Code of Virginia.

Historical Notes

Derived from VR630-3-410, eff. January 1, 1985.

23VAC10-120-180. Average value of property.

A. In general.

1. The average value of property shall be determined by averaging the value of the beginning and end of the taxable year, but the department may require the averaging of monthly values during the taxable year if reasonably required to reflect properly the average value of the corporation's property.

2. Averaging by monthly values may be elected by the taxpayer and will generally be required by the Department if there is substantial fluctuation in the values of the property during the taxable year or where a substantial amount of property is acquired after the beginning of the taxable year or disposed of before the end of the taxable year. Taxpayer may elect to average by monthly values whether or not the department requires it.

3. Substantial fluctuations in the values of property will be deemed to exist if the value for any month is outside a range of values which is the average of the beginning and ending value plus or minus 25%.

4. The taxpayer may elect to compute the average value of rental property by one of the following methods:

a. the net annual rental rate of property rented at the beginning and end of the taxable year may be averaged and multiplied by eight, or,

b. the net annual rental rate of property rented at the beginning of each month may be averaged and multiplied by eight, or

c. the total rent paid for all property for the taxable year may be multiplied by eight. This method is deemed equivalent to monthly averaging, or

d. the Department may require a taxpayer to determine the average value of property by using method (b) and (c).

B. Example. Taxpayer reports on a calendar year. The value of property at the end of the preceding year (and therefore the beginning value for this year) was $1,250. The value of property at the end of each month for this year is as follows:

   January                             1,300

   February                            1,350

   March                               1,500

   April                               1,700

   May                                 2,000

   June                                3,000

   July                                5,000

   August                              7,500

   September                          10,000

   October                            12,000

   November                            4,000

   December                            2,000

The average of the beginning and ending values is $1,625.

1,250+ 2,000 = 3,250 ÷ 2 =1,625

However, there is substantial fluctuation in the monthly values.

1,625 - 25% = 1,218.75; 1,625 + 25% = 2,031.25

Because the property values for some of the months is outside the acceptable range of fluctuation ($1,218.75 to $2,031.25) the department requires that the property be averaged monthly.

The total of the 12 monthly values is $51,350 and the average value is $4,279.

Statutory Authority

§§ 58.1-203 and 58.1-411 of the Code of Virginia.

Historical Notes

Derived from VR630-3-411, eff. January 1, 1985.

23VAC10-120-190. Payroll factor.

A. In general. The payroll factor is a fraction, the numerator of which is the total amount paid or accrued within Virginia during the tax period by the corporation for compensation, and the denominator of which is the total compensation paid or accrued everywhere during the tax period.

B. Compensation.

1. Compensation, as defined in Va. Code § 58.1-302, shall be included in the payroll factor if it is effectively connected with the taxpayer's trade or business within the United States and the income from such trade or business is includible in both Virginia taxable income and federal taxable income.

2. The denominator of the payroll factor is the total compensation paid everywhere during the tax period. Accordingly, compensation paid to employees whose services are performed entirely in a state where the taxpayer is exempt from taxation, for example, by federal law 15 USC §§ 381-384, is included in the denominator of the payroll factor. However, compensation paid to employees whose services are connected with foreign source income as defined in Va. Code § 58.1-302 is excluded from the denominator because such income is not effectively connected with the taxpayer's trade or business within the United States and such income is not includible in Virginia taxable income.

C. Compensation within Virginia. The total wages reported to Virginia for unemployment compensation purposes are presumed to be compensation paid in Virginia (except for compensation excluded above). Compensation paid to employees which is deemed paid or accrued in Virginia under Va. Code § 58.1-413 shall be included in the numerator of the fraction whether or not such compensation is subject to the Virginia Unemployment Tax Act (Va. Code §§ 60.1-1 et seq.).

Statutory Authority

§§ 58.1-203 and 58.1-412 of the Code of Virginia.

Historical Notes

Derived from VR630-3-412, eff. January 1, 1985.

23VAC10-120-200. When compensation deemed paid in this Commonwealth.

A. In general. Compensation is paid in Virginia if any one of the following tests, applied consecutively, is met:

1. The employee's service is performed entirely within Virginia.

2. The employee's service is performed both within and without Virginia, but the service performed without Virginia is incidental to the employee's service within Virginia.

3. If the employee's service is performed both within and without Virginia, the employee's compensation will be attributed to Virginia if:

(i) The employee's base of operations is in Virginia, or

(ii) If there is no base of operations in any state in which some part of the service is performed, but the place from which the employee's service is directed or controlled is in Virginia, or

(iii) If the base of operations or the place from which the employee's service is directed or controlled is not in any state in which some part of the service is performed, but the employee's residence is in Virginia.

4. Any wages reported pursuant to the Virginia Unemployment Compensation Act (Va. Code § 60.1-1 et seq.) shall be presumed to be compensation paid in Virginia.

B. Definitions.

1. "Incidental" means any service which is temporary in nature or which is rendered in connection with an isolated transaction. An "isolated transaction" is a transaction which is not one of a regular or consistent series of the corporation's business transactions.

2. "Base of operations" means a place of more or less permanent nature from which the employee starts his work and to which he customarily returns in order to receive instructions from the taxpayer or communications from his customers or other persons, or to replenish stock or other materials, repair equipment, or perform any other functions necessary to the exercise of his trade or profession at some other point or points. A contractor's job site will be considered to be a base of operations.

3. "Place from which the service is directed or controlled" means the place from which the power to direct, control or supervise the employee's service is exercised by the taxpayer.

C. Examples.

Example 1: A corporation manufactures and sells technical equipment. It does not install such equipment, but if technical problems arise it will from time to time send out one of its home based experts. This service is considered "incidental" within the meaning of this subsection.

Example 2: A corporation manufactures and sells technical equipment. Due to the highly specialized nature of the equipment, the corporation either installs the equipment or supervises the installation. The installation requires 4 or 5 people for several weeks and the installation is performed under an installation contract. The installation work is not considered incidental within the meaning of this subsection. However, if the installation work is normally performed by others without the general supervision of one of the corporation's employees, the occasional inspection or supervision by an employee would be considered incidental.

Statutory Authority

§§ 58.1-203 and 58.1-413 of the Code of Virginia.

Historical Notes

Derived from VR630-3-413, eff. January 1, 1985.

23VAC10-120-210. Sales factor.

A. In general. The sales factor is a fraction, the numerator of which is the total sales in Virginia during the taxable year, and the denominator of which is the total sales of the corporation everywhere during the taxable year.

B. Sales. "Sales" is defined in § 58.1-302 of the Code of Virginia and means all gross receipts of the corporation except dividends allocated under § 58.1-407 of the Code of Virginia. In the case of the sale or disposition of intangible property (including, but not limited to patents, copyrights, bonds, stocks and other securities) gross receipts shall be disregarded and only the net gain from the transaction shall be included. Sales shall be included in the sales factor if the gross receipts or net gain are included in Virginia taxable income and are connected with the conduct of taxpayer's trade or business within the United States. See 23VAC10-120-150.

1. Net gain is computed on a per transaction basis. A sale or disposition of intangible property is included in the sales factor only to the extent that it results in a net gain.

2. A disposition of intangible property resulting in a loss is ignored in computing the sales factor. A loss is not used to offset gains from the sale or other disposition of intangible property, and a loss is not used to reduce other gross receipts.

3. The net gain from the transaction must be recognized, i.e., includable in federal taxable income, in order to be included in the Virginia sales factor.

4. "Sale or other disposition" includes the sale, exchange, redemption, maturity or other disposition of intangible property.

C. Example. In 1990, Corporation C, a calendar year taxpayer, redeems bonds with an adjusted basis of $46 million for $50 million, recognizing a net gain of $4 million. C also sells stock with an adjusted basis of $98 million for $95 million, recognizing a net loss of $3 million. Only the $4 million dollar net gain is reflected in C's sales factor; the $3 million loss from the sale of stock is ignored and is not used to offset the $4 million net gain in computing C's sales factor. Likewise, the loss is not used to reduce C's other gross receipts in 1990.

D. Installment sales.

1. Receipts from an installment sale of real or tangible personal property shall be included in the sales factor based on the following:

a. The basis portion of the sales proceeds shall be included in the sales factor in the year of sale. The basis portion of the sales proceeds shall be included in the numerator of the sales factor if: (i) the tangible personal property sold was received in Virginia, or (ii) the real property sold was located in Virginia.

b. The net gain portion of the sales proceeds shall be included in the sales factor to the extent and in the year recognized for federal income tax purposes. The net gain portion of the sales proceeds shall be included in the numerator of the sales factor if a greater proportion of the recordkeeping, collection and other income producing activity in the year of receipt is performed in Virginia.

c. The interest income shall be included in the sales factor in the year it is recognized for federal income tax purposes. The interest is included in the numerator of the sales factor if a greater proportion of the recordkeeping, collection and other income producing activity in the year of receipt is performed in Virginia.

2. Receipts from an installment sale of intangible property shall be included in the sales factor based on the following:

a. The net gain portion of the sales proceeds shall be included in the sales factor to the extent and in the year recognized for federal income tax purposes. The net gain portion of the sales proceeds shall be included in the numerator of the sales factor if a greater proportion of the recordkeeping, collection and other income producing activity in the year of receipt is performed in Virginia.

b. The interest income shall be included in the sales factor in the year it is recognized for federal income tax purposes and in the same manner as interest income from an installment sale of real or tangible personal property.

c. The basis portion of the sales proceeds shall not be included in the sales factor in the year of sale.

Statutory Authority

§§ 58.1-203 and 58.1-414 of the Code of Virginia.

Historical Notes

Derived from VR630-3-414 §§ 1-4, eff. January 1, 1985; amended, eff. January 30, 1991; Volume 9, Issue 20, eff. July 28, 1993.

23VAC10-120-220. When sales of tangible personal property deemed in this Commonwealth.

A. In general.

1. Sales of tangible personal property are in Virginia if such property is received in Virginia by the purchaser. In the case of a direct delivery to a person designated by the purchaser, a sale of such property is in Virginia if such property is ultimately received in Virginia by such designated person.

2. Receipts and transfers by persons other than the purchaser, or a designated ultimate recipient, are part of the transportation process and not considered in assigning sales to Virginia or any other state. A receipt by a person is a direct delivery to such person unless some other person is known to be the ultimate recipient at or before the time of first shipment.

3. The state in which title passes has no bearing on the state to which a sale is attributed. However, the fact that title has passed from the seller is indicative that a sale is complete and that the property is either at its ultimate destination or in transit to the ultimate destination.

B. Examples.

Example 1: The taxpayer, with inventory in State A, sold $100,000 of its products to a purchaser having branch stores in several states including Virginia. The order for the purchase was placed by the purchaser's central purchasing department located in State B. $25,000 of the purchase order was shipped directly to purchaser's branch store in Virginia. The branch store in Virginia is the "purchaser within this Commonwealth" with respect to $25,000 of the taxpayer's sales.

Example 2: The taxpayer makes a sale to a purchaser who maintains a central warehouse in Virginia at which all merchandise purchases are received. The purchaser reships the goods to its branch stores in other states for sale. All of taxpayer's products shipped to purchaser's warehouse in Virginia are property "received by a purchaser within this Commonwealth."

Example 3: A wholesaler subject to income tax in Virginia sells merchandise to a retailer in State A. Pursuant to the retailer's instructions, the wholesaler directs the manufacturer located in State B to ship the merchandise directly to the retailer's customer in Virginia. The sale by the wholesaler is a sale in Virginia.

Example 4: Same facts as in example 3 except that both the retailer and manufacturer are subject to income tax in Virginia due to other business activity. For purposes of the retailer's Virginia tax return, the sale to the retailer's customer in Virginia is a sale in Virginia. For purposes of the manufacturer's Virginia tax return, the sale to the wholesaler, which is shipped to the retailer's customer in Virginia, is a sale in Virginia. In other words, although there is only one shipment of goods, for apportionment purposes there are three sales, all of which are attributed to Virginia.

Example 5: Taxpayer sells merchandise to purchaser who is located in State A. The merchandise is manufactured at taxpayer's plant in Virginia. Purchaser pays for the merchandise but directs taxpayer to hold the merchandise until further notice. Six months later purchaser directs taxpayer to ship the merchandise to purchaser's customer in State B. The sale is complete when the purchaser pays for the merchandise. The sale is attributed to Virginia because the purchaser accepted delivery at the manufacturing plant located in Virginia.

Statutory Authority

§§ 58.1-203 and 58.1-415 of the Code of Virginia.

Historical Notes

Derived from VR630-3-415, eff. January 1, 1985.

23VAC10-120-230. When certain other sales deemed in this Commonwealth.

A. In general. The numerator of the sales factor shall include sales, other than sales of tangible personal property governed by § 58.1-415 of the Code of Virginia, if:

1. the income producing activity is performed in Virginia, or

2. the income producing activity is performed both in and outside Virginia and a greater proportion of the income producing activity is performed in Virginia than in any other state, based on costs of performance.

B. Income producing activity. The term "income producing activity" means the act or acts directly engaged in by the taxpayer for the ultimate purpose of producing the sale to be apportioned by this section. Such activity does not include activities performed on behalf of a taxpayer, such as those conducted on its behalf by an independent contractor. Accordingly, the income producing activity includes but is not limited to the following:

1. The rendering of personal services by employees or the utilization of tangible or intangible property by the taxpayer in performing a service.

2. The rental, leasing, licensing the use of or other use of real property.

3. The rental, leasing, licensing the use of or other use of tangible personal property.

4. The sale, licensing the use of or other use of intangible personal property.

C. Location.

1. The income producing activity is deemed performed at the situs of real and tangible personal property or the place at which or from which such activities are performed by employees of the taxpayer.

2. If the sale to be apportioned was produced by activity occurring both in Virginia and outside Virginia, the sale will be in Virginia if a greater portion of such activity occurred in Virginia than in any other state. The portion of the income producing activity occurring in each state shall be determined by the cost of performance of such activity.

3. "Cost of Performance" is the cost of all activities directly performed by the taxpayer for the ultimate purpose of producing the sale to be apportioned. The cost of performance does not include:

a. the cost of activities performed for the purpose of obtaining dividends allocable under § 58.1-407 of the Code of Virginia;

b. the cost of activities performed for the purpose of producing sales of tangible personal property apportionable under § 58.1-415 of the Code of Virginia;

c. the cost of indirect expenses such as interest or activities performed by an independent contractor; or

d. the cost of activities performed for the purpose of producing both sales to be apportioned under this section and other income which is not apportionable under this section, unless either

(i) the cost of activities associated with sales to be apportioned under this section can be identified and separated from the cost of activities associated with other sales, or

(ii) the primary purpose of such activity is to produce sales apportionable under this section and substantially all of the income produced by such activity are such sales.

D. Examples.

Example 1:

a. Taxpayer owns a computer and operates a data processing service center in Virginia. Services are provided from this center for the entire eastern part of the United States. The corporation is developing a nationwide data processing service and it plans to eventually set up a processing service center in the western part of the United States to service that section of the country. In the meantime, it has made arrangements with an independent computer processing center in California to service its processing business from western states. All business is solicited and all customers are billed from taxpayer's offices in Virginia. Taxpayer in turn pays a fee to the independent computer processing center in California.

b. Since activities of an independent contractor are not considered activities of the taxpayer for this purpose, all of taxpayer's "income producing activity" is in Virginia and all of taxpayer's sales of computer services are included in the numerator.

Example 2:

a. Taxpayer, a corporation whose principal business activity is factoring, factors the accounts receivable of XYZ Corporation. The accounts receivable arose from XYZ's sale of tangible personal property in several states. XYZ's headquarters, accounting and collection offices are located in Virginia and the factoring of accounts receivable was arranged with XYZ personnel located in Virginia. XYZ continues to bill accounts and forwards collections to taxpayer.

b. Taxpayer's income arises from its factoring relationship with XYZ in Virginia not from collection of the accounts receivable. All income received is assigned to Virginia. Note that taxpayer may be considered a financial corporation under § 58.1-418 of the Code of Virginia.

c. To XYZ the proceeds from the factoring of accounts receivable to taxpayer are proceeds from the sales of the tangible personal property which generated the accounts receivable and assigned to the state of the ultimate recipient under § 58-151.048 of the Code of Virginia. (Sales will not be double counted. If XYZ accrued the entire sales price, the subsequent factoring of the resulting account receivable will be ignored. If XYZ is a cash basis taxpayer, the factoring of the accounts receivable will be counted.)

Example 3: Taxpayer is a collection agency which attempts to collect the delinquent accounts receivable of XYZ corporation, a retailer located in another state, by means of phone calls and letters originating from taxpayer's Virginia office. Taxpayer's income arises from its collection activity in Virginia and all income will be assigned to Virginia regardless of where the debtor resides or where the retailer is located.

Example 4: Corporation A's principal business is the sale of tangible personal property to purchasers in various states. As part of the sale transaction, A frequently receives interest bearing notes secured by the property sold. The acceptance of the note is deemed full payment for the purpose of assigning the sale of tangible personal property to a state. The sales price of the tangible personal property will be assigned to the state where it is delivered. Interest and other income arising from the notes will be assigned to the state in which A maintains its recordkeeping and collection activity for the notes.

Example 5: Taxpayer is a stockbroker with offices in Virginia and other states. Virtually all of the income produced by taxpayer's Virginia office is connected with the sale of securities and other intangible property. All of the expenses of maintaining the Virginia office are included in the cost of performing the income producing activity. In addition to the Virginia office expenses, Taxpayer's cost of performance includes the cost of executing customer orders in other states. Analysis of Taxpayer's records indicates that the cost of performance associated with sales made by or through the Virginia office are assigned as follows: 49% is associated with maintaining the Virginia office, 40% is associated with execution of customer orders on exchanges in New York and the transfer of securities by its New York office, and 11% is associated with execution of customer orders on exchanges located in other states and foreign countries. All of the sales by or through the Virginia office are assigned to Virginia because the greater portion of the income producing activity is performed in Virginia than in New York or any other state. Note that a stockbroker is likely to be a financial corporation under § 58.1-418 of the Code of Virginia.

Statutory Authority

§§ 58.1-203 and 58.1-416 of the Code of Virginia.

Historical Notes

Derived from VR630-3-416, eff. January 1, 1985.

23VAC10-120-240. Motor carriers; apportionment.

A. In general.

1. Motor carriers do not use the three factor formula to apportion Virginia taxable income but instead apportion solely on the basis of vehicle miles traveled. The ratio is vehicle miles in Virginia to vehicle miles everywhere.

2. Foreign source income is excluded from Virginia taxable income. However, income from vehicle miles traveled in a foreign country is not one of the categories of foreign source income qualifying for exclusion. Therefore, all income from such vehicle miles is included in Virginia taxable income and such vehicle miles are included in the denominator, but not the numerator.

3. "Motor carrier" means all corporations licensed by the Interstate Commerce Commission or the Virginia State Corporation Commission as motor carriers of property or passengers which use the highways of Virginia.

4. a. "Vehicle miles" means miles traveled on a scheduled route or, in any case, while carrying property or passengers for a charge. A scheduled route is any route for which the motor carrier has been granted operating authority by the Interstate Commerce Commission, State Corporation Commission or similar agency. The miles traveled by all vehicles operated by the taxpayer shall be included, regardless of whether they are owned or leased by the taxpayer.

b. Vehicle miles shall not include travel for repairs or service whether the vehicle is normally used for carrying property or passengers or is normally used to service such vehicles.

B. Exception.

1. A motor carrier shall not be subject to Virginia income tax if the corporation:

a. neither owns nor rents real or tangible personal property in Virginia except vehicles, and

b. the vehicle miles in Virginia are not more than 5% of the total vehicle miles annually traveled in all states, and

c. the corporation either: (i) has made no pick-ups or deliveries in Virginia and has traveled less than 50,000 miles in Virginia, or (ii) has made no more than twelve round trips into Virginia.

2. A motor carrier which is not subject to Virginia income tax because of this exception may still be required to file a Virginia income tax return reporting its qualification for the exception.

Statutory Authority

§§ 58.1-203 and 58.1-417 of the Code of Virginia.

Historical Notes

Derived from VR630-3-417, eff. January 1, 1985.

23VAC10-120-250. Financial corporations; apportionment.

A. In general.

1. Financial corporations do not apportion Virginia taxable income using the three factor formula but instead apportion income based solely on cost of performance.

2. Financial corporations include, but are not limited to, banks, savings and loan associations, mortgage companies, small loan companies, sales finance companies, brokerage companies, investment companies and other corporations which meet the definition of a financial corporation set forth in subsection B.

3. If a corporation meets the definition of a financial corporation, it apportions Virginia taxable income, less allocable dividends, on a one factor formula based on cost of performance in Virginia over cost of performance everywhere.

B. Definitions.

"Financial corporations" means any corporation not exempt from taxation under § 58.1-401 of the Code of Virginia which derives more than 70% of its gross income from:

a. Fees, commissions, other compensation for financial services rendered;

b. Gross profits from trading in stocks, bonds or other securities;

c. Interest; and

d. Dividends received to the extent included in Virginia taxable income.

"Cost of performance."

a. The "cost of performance" is the cost of all activities directly performed by the taxpayer for the ultimate purpose of obtaining gains or profit except activities directly performed by the taxpayer for the ultimate purpose of obtaining dividends allocable under the provisions of § 58.1-407 of the Code of Virginia. See 23VAC10-120-140.

(i) Such activities do not include activities performed on behalf of a taxpayer, such as those performed on its behalf by an independent contractor.

(ii) The cost of performance does not include the cost of funds (interest, etc.), but does include the cost of activities required to procure loans or other financing.

b. Activities constituting the cost of performance are deemed performed at the situs of real and tangible personal property or the place at which or from which activities are performed by employees of a taxpayer.

c. Cost of performance of a financial institution within and without Virginia shall be determined without regard to the location of borrowers, location of property in which the financial corporation has only a security interest or the cost to the financial corporation of the funds which it lends.

C. Inter-affiliate transactions.

1. If the taxpayer is a member of an affiliated group and renders financial services to its affiliate for compensation, or sells stock, bonds or other securities to its affiliate, or receives interest or dividends from its affiliate, then taxpayer shall include the net income, not gross income, from such transactions for the purpose of the 70% test. The net income for this purpose is the gross income less directly related expenses. Whether an item of expense is directly related to an item of gross income depends on the facts of each case.

2. Taxpayer is a member of an affiliated group if it meets the test of IRC § 1504(a) (concerning ownership of 80% of voting power and nonvoting stock) without regard to IRC § 1504(b) (concerning certain exemptions).

Example A: Retailer sells its accounts receivable to a wholly owned subsidiary called Finance Co. The terms of the accounts provide for interest on balances due of 1½% per month which Finance Co. collects in addition to the balances. Finance Co. borrows from banks in order to purchase the accounts receivable. Finance Co. has several employees and various other expenses.

For purpose of the 70% test Finance Co. receives interest from the consumers not the affiliated retailer. All interest received on the accounts receivable is included for the 70% test without any deduction of directly related expenses. Therefore, Finance Co. qualifies as a financial corporation.

Statutory Authority

§§ 58.1-203 and 58.1-418 of the Code of Virginia.

Historical Notes

Derived from VR630-3-418, eff. January 1, 1985.

23VAC10-120-260. Construction corporation; apportionment.

A. If a construction corporation used the completed contract method of accounting for its federal income tax return it is required by § 58.1-440 of the Code of Virginia to use the same method for computing Virginia taxable income.

B. If a construction corporation is required to allocate and apportion income by § 58.1-405 of the Code of Virginia, it shall apportion income (other than dividend income allocable under § 58.1-407 of the Code of Virginia) within and without this Commonwealth in the ratio that the business within this Commonwealth is to the total business of the corporation.

C. If a corporation does not use the completed contract method, it shall use the three factor apportionment formula in § 58.1-408 et seq. of the Code of Virginia.

D. If a portion of a construction corporation's income is reported under the completed contract method and a portion is reported under a percentage of completion method or some other accounting method, the applicable apportionment formula is determined by the method used to report a majority (more than 50%) of the total business (measured by gross revenue) conducted by the taxpayer for the taxable year. If no one method is used to report a majority of the taxpayer's total business, the three factor apportionment formula in § 58.1-408 et seq. of the Code of Virginia shall be used.

E. An example follows:

A construction corporation's total business is $500,000 for the taxable year ended December 31, 1991: $275,000 is reported on the completed contract basis, $150,000 is reported under a percentage of completion method, and the remainder is reported on a cash basis. Because a majority of the total business was reported using the completed contract method of accounting, the taxpayer is required to apportion income using the single factor of business within Virginia over total business of the corporation.

Statutory Authority

§§ 58.1-203 and 58.1-419 of the Code of Virginia.

Historical Notes

Derived from VR630-3-419 § 1, eff. January 1, 1985; amended, eff. July 28, 1993.

23VAC10-120-265. Construction corporation; definitions.

A. The total business of a corporation using the completed contract method of accounting is its gross receipts from completed contracts and all other gross receipts except income allocable under § 58.1-407 of the Code of Virginia.

B. Business within this Commonwealth is the gross receipts of such corporations from completed contracts on jobs within Virginia and all other gross receipts attributable to income from sources within Virginia.

C. The "completed contract method" does not include any of the percentage of completion methods available under federal law.

Statutory Authority

§§ 58.1-203 and 58.1-419 of the Code of Virginia.

Historical Notes

Derived from VR630-3-419 § 2, eff. January 1, 1985; amended, eff. July 28, 1993.

23VAC10-120-270. Railway companies; apportionment.

A. Railway companies are required to apportion income by use of a special factor. The factor is a fraction, the numerator of which is the revenue car miles in Virginia and the denominator of which is revenue car miles everywhere.

B. Definitions.

"Railway company" means any corporation subject to regulation as a railway company by the U.S. Interstate Commerce Commission.

"Income subject to apportionment" means the entire Virginia taxable income of the corporation except income allocable under 23VAC10-120-140.

"Revenue car mile" means the movement of loaded car equipment a distance of one mile determined in accordance with the Uniform System of Accounts for Railroad Companies of the Interstate Commerce Commission.

Statutory Authority

§§ 58.1-203 and 58.1-420 of the Code of Virginia.

Historical Notes

Derived from VR630-3-420, eff. January 1, 1985.

23VAC10-120-280. Alternative method of allocation and apportionment.

A. All corporations are required to file returns allocating and apportioning income using the statutory methods set forth in Va. Code §§ 58.1-407 through 58.1-420, and no corporation has a right under this section to use an alternative method without specific permission from the Department. Such permission will generally be granted only on a year by year basis. Even if an alternative method has been allowed for a prior year, or is expected to be allowed for the current year, a return following the statutory method must be filed.

The policy of the department is that the statutory method is the most equitable method of determining the portion of a multistate corporation's income that is attributable to business activity in Virginia. Permission to use an alternate method of allocation and apportionment will be granted only in extraordinary circumstances.

B. In order to request the department to redetermine the portion of Virginia taxable income subject to Virginia income tax based on an alternate method, the taxpayer must:

1. File a return using the statutory method of allocating and apportioning income and pay the resulting tax.

2. File an amended return within the time prescribed for filing amended returns claiming refunds. The amended return must follow the proposed alternative method and contain the following information:

a. a statement of why the statutory method is inapplicable or inequitable as applied to taxpayer, and

b. an explanation of the proposed method of allocation and apportionment in sufficient detail for the department to make a meaningful review.

3. If the situation causing the claimed inequity or inapplicability is expected to continue from year to year, the corporation may apply for permission to pay the income tax for future years based on the alternate method. If granted, such permission will relieve the corporation of the obligation to file a return based on the statutory method and the information in subdivision 2 of this subsection. If the department determines that circumstances have changed and no longer justify use of an alternate method, the department will revoke such permission effective with the change in circumstances and will assess any additional tax due.

4. The department will not grant permission to use an alternate method of allocation and apportionment unless it determines:

a. That the statutory method is in fact inapplicable because it produces an unconstitutional result under the particular facts and circumstances of the taxpayer's situation; or

b. That the statutory method is in fact inequitable because:

(1) It results in double taxation of the income, or a class of income, of the taxpayer; and

(2) The inequity is attributable to Virginia, rather than to the fact that some other state has a unique method of allocation and apportionment.

c. Such determination shall be made each year based on a review and information filed.

5. Permission to pay the income tax based on an alternate method will not be granted for future years unless the department also determines that the statutory method will probably be inapplicable or inequitable in future years to the same extent and for the same reasons as in the taxable period applied for.

Statutory Authority

§§ 58.1-203 and 58.1-421 of the Code of Virginia.

Historical Notes

Derived from VR630-3-421, eff. January 1, 1985.

23VAC10-120-290. (Repealed.)

Historical Notes

Adopted March 16, 1983 as § 3.58-151.014:2. Renumbered 630-3-431 and adopted September 14, 1984; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-300. Accounting.

A. A corporation shall use the same taxable year for Virginia tax purposes as is used for federal income tax purposes.

B. If a corporation's taxable year is changed for federal income tax purposes, its taxable year for Virginia tax purposes shall be similarly changed.

If a change in a corporation's taxable year results in a taxable period of less than twelve months, no proration is required because the corporate tax rate is a flat 6%. However, if a corporation is required to annualize its federal taxable income and prorate the federal income tax, then the Virginia taxable income shall be similarly annualized and the tax prorated.

C. Virginia taxable income is defined as federal taxable income with certain additions, subtractions and modifications. Therefore, Virginia taxable income will always be based upon the same accounting methods as used for federal purposes.

The allocation and apportionment formulas use information not required in computing federal taxable income. See 23VAC10-120-140 through 23VAC10-120-270.

D. If a corporation's method of accounting is changed for federal income tax purposes, its method of accounting for Virginia tax purposes must be similarly changed. Since Virginia taxable income is based upon federal taxable income, any accounting adjustments for federal purposes for any taxable year shall also apply to the computation of Virginia taxable income.

Statutory Authority

§§ 58.1-203 and 58.1-440 of the Code of Virginia.

Historical Notes

Derived from VR630-3-440, eff. January 1, 1985.

23VAC10-120-310. Reports by corporations.

A. 1. Every corporation organized under the laws of Virginia and every foreign corporation registered with the State Corporation Commission for the privilege of doing business in Virginia shall file a return with the Department of Taxation under this section. A return must be filed even if the corporation has no income from Virginia sources and no Virginia income tax is due.

2. Every corporation having income from Virginia sources shall file a return with the Department of Taxation. "Income from Virginia sources" is defined in 23VAC10-120-20. If a corporation has income from Virginia sources it shall file a return regardless of where it is organized, headquartered or from where it is managed or directed, or where its shareholders reside or whether it has registered with the State Corporation Commission for the privilege of doing business in Virginia.

3. Corporations exempt from Virginia income tax may be required to file a return even though the income from Virginia sources is exempt from income tax.

4. U.S. Public Law 86-272 (15 USC §§ 381-384) prohibits Virginia from taxing income from Virginia sources if the corporation does not have sufficient connection with Virginia. Corporations whose income from Virginia sources is not subject to tax because of P.L. 86-272 must file a return if they are registered with the State Corporation Commission for the privilege of doing business in Virginia.

5. a. Receivers appointed by a court shall file a return for a corporation if:

(i) property or business of the corporation is being operated by the receiver, or

(ii) the receivers have full custody of and control over the business or property of a corporation.

b. Returns must be filed whether the receivers are carrying on the business for which the corporation was organized or only marshalling, selling or disposing of its assets for the purpose of liquidation.

6. Trustees in dissolution, trustees in bankruptcy and assignees for the benefit of creditors shall file returns for a corporation if they are operating the property or business of the corporation. Property or business is being operated if there are any gross receipts from such property or business.

B. 1. Returns of corporations shall be filed on or before the fifteenth day of the fourth month following the close of the taxable year.

2. Extensions of time to file returns may be granted by the Department under provisions of Va. Code § 58.1-453 and the regulations thereunder.

C. 1. Returns shall be made on forms prescribed by the Department of Taxation.

2. A complete copy of the federal return shall be filed with the Virginia return. Any schedules or other information supplied to the Internal Revenue Service shall also be supplied to the Department of Taxation.

Statutory Authority

§§ 58.1-203 and 58.1-441 of the Code of Virginia.

Historical Notes

Derived from VR630-3-441, eff. January 1, 1985.

23VAC10-120-320. Consolidated and combined returns; general.

A. [Reserved.]

B. Overview. In the first year two or more members of an affiliated group of corporations, as defined in § 58.1-302 of the Code of Virginia, are required to file Virginia returns, the group may elect to file separate returns, a consolidated return or a combined return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department of Taxation. The group may elect to file on a basis different from its federal return(s). Other members of the affiliated group of corporations which become subject to Virginia income tax in subsequent years must conform to the initial election made by the group unless permission to change is granted by the department.

C. Affiliate. Corporations actually included in a consolidated federal return shall be presumed to satisfy the ownership criteria of the definition of "affiliated" in § 58.1-302 of the Code of Virginia and 23VAC10-120-20. A corporation included in a federal consolidated return but which is not subject to Virginia income tax is not an affiliate for Virginia purposes.

D. Federal taxable income.

1. When the affiliated group files federal and Virginia returns on a different basis, or files a federal consolidated return including corporations which are not subject to Virginia income tax, the "federal taxable income" for Virginia purposes of the affiliated group and of each member of the group shall be computed in accordance with the following principles:

a. If the affiliated group files a consolidated Virginia return:

(1) The federal taxable income (before and after deductions for net operating losses, net capital losses, and charitable contributions) of the affiliated group shall be computed as if a federal consolidated return had been prepared that included only the members included in the Virginia consolidated return for the current year. If a federal deduction for a net operating loss, net capital loss or charitable contribution in the current year affects or is affected by another taxable year, then a similar computation shall be made for every such taxable year beginning on and after the year for which an election was made, or permission granted, to file a consolidated Virginia return, and federal taxable income shall be computed on a separate basis for every such taxable year before consolidated Virginia returns were filed.

(2) The federal taxable income shall be computed without giving effect to the deferral of any gain, loss, or deduction arising from a transaction with a corporation not subject to Virginia income tax.

(3) Any deferred gain, loss or deduction arising from a prior transaction with an affiliate shall be recognized for Virginia purposes when the affiliate subsequently ceases to be an affiliate or when the asset involved is transferred to a corporation which is not an affiliate.

(4) The group's federal taxable income for Virginia purposes shall be computed as if each affiliate's losses incurred before joining the Virginia consolidated return had been incurred in a separate return year. This provision shall not operate to create a separate return limitation year within the meaning of U.S. Treasury Reg. § 1.1502-21 or § 1.1502-22 if all three of the following conditions are satisfied with respect to the taxable year of the loss: the affiliate was subject to Virginia income tax and its loss was reported on a timely filed Virginia return; the affiliate satisfied the ownership requirements of the definition of "affiliated" in § 58.1-302 of the Code of Virginia on every day of the taxable year with respect to the group to which the loss will be carried; and either the affiliate was prohibited from being included in a consolidated Virginia return filed by other affiliates solely because of its apportionment factor, or permission to file a consolidated return was granted pursuant to the provisions of 23VAC10-120-324 A 3.

b. If the group files separate Virginia returns or a combined Virginia return, then the federal taxable income (before and after deductions for net operating losses, net capital losses, and charitable contributions) of each member of the group shall be computed as if separate federal returns had been filed. A similar computation shall be made for every other year which affects or is affected by a federal deduction for a net operating loss, net capital loss or charitable contribution in the current year.

c. A group filing a combined Virginia return cannot claim a combined or consolidated deduction for federal net operating losses, net capital losses, or charitable contributions. Each affiliate must compute its separate federal taxable income (including its separate net operating loss deduction) pursuant to this subdivision, together with its separate Virginia NOLD modification pursuant to 23VAC10-120-100 B 5.

d. Whenever the computation of federal taxable income includes a federal net operating loss deduction, the Virginia return for such deduction year shall include an addition or subtraction, as the case may be, that is in such proportion to each loss year's net Virginia NOLD modification as the loss absorbed in the deduction year bears to the total federal net operating loss for the loss year. The loss absorbed in the deduction year taxable income shall be the amount that would be subtracted from the federal net operating loss pursuant to IRC § 172(b)(2) to compute the amount of the loss available in subsequent years, assuming that separate federal returns were filed pursuant to this subsection of this regulation. For example, assume that a 1990 federal net operating loss of $1,000 is carried back and offsets income in 1987 and 1988. The loss absorbed in 1988 is determined by computing the amount of the loss available in 1990 pursuant to IRC § 172(b)(2). If federal rules require that 1988 taxable income of $300 be subtracted from the loss, then 30% ($300 ÷ $1,000) of the net Virginia NOLD modification associated with the 1990 loss must be reported in the 1988 Virginia return.

2. If an election under Internal Revenue Code § 338(h)(10) is made (allowing a sale of stock in a subsidiary to be treated as a sale of the subsidiary's assets), then the Virginia returns of any members of the selling group that are affected by such election shall reflect the amount and character of income recognized in the federal consolidated return.

3. The details of the computation of federal taxable income shall be disclosed in the return together with copies of any federal returns filed.

Statutory Authority

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

Historical Notes

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

23VAC10-120-321. Separate return; description; filing.

A. Description. A separate return shows only the income, expenses, gains, losses, allocable income, and apportionment factors of the filing corporation. All affairs of other members of the affiliated group are ignored unless § 58.1-446 of the Code of Virginia applies.

B. Filing. If the affiliated group filed a consolidated federal return and the filing corporation files a separate Virginia return, a complete copy of the federal consolidated return must be filed with the Virginia return. If the federal return is so voluminous that it is impractical to file a complete copy with the Virginia return, the complete federal return must be made available to the department upon request. A worksheet must accompany the federal consolidated return, showing the adjustments and eliminations for consolidation in form similar to that set forth in 23VAC10-120-322 C.

Statutory Authority

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

Historical Notes

Derived from VR630-3-442 § 2, eff. January 1, 1985; amended, eff. March 10, 1993.

23VAC10-120-322. Consolidated returns; description; eligible members; filing; consent.

A. Description. A consolidated return is a single return for all eligible members of an affiliated group of corporations. The return shall show consolidated net income prepared in accordance with IRC § 1502 and the regulations thereunder and consolidated apportionment factors (See §§ 58.1-407 through 58.1-420 of the Code of Virginia).

B. Eligible members.

1. A consolidated return must include the net income and apportionment factors of all members of an affiliated group which would be subject to Virginia income tax if separate returns were to be filed. However, in the first year two or more members of an affiliated group are required to file a Virginia income tax return, all members subject to Virginia income tax and otherwise eligible to participate in a Virginia consolidated return in that first year must have the same taxable year end in order for the group to elect consolidated filing. In order for the affiliate's income to be includible in a Virginia consolidated return, each new affiliate created or purchased after the initial Virginia consolidated return filing must adopt the taxable year end of the original group for the new affiliate's first full 12-month taxable year and thereafter.

2. A consolidated return may not include corporations which are: (i) exempt from Virginia income tax under § 58.1-401 of the Code of Virginia or U.S. Public Law 86-272 (15 USC §§ 381-384), or (ii) not affiliated as defined by § 58.1-302 of the Code of Virginia, or (iii) not subject to Virginia income tax if separate returns were to be filed, or (iv) using different taxable years. For purposes of clause (iv) a corporation shall not be deemed to be using a different taxable year if it files a return for a period of less than 12 months and all of the months are within the taxable year of the consolidated group.

3. No affiliated corporations, otherwise eligible, will be denied the privilege of consolidation merely because other members of the affiliated group are not eligible to be included.

C. Filing. A complete copy of the federal consolidated return, or the separate federal return of each corporation included in the consolidated Virginia return, must be filed with the Virginia return. If the federal return is so voluminous that it is impractical to file a complete copy with the Virginia return, the complete federal return shall be made available to the department upon request. All supplementary and supporting schedules filed with a consolidated Virginia return should be prepared in columnar form, one column being provided for each corporation included in the consolidation, one column for a total of like items before adjustments are made, one column for intercompany eliminations and adjustment, and one column for a total of the like items after giving effect to the eliminations and adjustments. The items included in the columns for eliminations and adjustments should be symbolized so as readily to identify contra items affected, and suitable explanations appended, if necessary.

D. Consent.

1. The filing of a consolidated return requires the consent of all corporations eligible to be included. The filing of a consolidated return will be deemed to be consented to by all eligible corporations included therein. See 23VAC10-120-380 for requirements as to the execution of the consolidated return and consent to be included.

2. Once a consolidated return has been filed all subsequent returns by such corporations, their successors, and other members of the affiliated group who are subsequently required to file a Virginia income tax return, must also be filed on a consolidated basis unless the department grants permission to change from a consolidated return.

Statutory Authority

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

Historical Notes

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

23VAC10-120-323. Combined returns; description; eligible members; filing; consent.

A. Description. For a combined return the Virginia taxable income or loss is separately determined for each eligible corporation. The Virginia taxable income is then separately allocated and apportioned for each eligible corporation using each corporation's commercial domicile and apportionment factors. The resulting income or loss from Virginia sources is then combined and reported on a single return.

B. Eligible members.

1. Members of an affiliated group are eligible to file a combined return if they are: (i) subject to Virginia income tax if a separate return were to be filed, and (ii) affiliated as defined by § 58.1-302 of the Code of Virginia, and (iii) filing using the same taxable year. For the purpose of determining eligibility to be included in a combined return, a corporation shall not be deemed to be using a different taxable year if it files a return for a period of less than 12 months and all of the months are within the taxable year of the combined group.

2. Members of an affiliated group are eligible to file combined even though they use different apportionment formulas.

C. Filing. A combined return shall contain all of the information that would be contained in a separate return for each corporation. A copy of the federal consolidated return, or the separate federal returns of each corporation included in the combined return, must be filed with the Virginia return. If the federal return is so voluminous that it is impractical to file a complete copy with the Virginia return, the complete federal return shall be made available to the department upon request. In addition, a schedule shall be included with the Virginia return showing the separate income, adjustments, allocation and apportionment factors for each included corporation.

D. Consent. The filing of a combined return requires the consent of all of the corporations eligible to be included. The filing of a combined return will be deemed to be consented to by all eligible corporations included therein. All subsequent returns must also be filed on a combined basis. See 23VAC10-120-380 for requirements as to execution of the combined return and the required consent of each included corporation.

Statutory Authority

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

Historical Notes

Derived from VR630-3-442 § 4, eff. January 1, 1985; amended, eff. March 10, 1993.

23VAC10-120-324. Consolidated and combined returns; permission to change.

A. To or from consolidated.

1. Permission to change to or from filing consolidated returns will generally not be granted. Such changes affect the allocation and apportionment factors and distort the business done in Virginia and the income arising from activity in Virginia.

2. If granted, permission to change will generally be effective only for returns filed on and after the date the request for permission to change was filed.

3. Permission to file a consolidated return will generally be granted if timely requested by a group including corporations that would be required to use different apportionment factors. A request is timely filed if it is filed on or before the due date for the first Virginia return for an affiliate which was owned by the same interests on January 1, 1990, and which would be required to use an apportionment factor that is not the same as that required to be used by all other affiliates of the group in previous Virginia returns, whether or not any affiliate is subject to tax in another state.

B. To or from combined.

1. Separate and combined returns do not affect the allocation and apportionment formulas for each corporation and permission to change from separate to combined returns or from combined to separate returns will generally be granted.

2. If granted, permission to change will generally be effective only for returns filed on and after the date the request for permission to change was filed.

C. Election. Elections as to filing method are deemed to be made by the affiliated group as a whole. Changes in the membership of an affiliated group do not affect the original election by the affiliated group. If a new corporation becomes a member of the affiliated group, the new corporation must follow the filing method previously elected by the group.

D. Short year return. The filing of a separate short year federal and Virginia return upon organization or acquisition of a new corporation will not be deemed an election of separate return status. The filing of the first return for a 12-month taxable year beginning on or after the date of organization or acquisition of a new corporation which creates the affiliated group will be deemed the filing which elects a return filing status.

Statutory Authority

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

Historical Notes

Derived from VR630-3-442 § 5, eff. January 1, 1985; amended, eff. March 10, 1993.

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).

Statutory Authority

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

Historical Notes

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

23VAC10-120-326. Consolidated return; mixed apportionment factors.

A. Three factor required. If a consolidated Virginia return will include corporations that are required to use different apportionment factors, the return shall use a three factor apportionment formula that includes the property, payroll, and sales of all affiliates.

B. Computation. The consolidated property, payroll, and sales factors of the group shall be computed as follows:

1. With respect to a corporation that is required to use a single apportionment factor under §§ 58.1-417, 58.1-418, 58.1-419 or 58.1-420 (single factor affiliate), the group shall:

a. Include in the consolidated property, payroll, and sales factor denominators amounts with respect to the single factor affiliate determined following the normal rules for each factor;

b. Include in the consolidated property factor numerator an amount constructed by multiplying the amount includible in the property factor denominator determined in subdivision a above by the percentage derived from the appropriate factor prescribed for the single factor affiliate;

c. Include in the consolidated payroll factor numerator an amount constructed by multiplying the amount includible in the payroll factor denominator determined in subdivision a above by the percentage derived from the appropriate factor prescribed for the single factor affiliate; and

d. Include in the consolidated sales factor numerator an amount constructed by multiplying the amount includible in the sales factor denominator determined in subdivision a above by the percentage derived from the appropriate factor prescribed for the single factor affiliate.

2. With respect to all affiliates other than single factor affiliates, the group shall determine the property, payroll, and sales to be included in the consolidated numerators and denominators following the normal rules appropriate to each factor.

Statutory Authority

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

Historical Notes

Derived from VR630-3-442 § 7, eff. January 1, 1985; amended, eff. March 10, 1993.

23VAC10-120-327. Consolidated and combined returns; examples.

The principles of this regulation are illustrated by the following examples:

Example 1. Corporations A, B, C, D, E, F and G constitute a controlled group of corporations within the meaning of Section 1563 of the Internal Revenue Code. Corporations A, B, and C are manufacturing companies, subject to the Virginia income tax. Corporations D and E are motor carriers, subject to the Virginia income tax. Corporation F is a Virginia-based insurance company exempt from Virginia income tax under § 58.1-401 of the Code of Virginia. Corporation G is a manufacturing company exempt from the Virginia income tax under Public Law 86-272.

(a) Corporations A, B, C, D, and E may file a consolidated return. If corporations D and E were not included in consolidated returns filed prior to 1990 because they were not subject to the same three-factor apportionment formula, they must be included in the consolidated return for the group filed for years after 1989. Corporations F and G may not be included because they are not subject to the Virginia income tax.

(b) Corporations A, B, D, and E may not file a consolidated return without corporation C. All eligible corporations must be included in a consolidated return. If corporation C is on a different fiscal year than corporations A, B, D, and E, it must change its fiscal year in order for a consolidated return to be filed.

(c) If corporations D and E filed a consolidated return for years prior to 1990, although consolidation was not elected for corporations A, B, and C, then the consolidated return for years after 1989 must include corporations A, B, and C.

Example 2. Same facts as in example 1 above. Corporations A, B C, D, and E file consolidated Virginia returns for 1990 and 1991. In 1992 corporation G expands its activity within Virginia and becomes subject to Virginia income tax. Corporation G must be included in the 1992 consolidated Virginia return with corporations A, B C, D, and E. The corporations may not file separate returns unless they apply to the department for permission.

Example 3. An affiliated group of five corporations has filed a consolidated federal return the three preceding years, and for calendar year 1990 the group reported a consolidated net operating loss. All five corporations are subject to tax in Virginia in 1990, but none of the corporations were subject to tax in Virginia in prior years. The relevant lines of the federal return are shown below.

a. If the group elects to file a consolidated Virginia return the consolidated federal taxable income for Virginia purposes would be (400) because the group's net operating loss deduction cannot create or increase a federal net operating loss. Line 1 of the Virginia return is shown below.

Assuming that the group has no federal taxable income in the preceding taxable years to absorb net operating loss deductions, the group would carry the prior year losses of (75) and the 1990 loss of (400) to 1991 together with the appropriate portion of the net Virginia modification from the respective loss years (see examples 4 and 5).

b. If the group elects to file separate returns the sum of the separate federal taxable incomes for Virginia purposes would total (425). Corporation C's federal net operating loss deduction of (50) from prior years cannot increase C's 1990 federal net operating loss for Virginia purposes, while D's federal net operating loss deduction is absorbed to the extent of D's income. Line 1 of the Virginia return is shown below.

Each corporation must carry its 1990 loss back three years as if separate federal returns had been filed for those years. Thus, for Virginia purposes corporations B's and E's 1990 federal net operating losses will be deemed to have been absorbed by any separate federal taxable income in 1987, 1988, and 1989 (even though no Virginia returns were required to be filed for those years). Any loss not absorbed by the separate federal taxable income of the corporations would be available to carry forward to 1991 together with each corporation's net 1990 Virginia modification. Since C has a federal net operating loss deduction in 1990, there can be no federal taxable income in prior years against which to offset the loss. Therefore, the entire federal net operating loss deduction of (150) for 1990 and prior years may be carried forward to 1991.

c. If the group elects to file a combined Virginia return the amount reported as the separate federal taxable income for each affiliate (for purposes of the combined return) is deemed to be computed as if separate federal returns were filed. The years to which the federal net operating losses are carried and the amounts absorbed each year for Virginia purposes are deemed to be computed as if separate federal returns were filed, regardless of the type of federal returns actually filed in the carryback or carryover year. The portion of the combined net Virginia modification which follows each corporation's 1990 federal net operating loss would be computed as required by 23VAC10-120-325 D (see example 6).

Example 4. Same facts as in example 3 except that: (i) the group elects to file a consolidated Virginia return, (ii) there is no federal taxable income in prior years to absorb the 1990 federal net operating loss, and (iii) the group is subject to Virginia tax in years prior to 1990. The group would carry the 1990 federal net operating loss to 1991 along with unabsorbed losses from prior years. Both the losses from prior years and the 1990 loss carry with them the net Virginia modifications from each loss year. For 1990 the net Virginia modification is the sum of the consolidated additions of 133 and consolidated subtractions of (86) for a total modification of 47 that follows the 1990 consolidated federal net operating loss of (400). Assume that the (75) consolidated federal net operating loss from prior years carries with it a net Virginia modification of 35. The relevant lines of the 1991 federal and Virginia returns are shown below.

Example 5. Same facts as examples 3 and 4. The portion of the consolidated federal 1990 loss, and accompanying Virginia modification, attributable to each affiliate must be computed. The relevant lines of the consolidated 1990 Virginia return are shown below.

Federal net operating losses: The 1990 consolidated federal net operating loss must be divided among the loss corporations in proportion to their operating losses using the principles of U.S. Treasury Regulation § 1.1502-79. The amount reported for Virginia purposes by each loss corporation as a federal net operating loss deduction attributable to 1990 is computed as follows:

B: (120.00) = 150 ÷ (150 + 100 + 250) X (400)

C: (80.00) = 100 ÷ (150 + 100 + 250) X (400)

E: (200.00) = 250 ÷ (150 + 100 + 250) X (400)

Net Virginia modification: The amount of the 1990 net Virginia modifications that are associated with B's, C's, and E's portion of the consolidated 1990 federal net operating loss for Virginia purposes is computed by first computing a tentative Virginia loss as follows:

B: (146.36) = 180 ÷ (180 + 48 + 200) X (348)

C: (39.03) = 48 ÷ (180 + 48 + 200) X (348)

E: (162.61) = 200 ÷ (180 + 48 + 200) X (348)

The difference between each loss corporation's portion of the consolidated federal net operating loss and the tentative Virginia loss is the amount of consolidated income, additions and subtractions that was offset in the consolidated Virginia return by corporation's loss (the amount modifying the federal net operating loss). This amount is computed as follows:

B: (26.36) = (146.36) - (120.00) or a net subtraction of $26.36

C: 40.97 = (39.03) - (80.00) or a net addition of $40.97

E: 37.39 = (162.61) - (200.00) or a net addition of $37.39

Example 5.A. Same facts as Example 5, except that E is not subject to Virginia income tax in 1991. For the 1991 Virginia consolidated return, the group consisting of A, B, C, and D may claim a federal net operating loss deduction in computing federal taxable income for Virginia income tax purposes of 275.00, computed as follows:

(75.00) = Consolidated losses prior to 1990 (C and D)

(120.00) = B's portion of the 1990 consolidated loss

(80.00) = C's portion of the 1990 consolidated loss

(275.00) = Total consolidated net operating loss deduction

Assume that for federal purposes, the following amounts of net operating loss were utilized in 1991:

(90.00) = B's federal net operating loss utilized

A Virginia modification accompanies B's federal net operating loss utilized, computed as follows:

(19.77) = the net subtraction from 1990 of $26.36, multiplied by .75 ($90.00 federal loss utilized divided by $120.00 total loss available).

The total net Virginia modifications remaining for losses carried to 1992 are:

35.00 = Consolidated net Virginia modification associated with losses prior to 1990

(6.59) = B's portion of the 1990 consolidated net Virginia modification remaining after offsetting the portion of the 1990 federal net operating loss utilized in 1991, (26.36 original modification, less (19.77) utilized in 1991)

40.97 = C's portion of the 1990 consolidated net Virginia modification

69.38 = Total net Virginia modification that follows the total federal net operating losses of (275.00).

If E becomes subject to Virginia income tax in 1992, it will be deemed to have claimed a federal net operating loss deduction of (200.00) in computing its separate 1991 federal taxable income for Virginia purposes. To the extent any of the (200.00) was absorbed in 1991 for federal purposes, the same portion of E's consolidated net Virginia modification (37.39) will also be deemed to have been used.

Example 6. Same facts as in Example 3 except that the group elects to file a combined Virginia return. The relevant lines of the 1990 Virginia return are set out below.

Note that the totals in the "TOTAL" (combined) column are provided for convenience. The actual combination on a Virginia combined return takes place only on the line labeled "income of a multistate." When each corporation's income is computed separately, D's federal net operating loss from a prior year is absorbed; and, therefore, a net Virginia NOLD modification associated with it must be reported.

Federal net operating loss: The amount that will be carried back or over in computing federal taxable income for Virginia purposes is equal to the separate federal net operating loss for B, C, and E.

Net Virginia NOLD modification: Although C has a federal net operating loss, its separate income of a multistate is positive. Pursuant to 23VAC10-120-325 D 1 b of this regulation, C's federal net operating loss of $100 will carry with it a net Virginia NOLD modification equal to an addition of $100.

Affiliates B and E have both a federal net operating loss and a loss after allocation and apportionment. They must compute an addition pursuant to 23VAC10-120-325 D 1 c, utilizing the steps enumerated below.

Step 1: Compute the income offset in combination:

Because of filing in a combined return, the $85 income of A, C, and D offsets a portion of the $146 loss of B and E (A's loss is not attributable to a federal net operating loss). The income offset in combination ($85) is computed using the summation method:

$85 = (4) + 3 +86

Step 2: Allocate the income offset in combination between the appropriate affiliates:

The procedure outlined in U.S. Treasury Regulation § 1.1502- 79 is then used to divide the $85 income offset in combination among B and E in proportion to their loss after allocation and apportionment, ($93) and ($53), respectively.

B: $54.14 = $85 X ( 93 ÷ (93 + 53))

E: $30.86 = $85 X (53 ÷ (93 + 53))

Therefore, $54 of B's $93 loss, and $31 of E's $53 loss, respectively, are deemed to have offset the income, after allocation and apportionment, of other affiliates in the combined Virginia return.

Step 3: Compute the amount of B's and E's federal net operating loss deemed to offset the income of the other affiliates, and the Virginia modification accompanying B's and E's federal net operating loss.

In a combined return, B's and E's federal net operating loss offsets the income of other affiliates after allocation and apportionment. However, since B's and E's federal net operating loss is on a preapportionment basis, the Virginia modification must be on a preapportionment basis as well. This modification is computed by converting B's and E's post apportionment offsetting losses to an amount equivalent to an addition before allocation and apportionment, and adding B's and E's separate Virginia additions and subtractions. The conversion steps are summarized below:

Note that the totals in the "TOTAL" column are provided for convenience only and have no relevance to the actual computation of the separate net Virginia NOLD modification for B and C.

Explanation:

E's after apportionment loss was first used to offset all of E's income allocated to Virginia (B had no income allocated to Virginia). Therefore, E's portion of the income offset by combination is first increased by its income allocated to Virginia: 41 = 31 + 10. This amount is then "grossed up" by dividing by the apportionment factor. Both B and E had income allocable everywhere that increased the loss apportioned to Virginia. Since the Virginia modification should only account for the amount of federal net operating loss offsetting the income of other affiliates, the income allocable everywhere must be subtracted from the "grossed up" amount to compute the amount equivalent to an addition before allocation and apportionment. Note that this addition before allocation and apportionment represents the amount of federal net operating loss actually utilized by B and E in offsetting the income of other affiliates. B and E then add this equivalent addition to their own additions and subtractions for the loss year to arrive at the net Virginia NOLD modification. Note that the net Virginia NOLD modification may be either positive or negative. This modification would be negative if an affiliate's subtractions exceeded the addition equivalent computed above.

Example 6.A. Assume the same facts as in Example 6. This example is a combined Virginia return for A, B, C, D, and E for 1991. Assume that B and E had $100, and $50, respectively, of federal taxable income on Line 28, Form 1120, resulting in the utilization of $(100) and $(50), respectively, of B's and E's of B's federal net operating loss carryforward in computing 1991 federal taxable income. On a schedule attached to the affiliated group's combined Virginia income tax return, the amount of federal taxable income for Virginia purposes for B and E would be computed on an additional schedule in the following manner:

(i) Compute the percentage of federal net operating loss utilized:

B: 67% = $100 utilized ÷ $150 available

E: 20% = $ 50 utilized ÷ $250 available

(ii) Compute the amount of net Virginia NOLD modification following B's and E's federal net operating loss.

B: $48.24 = 67% * $72 (1990 net Virginia NOLD modification)

E: $35.40 = 20% * $177 (1990 net Virginia NOLD modification)

(iii) Compute the federal taxable income for Virginia tax purposes of B and E.

B: $48.24 = $100 Line 28, Form 1120 federal income - $(100) federal NOL carryforward + $48.24 net Virginia NOLD modification

E: $35.40 = $40 Line 28, Form 1120 federal income - $(40) federal NOL carryforward + $35.40 net Virginia NOLD modification

Example 7. Corporation F is a motor carrier and its Virginia vehicle mile factor under § 58.1-417 of the Code of Virginia is 25%. Corporation G is a railroad and its Virginia revenue car mile factor under § 58.1-420 is 10%. For 1990 the corporations have been granted permission to file a consolidated Virginia return. The consolidated denominators of the property, payroll, and sales factors are as follows:

A consolidated numerator for each of the factors would then be constructed. The consolidated property factor numerator would be the sum of F's vehicle mile factor times F's property and G's revenue car mile factor times G's property, or 255 (25% of 300 + 10% of 1,800). Similarly, the consolidated payroll factor numerator would be 50 (25% of 100 + 10% of 250), and the consolidated sales factor numerator would be 190 (25% of 400 + 10% of 900). The consolidated apportionment factor would be one-third of (255/2,100 + 50/350 + 190/1,300), or 13.6813%.

Example 8. For the 1990 return the group requests and is granted permission to file a consolidated Virginia return. The group previously filed a Virginia combined return. Pursuant to 23VAC10-120-320 D 1 a (4) the change in filing status will not create a separate return limitation year. Selected information from the federal and Virginia consolidated returns for 1990 and 1991 is shown below.

Although both federal and Virginia returns are filed on a consolidated basis, the federal information must be restated as if separate federal returns had been filed for years prior to 1990 except, in this case, the separate return limitation rules do not apply. When restating federal return information for 1991, the consolidated net capital loss and net operating loss from 1990 would be absorbed and, because separate return limitation rules do not apply, all of A's losses from 1987, 1988, and 1989 may also be absorbed together with all of their associated net Virginia NOLD modifications as shown below:

Example 9. Same facts as in example 8 except that B filed separate returns because A was not subject to Virginia tax until 1990 when the group elected to file a consolidated return. Under these circumstances the federal return information for Virginia purposes must be restated as if the group filed their first consolidated federal return in 1990 including any applicable separate return limitation year rules. Selected information from the 1991 return is shown below.

When federal return information is restated for Virginia purposes as if the first federal consolidated return was filed in 1990, all of the 1990 consolidated federal capital loss may be used to offset 1991 consolidated federal capital gain. Similarly, all of the 1990 consolidated net operating loss may be used to offset 1991 consolidated operating income. However, years prior to 1990 would be separate return limitation years. Therefore, A's net operating losses from years prior to 1990 may not offset income of other affiliates in the 1991 consolidated return.

For Virginia purposes all of the available net operating losses are deemed to be from A. For Virginia purposes B's separate 1987 federal net operating loss was entirely absorbed by B's separate 1988 and 1989 federal taxable income. On the actual 1988 federal return B's income reduced the consolidated net operating loss for 1988 instead of absorbing any of B's separate 1987 loss.

Statutory Authority

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

Historical Notes

Derived from VR630-3-442 § 8, eff. January 1, 1985; amended, eff. March 10, 1993.

23VAC10-120-330. Prohibition of worldwide consolidation or combination.

A consolidated or combined return may not include a controlled foreign corporation the income of which is derived from sources without the United States.

1. A controlled foreign corporation is a corporation which:

a. is organized under the laws of a foreign country, and

b. has its commercial domicile in a foreign country, and

c. is an affiliate of one or more corporations having income from Virginia sources.

2. The income of a controlled foreign corporation is derived from sources without the United States if:

a. such controlled foreign corporation is not subject to income tax under the laws of the United States, and

b. dividends paid by such controlled foreign corporation would qualify as "income from foreign sources" under § 58.1-302 of the Code of Virginia.

Statutory Authority

§§ 58.1-203 and 58.1-443 of the Code of Virginia.

Historical Notes

Derived from VR630-3-443, eff. January 1, 1985.

23VAC10-120-340. (Repealed.)

Historical Notes

Derived from VR630-3-444 §§ 1, 2, eff. January 1, 1985; amended, eff. June 30, 1993; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-350. Consolidation of accounts.

A. 1. This section allows the Department of Taxation to consolidate the accounts of two or more related trades or businesses which are owned or controlled directly or indirectly by the same interests and liable to taxation under this chapter, if the Department determines such consolidation is necessary to accurately distribute or apportion gains, profits, income, deductions or capital between or among such trades or businesses.

2. If related trades or businesses have been conducted in such a manner that income is inaccurately stated, the Internal Revenue Service will usually apply IRC § 482 to make necessary adjustments. This section applies to situations in which the federal taxable income is accurately stated but the income from Virginia sources taxable by Virginia is inaccurate.

3. If one of the related trades or businesses is a corporation, § 58.1-446 of the Code of Virginia may also apply.

B. 1. "Trades or businesses" means any trade or business which keeps its own accounting records and which is required to make a separate report of its income to the Department of Taxation or any other taxing authority.

2. "Related." Trades or businesses are related if they are doing business with each other directly or indirectly. Such business dealings may consist of buying and selling of goods, services or other property, or borrowing or lending money or other property.

3. "Liable to taxation under this chapter." A trade or business is liable to taxation under this chapter if:

a. in the case of a sole proprietorship, the owner is subject to Virginia income tax;

b. in the case of a partnership, any of the partners is subject to Virginia income tax;

c. in the case of a corporation, it is subject to Virginia income tax;

d. in the case of an electing small business under Subchapter S of the Internal Revenue Code, any of the shareholders is subject to Virginia income tax;

e. in any case where an owner, partner or shareholder is an estate or trust, either the estate or trust is subject to Virginia income tax or any beneficiary is subject to Virginia income tax on distributions from such estate or trust.

4. "Owned or controlled directly or indirectly." A trade or business is owned or controlled directly or indirectly by another person or entity if such other person or entity has substantial influence over the manner in which the business is conducted. Substantial influence may be exerted by owners, shareholders, partners and others depending upon the facts and circumstances of each case.

5. "Same interests." Two or more related trades or businesses are owned or controlled directly or indirectly by the same interests if any one person or entity, or group of persons or entities acting together, has enough ownership or control of each trade or business to have substantial influence over the manner in which the business is conducted. The nature of the ownership or control interest does not have to be identical for each trade or business.

6. "Accurate distribution or apportionment." The purpose of this section is to assure that items of income, gain, profit, deductions and capital are properly distributed or apportioned between taxpayers who may be taxable at different rates, by different methods or in different states.

7. "Consolidate the accounts." If the Department finds it necessary to consolidate the accounts of two or more related trades or businesses then the accounts will be adjusted in order to accurately distribute or apportion gains, profits, income, deductions or losses of such trades or businesses.

8. "Request of the taxpayer." A taxpayer may request permission to consolidate accounts of related trades or businesses by filing an amended return using the proposed consolidation and shall attach an explanation of nature and cause of the distortion of income from Virginia sources and an explanation of why the consolidation of accounts is necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions or capital between or among such related trades or businesses. If the Department finds that consolidation is necessary, the tax shall be adjusted accordingly.

Statutory Authority

§§ 58.1-203 and 58.1-445 of the Code of Virginia.

Historical Notes

Derived from VR630-3-445, eff. January 1, 1985.

23VAC10-120-360. (Repealed.)

Historical Notes

Derived from VR630-3-446 §§ 1 to 5, eff. January 1, 1985 or VR630-3-446.1 §§ 1-3, eff. March 10, 1993; amended, eff. March 10, 1993; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-380. Execution of returns.

A. The return of a corporation with respect to its income shall be signed by one of the following officers: president, vice-president, treasurer, assistant treasurer, chief accounting officer or any other officer duly authorized to act. In the case of a return made for a corporation by a fiduciary such as a receiver, trustee or assignee, such fiduciary shall sign the return. The fact that an individual's name is signed on the return shall be prima facie evidence that such individual is authorized to sign the return on behalf of the corporation.

B. The return of an affiliated group of corporations shall be signed by an officer of the lead corporation. The name and address of the lead corporation shall be shown on the return. All correspondence from the department to the affiliated group may be mailed to the lead corporation. The lead corporation will usually be a parent corporation, if the parent is subject to tax in Virginia, but may be any member subject to the tax in Virginia.

The return shall contain the following information for each member of the affiliated group included in the return:

1. Name, address and taxpayer I.D. No. of each consenting corporation,

2. Name, title and telephone number of an officer authorized to sign a return for the member,

3. Name and address of the person with custody of the books of the member.

Statutory Authority

§§ 58.1-203 and 58.1-447 of the Code of Virginia.

Historical Notes

Derived from VR630-3-447 §§ 1, 2, eff. January 1, 1985; amended, eff. June 30, 1993.

23VAC10-120-390. Supplemental reports.

A. Audits. During the course of an office or field audit the department may request additional information if the auditor determines that the information is necessary to compute the tax. For example, when an adjustment is contemplated under § 58.1-446 of the Code of Virginia, the department will ask for a copy of the federal return of the Domestic International Sales Company.

B. Penalty. If the additional information or supplemental report is not supplied within a reasonable time after written demand, the penalty under § 58.1-450 of the Code of Virginia may be imposed.

Statutory Authority

§§ 58.1-203 and 58.1-449 of the Code of Virginia.

Historical Notes

Derived from VR630-3-449, eff. January 1, 1985.

23VAC10-120-400. Extension of time for filing returns.

A. Automatic extension. Whenever a corporation has been granted an extension of time for filing by the Internal Revenue Service, a similar extension will be granted to a date thirty days after the extended federal due date but not later than six months after the due date required by Virginia law. In other words, an extension will not be granted beyond the fifteenth day of the tenth month following the close of the taxable year.

A penalty will be imposed unless a tentative tax return is filed and the tax paid as provided in subsection C of this section.

B. Good cause extension. When no federal extension has been granted, the department may grant an extension for filing if the taxpayer shows good cause for requesting such an extension. The extension may not exceed six months.

A penalty will be imposed unless a tentative tax return is filed and the tax paid as provided in subsection C of this section.

C. Tentative tax return. Any corporation requesting an extension of time for filing its return must file a tentative tax return with the request. The tentative tax return must estimate the tax liability of the corporation and be accompanied by payment of the balance due after allowance for prior payments of estimated tax and prior tentative tax returns, if any.

Interest will accrue under § 58.1-1812 of the Code of Virginia on any unpaid tax liability from the due date of the return without regard to any extensions. This section extends only the date for filing a return, not the date for payment of the tax.

If the underestimation of the balance of tax due exceeds ten percent of the actual tax liability a penalty will be imposed. The penalty is one half of one percent per month for each month or fraction thereof from the original due date for the filing of the income tax return to the date of payment. The penalty will be imposed in addition to interest under § 58.1-1812 of the Code of Virginia.

D. Application procedure. The extension request and tentative tax return must be filed before the original due date of the return. An additional extension may be requested if filed before the expiration of a previous extension. Requests will not be acknowledged or returned unless the request for extension is denied. A copy of each extension request and tentative tax return shall be attached to the income tax return when filed.

Statutory Authority

§§ 58.1-203 and 58.1-453 of the Code of Virginia.

Historical Notes

Derived from VR630-3-453, eff. January 1, 1985.

23VAC10-120-410. Time of payment of corporation income taxes.

A. In general. The tax payable as shown on the face of the return shall be paid on or before the due date of the return. Where an extension of time for filing the return has been obtained pursuant to § 58.1-453 of the Code of Virginia, the balance of the actual tax due shall be paid on or before the due date as extended.

B. Penalty. If the tax, or unpaid balance of the tax, is not paid in full when due then a penalty of five percent of the unpaid tax shall be imposed. No penalty will be imposed on the late payment of a tax, or portion of the tax, if all three of the following conditions are satisfied:

1. The unpaid tax is attributable to an assessment of additional tax by the department, and

2. The return was filed by the taxpayer in good faith, and

3. The understatement of tax in the return was not due to any fault of the taxpayer.

C. Interest. If the penalty is imposed, interest under § 58.1-1812 of the Code of Virginia shall accrue on the unpaid tax and penalty from one month after the original due date of the return (without regard to any extensions) until paid.

If no penalty is imposed, interest under § 58.1-1812 of the Code of Virginia shall accrue on the unpaid tax from the original due date of the return (without regard to any extension) until paid.

Statutory Authority

§§ 58.1-203 and 58.1-455 of the Code of Virginia.

Historical Notes

Derived from VR630-3-455, eff. January 1, 1985.

23VAC10-120-420. Declarations of estimated income tax required.

A. In general. Every corporation which expects its income tax to exceed $1,000 for the taxable year is required to file a declaration of estimated tax and to pay the tax in installments during the taxable year. The payments of estimated tax are considered payments on account of the income tax for the taxable year and shall be applied toward payment of the income tax upon filing of the income tax return for the taxable year. The declaration of estimated tax may be amended with each installment and subsequent payments adjusted accordingly. No refund of estimated tax can be made until the income tax return is filed except in extraordinary circumstances. For example, if a credit union pays estimated tax without realizing that it is exempt from income tax under § 58.1-401 of the Code of Virginia, it would be entitled to a refund of estimated tax because a credit union is not required to file an income tax return.

B. Who to file.

1. A declaration of estimated tax shall be made by every corporation which is subject to the Virginia income tax under § 58.1-400 of the Code of Virginia if its income tax less the credit allowable under §§ 58.1-430 (relating to credit for investments under the Neighborhood Assistance Act of 1981) and 58.1-431 of the Code of Virginia (relating to the Energy Income Tax Credit) can reasonably be expected to exceed $1,000.

2. The term "estimated tax" means the amount which the corporation estimates as the amount of the income tax for the taxable year less the amount which the corporation estimates as the sum of any credit allowable against the income tax under §§ 58.1-430 and 48.1-431 of the Code of Virginia. For the purpose of determining if a declaration of estimated tax is required, a refund of income tax for prior taxable year, which the corporation requests be applied toward the estimated tax for the subsequent taxable year, is not an allowable credit but a payment of the estimated tax. For example, a corporation which estimates its 1984 income tax to be $2,500, its Energy Income Tax Credit to be $1,000 and which has a refund from 1983 of $300 has an "estimated tax" of $1,500. The $300 refund may be applied toward the first quarterly installment payment of $375 (1,500/4).

C. Contents of declaration.

1. The declaration of estimated tax shall be made on form 500-ES. For the purpose of making the declaration, the estimated tax should be based upon the amount of federal taxable income for the federal estimated tax plus the estimated net Virginia modifications. Such amounts of federal taxable income and net Virginia modifications should be determined upon the basis of facts and circumstances existing as at the time prescribed for the declarations as well as those reasonably to be anticipated for the taxable year.

2. Copies of form 500-ES will so far as possible be furnished taxpayers by the Department. A taxpayer will not be excused from making a declaration, however, by the fact that no form has been furnished. Taxpayers not supplied with the proper form should make application therefor to the Department in ample time to have their declarations prepared, verified, and filed with the Department on or before the date prescribed for filing the declaration. If the prescribed form is not available a statement disclosing the estimated income tax should be filed as a tentative declaration within the prescribed time, accompanied by the payment of the required installment. Such tentative declaration should be supplemented, without unnecessary delay, by a declaration made on the proper form.

D. Short taxable year. If a corporation expects its income tax less allowable credits to exceed $1,000 for a short taxable year then such corporation shall make a declaration of estimated tax. If the short taxable year results from a change in accounting period, the tax shall be placed on an annual basis to determine if the annualized tax exceeds $1,000. The tax shall be placed on an annual basis by multiplying the expected income tax less allowable credits by 12 and dividing by the number of months in the short taxable year.

E. Consolidated and combined returns.

1. Affiliated groups of corporations which have properly elected, or received permission, to file Virginia income tax returns on a consolidated or combined basis shall also make declarations of estimated tax on a consolidated or combined basis.

2. Corporations registering with the State Corporation Commission for the privilege of doing business in Virginia will receive a "Combined Registration Application" to register the corporation for Sales and Use, Withholding, Litter and Income taxes. Corporations which have decided to file their Virginia income tax returns on a consolidated or combined basis at the time of registration should so indicate on the application. An affiliated group of corporations makes an election to file returns on a separate, consolidated or combined basis when two or more members of the affiliated group file their first income tax returns. Thereafter the affiliated group must obtain permission from the Department to change the method of reporting. Members of the affiliated group which become subject to Virginia income tax in subsequent years must use the method of reporting previously elected by the group. For additional information on separate, consolidated and combined returns see 23VAC10-120-320 through 23VAC10-120-327. The filing of a registration application or declaration of estimated tax is not an election of a method of reporting.

Statutory Authority

§§ 58.1-203 and 58.1-500 of the Code of Virginia.

Historical Notes

Derived from VR630-3-500, eff. January 1, 1985.

23VAC10-120-430. Time for filing declarations.

A. In general. If a corporation expects its income tax less allowable credits to exceed $1,000 at the beginning of the taxable year then the corporation must make its declaration of estimated tax on or before the 15th day of the 4th month of the taxable year (April 15 for a calendar year corporation) and the declaration must be accompanied by the installment payment for the first quarter.

Corporations which expect their income tax less allowable credits to exceed $1,000 as a result of events occurring after the beginning of a taxable year shall make a declaration of estimated tax at the time specified below. Examples of events occurring after the beginning of a taxable year are: a foreign corporation registering to do business in Virginia and acquisition of a corporation doing business in Virginia.

The date on which a corporation first estimates that its Virginia income tax less allowable credits will exceed $1,000 determines the date that the declaration of estimated tax is required to be filed.

1. If such date is before the 1st day of the 4th month of the taxable year the declaration is required to be filed on or before the 15th day of the 4th month of the taxable year.

2. If such date is after the last day of the 3rd month and before the 1st day of the 6th month of the taxable year the declaration is required to be filed on or before the 15th day of the 6th month of the taxable year.

3. If such date is after the last day of the 5th month and before the 1st day of the 9th month of the taxable year the declaration is required to be filed on or before the 15th day of the 9th month of the taxable year.

4. If such date is after the last day of the 8th month and before the 1st day of the 12th month of the taxable year the declaration is required to be filed on or before the 15th day of the 12th month of the taxable year.

B. Amendments. If a corporation expects its Virginia income tax less allowable credits to differ from the declaration of estimated tax for the taxable year, it shall amend the declaration. Only one amendment may be filed in the interval between installment dates. The amendment shall be reported on the voucher for the installment of estimated tax due after the corporation discovers the change in the estimated tax.

C. Short taxable years. No declaration of estimated tax is required for a short taxable year of less than four months or if the date the corporation first expects its estimated tax to exceed $1,000 occurs on or after the first day of the last month of the short taxable year. In all other cases the declaration is due as provided in subsection A.

Statutory Authority

§§ 58.1-203 and 58.1-501 of the Code of Virginia.

Historical Notes

Derived from VR630-3-501 §§ 1-3, eff. January 1, 1985; amended, eff. June 30, 1993.

23VAC10-120-440. Installment payment of estimated tax.

A. In general. The estimated tax shall be paid in installments as follows:

1. If the declaration is required to be filed on the 15th day of the 4th month of the taxable year, 25% shall be paid with the declaration and on the 15th day of the 6th, 9th and 12th month of the taxable year.

2. If the declaration is required to be filed on the 15th day of the 6th month of the taxable year, 33% shall be paid with the declaration and on the 15th day of the 9th and 12th month of the taxable year.

3. If the declaration is required to be filed on the 15th day of the 9th month of the taxable year, 50% shall be paid with the declaration and on the 15th day of the 12th month of the taxable year.

4. If the declaration is required to be filed on the 15th day of the 12th month of the taxable year, 100% shall be paid with the declaration.

B. Late declarations. If the declaration is filed after the time prescribed then the corporation shall pay with the declaration all installments of estimated tax which would have been payable on or before the filing if the declaration had been filed within the prescribed time. Subsequent installments shall be payable as if the declaration had been timely filed.

Example: On January 1 a calendar year corporation expected its estimated tax to be $2,000 but did not file a declaration until June 15, even though the filing requirements for filing a declaration were met before April 1. Had the declaration been timely filed 50% of the estimated tax would have been paid on or before the filing (25% on April 15 and June 15). The corporation must pay 50% of the estimated tax with the declaration and 25% on September 15 and December 15.

C. Amendments. If the declaration of estimated tax is amended the amount payable with the amended declaration and the amount of each remaining installment (if any) shall be the difference between the new estimate and the amount actually paid prior to the amendment divided by the number of installments remaining. However, if the payments made exceed the new estimated tax the difference may not be refunded until the income tax return is filed for the taxable year.

Example: A corporation expects its estimated tax to be $2,000 and timely files its declaration and pays the first two installments of $500. Upon payment of the third installment the corporation amends its declaration of estimated tax to $3,000. The third and fourth installments are $1,000 each computed as follows: $3,000 new estimate less $1,000 paid to date divided by the two payments remaining equals $1,000.

D. Short taxable year. All installments due before the close of the short taxable year shall be paid. If the declaration is amended the corporation shall follow the same procedure for computing the amount of the remaining installments due before the close of the short taxable year.

E. Application of payments. All payments of estimated tax shall be applied toward the income tax liability of the taxpayer for the taxable year. No refunds of estimated tax may be obtained except upon filing of the income tax return for the taxable year. Payments of estimated tax may not be applied toward any other tax or taxable year unless and until an income tax return is filed showing a refund. In extraordinary circumstances where the taxpayer is not required to file an income tax return the taxpayer may request a refund of estimated tax.

Statutory Authority

§§ 58.1-203 and 58.1-502 of the Code of Virginia.

Historical Notes

Derived from VR630-3-502 §§ 1-4, eff. January 1, 1985; amended, eff. June 30, 1993.

23VAC10-120-450. (Repealed.)

Historical Notes

Derived from VR630-3-503, eff. January 1, 1985; repealed, Virginia Register Volume 23, Issue 8, eff. March 10, 2007.

23VAC10-120-460. Failure to pay estimated tax.

A. Definitions. The following definitions apply only to the computation of the addition to the tax for failure to pay estimated tax.

1. Underpayment. With respect to any installment, the "underpayment" is the excess of (i) the installment which would be required to be paid if the estimated tax were equal to 90% of the income tax shown on the income tax return for the taxable year (or the amount to the tax, if no return was filed) over (ii) the amount, if any, of the installment paid on or before the last day prescribed for payment of the installment.

2. Tax or income tax. For the purpose of computing the addition to the tax, the term "tax" means the income tax shown on the income tax for the taxable year less the credits allowed by Va. Code §§ 58.1-430 and 58.1-431.

3. Period of underpayment. The addition is computed with respect to each installment for which there is an underpayment. The "period of underpayment" begins with the date the installment was required to be paid and ends on the earlier of:

a. The 15th day of the 4th month following the close of the taxable year, or

b. The date on which any portion of the underpayment is paid. A payment of estimated tax on any installment date shall be considered a payment of previous underpayment only to the extent such payment exceeds the installment which would be required to be paid if the estimated tax were equal to 90% of the income tax.

4. Rate. The "rate" applied to each underpayment to determine the amount of the addition to the tax shall be the interest rate determined under Va. Code § 58.1-15.

B. Exceptions. The addition to the tax will not be imposed for any underpayment of any installment of estimated tax if, on or before the date prescribed for payment of the installment, the total amount of all payments of estimated tax made equals or exceeds the amount which would have been required to be paid on or before such date if the estimated tax were the least of the following amounts:

1. The tax shown on the return for the preceding taxable year, provided that the preceding taxable year was a year of 12 months and a return showing a liability for tax was filed for such year. For the purpose of this exception the credits allowable under Va. Code § 58.1-430 and 58.1-431 shall not be taken into account in determining the prior year's tax.

2. An amount equal to a tax determined on the basis of the tax rates for the taxable year but otherwise on the basis of the facts shown on the return for the preceding year and the law applicable to such year, in the case of a corporation required to file a return for such preceding taxable year.

3. a. An amount equal to 90% of the income tax for the taxable year computed by placing on an annual basis the taxable income

(i) For the first 3 months of the taxable year, in the case of an installment required to be paid in the 4th month.

(ii) Either the first 3 months or the first 5 months of the taxable year (whichever results in no addition being imposed), in the case of an installment required to be paid in the 6th month.

(iii) Either the first 6 months or the first 8 months of the taxable year (whichever results in no addition being imposed), in the case of an installment required to be paid in the 9th month.

(iv) Either the first 9 months or the first 11 months of the taxable year (whichever results in no addition being imposed), in the case of an installment required to be paid in the 12th month.

b. The taxable income shall be placed on an annual basis for the purpose of exception (3) by first multiplying the taxable income by 12 and dividing the resulting amount by the number of months in the taxable year (3, 5, 6, 8, 9 or 11, as the case may be). A taxpayer whose taxable year consists of 52 or 53 weeks shall use the procedure set forth in U.S. Treasury Regulation § 1.6655- 2(a) (4) to place its taxable income on an annual basis. In determining the applicability of this exception, there must be an accurate determination of the amount of income, deductions, and Virginia modifications for the appropriate period, that is, for the 3, 5, 6, 8, 9 or 11 months of the taxable year.

Statutory Authority

§§ 58.1-203 and 58.1-504 of the Code of Virginia.

Historical Notes

Derived from VR630-3-504, eff. January 1, 1985.

Forms (23VAC10-120)

Virginia Corporation Income Tax Return (Booklet-Instructions for Form 500), Form 500 (eff. 9/1993)

Schedule A-Multistate Corporation-Allocation and Apportionment of Income

Underpayment of Virginia Estimated Tax by Corporations, Form 500C

Application for Extension of Time, Form 500E (eff. 9/1993)

Declaration of Estimated Income Tax for Corporations, Form 500V (eff. 9/1993)

Virginia Corporation Income Tax Extension Payment Voucher, Form 500EV (eff. 9/1993)

Corporation Application for Refund, Form 500-NOLD (eff. 9/1993)

Virginia Small Business Corporation Return of Income, Form 500-S (eff. 9/1993)

Telecommunications Companies Minimum Tax and Credit Schedule (Instructions for Form 500T), Form 500-T (eff. 2/1992)

Corporation Income Tax Voucher

Amended Virginia Corporation Income Tax Return, Form 500X (eff. 9/1993)

Combined Registration Application, Form R-1 (eff. 10/1989)

Instructions for Completing Combined Registration, Form R-4 (eff. 10/1989)

Instructions for Virginia Venture Capital Account Investment Fund Registration and Certification Forms (rev. 2/2018)

Venture Capital Account Investment Fund Registration Application, Form VEN-1 (rev. 1/2018)

Venture Capital Account Investment Fund Confirmation Application, Form VEN-2 (rev. 1/2018)

Venture Capital Account Investment Fund Investor Information Report, Form VEN-3 (rev. 2/2018)