Bulletin Number
VTB 00-5
Tax Type
Individual Income Tax
Description
Qualified equity and subordinated debt investments tax credit
Topic
Credits
Date Issued
07-31-2000
QUALIFIED EQUITY AND SUBORDINATED DEBT INVESTMENTS TAX CREDIT
Generally
In 1998, the General Assembly enacted the Qualified Equity and Subordinated Debt Investments Tax Credit (House Bill 1359; Chapter 491 of the 1998 Acts of Assembly) (the "Credit"). The Credit, effective for taxable years beginning on and after January 1, 1999, is equal to 50% of a qualifying equity or subordinated debt investment in a qualified business. Under the legislation, the credit available to a taxpayer in a taxable year is limited to the lesser of the tax imposed for the taxable year or $50,000. Where the aggregate amount of requested Credits for investments made in a calendar year exceed $5 million, the Department of Taxation (the "Department") will allocate the available tax credits pro rata among the approved tax credit applicants. Unused credits may be carried forward to offset future income tax for up to 15 taxable years.
The procedures set forth below in this Tax Bulletin are intended as guidelines to replace the expired emergency regulation (Title 23 of the Virginia Administrative Code ("VAC"), 10-110-225 through 229) that had been in effect for the period February 4, 1999 through February 3, 2000. For taxable years beginning on and after January 1, 2000, and ending before January 1, 2001, the Department has adopted, as guidance to qualified businesses and their investors, the procedures set forth below, for the processing of all applications filed in connection with the Credit. The Department is in the process of issuing permanent regulations for administering the Credit that will be effective for taxable years beginning on and after January 1, 2001.
Definitions
The following words and terms, when used in this Tax Bulletin, shall have the following meaning, unless the context clearly indicates otherwise:
"Equity" means common stock or preferred stock, regardless of class or series, of a corporation; a partnership interest in a limited partnership; or a membership interest in a limited liability company, any of which is not required, or subject to an option on the part of the taxpayer, to be redeemed by the issuer within five years from the date of issuance.
"Family member" means spouse, child, grandchild, parent, sibling or any other person who is related to the taxpayer by blood, marriage, or adoption.
"Primarily engaged in business in the Commonwealth" means 50% or more of the entity's gross receipts are derived from sources within Virginia.
"Qualified business" means a business which (i) has annual gross revenues of no more than five million dollars in its most recent taxable year, (ii) is commercially domiciled in the Commonwealth, (iii) is primarily engaged in business or does substantially all of its production in the Commonwealth, and (iv) is not primarily engaged, or is not primarily organized to engage, in any of the following types of businesses:
1. Banks;
2. Savings and loan institutions;
3. Credit or finance;
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- 4. Financial, broker or investment;
5. Businesses organized for the primary purpose of rendering professional services as defined in Chapter 7 (§ 13.1-542 et seq.) of Title 13.1;
- 4. Financial, broker or investment;
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- 7. Government, charitable, religious or trade institutions or organizations;
8. Conventional coal, oil and gas, and mineral exploration;
9. Insurance;
- 7. Government, charitable, religious or trade institutions or organizations;
11. Construction or construction contracting;
12. Business consulting or business brokering;
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- 13. Residential housing, real estate brokerage, sale or leasing businesses, or real estate development; or
14. Any business which is in violation of the law, and such others as the Department may, by regulation, designate.
- 13. Residential housing, real estate brokerage, sale or leasing businesses, or real estate development; or
"Subordinated debt" means indebtedness of a corporation, general or limited partnership, or limited liability company that (i) by its terms requires no repayment of principal for the first three years after issuance; (ii) is not guaranteed by any other person or entity, or secured by any assets of the issuer or any other person or entity; and (iii) is subordinated to all indebtedness and obligations of the issuer to national or state-chartered banking or savings and loan institutions.
"Substantially all of its production in the Commonwealth" means 80% or more of the entity's expenses are incurred within Virginia.
General Credit Provisions
A. In general, for taxable years beginning on or after January 1, 1999, a taxpayer shall be allowed a credit against the Individual and Fiduciary Income Tax in an amount equal to 50% of such taxpayer's qualified investments made during such taxable year.
B. The amount of any Credit attributable to a qualified investment by a partnership, electing small business corporation (S corporation), or limited liability company shall be allocated to the individual partners, shareholders, or members, as they may determine.
C. The aggregate amount of the Credit that may be used by any taxpayer per taxable year shall not exceed the lesser of (i) the tax imposed for such taxable year or (ii) $50,000. The Credit is not refundable and may not be carried back. Any credit, or portion thereof, not usable for the taxable year in which the credit was allowed may be, to the extent usable, carried over for the next fifteen succeeding taxable years or until the total amount of the tax credit has been taken, whichever occurs first.
D. The total amount of Credits available for the Commonwealth's fiscal year shall not exceed $5 million. In the event that the total eligible credit requests exceed the Commonwealth's annual fiscal limitation, each taxpayer shall be granted a pro rata amount as determined by the Department. The amount of such prorated Credit shall be determined by multiplying a fraction, the numerator of which shall be the Credit requested by the eligible taxpayer for such year, and the denominator of which shall be the total Credits requested by all eligible taxpayers for such taxable year, to the Commonwealth's annual fiscal limitation of $5 million.
Qualified Business Application Procedure
A. Every eligible entity desiring to be designated as a qualified business for purposes of the Credit must make an application to the Department. Such application must be made prior to the issuance of any equity or, subordinated debt; otherwise, the issuance shall not qualify for the Credit.
1. A qualified business application will not be accepted after the issuance date of any equity or subordinated debt, except for issuances made between January 1, 2000 and before September 1, 2000, for which application must be made by October 1, 2000. For issuances of equity or subordinated debt made on September 1, 2000 and thereafter, qualified business applications must be made prior to the issuance date as described below. For example, issuances made on September 1, 2000, will require a qualified business application no later than June 1, 2000, to ensure that the Department's determination will be made prior to the issuance date.
2. A qualified business application must be made at least 90 days prior to the issuance of any equity or subordinated debt to ensure that the Department's determination regarding the entity's qualification will be made prior to the issuance date.
3. A qualified business application may be made less than 90 days prior to the issuance of any equity or subordinated debt. However, the Department cannot ensure that its determination regarding the entity's qualification will be made prior to the issuance date.
B. The entity seeking designation as a qualified business shall make application by completing and submitting Form QBA to the Department (at the address shown below).
C. If the Department determines the entity is a qualified business, the Department shall issue a certificate to the entity stating the same. Such designation shall be valid only for the calendar year of issuance.
D. Upon issuance of equity or subordinated debt to taxpayers, the qualified business shall issue a statement to each taxpayer for attachment to the taxpayer's tax credit application. Such statement shall contain the following information:
1. A copy of the qualified business certification granted by the Department.
2. The type of investment at issue (i.e., equity or subordinated debt) and the amount thereof.
a. If the investment at issue is equity, the statement must also indicate that such issuance is an original issuance which provides new capital to the qualified business, and that it is not required, or subject to an option on the part of the taxpayer, to be redeemed by the issuer within five years from the date of issuance.
b. If the investment at issue is subordinated debt, the statement must also indicate that such issuance is an original issuance which provides new capital to the qualified business, and that (i) by its terms requires no repayment of principal for the first three years after issuance; (ii) is not guaranteed by any other person or entity, or secured by any assets of the issuer or any other person or entity; and (iii) is subordinated to all indebtedness and obligations of the issuer to national or state-chartered banking or savings and loan institutions.
3. That the investment at issue meets the definition of a "qualified investment" for purposes of the Credit.
Application Procedure for Investors
A. Eligible taxpayers who qualify for the Credit must make an application to the Department.
1. For taxable years ending on and after November 1, 2000, and before January 1, 2001, eligible taxpayers must submit an application and supporting documentation requesting the Credit no later than April 1, 2001.
B. The Department shall review all applications for completeness and notify taxpayers of any errors found no later than June 1, 2001. Taxpayers must fully respond to any such notices no later than June 15, 2001.
C. All eligible taxpayers shall be notified by June 30, 2001 as to the amount of applicable Credit that may be claimed for the taxable year for which the request was made.
D. Applications must be made on Form EDC, and either hand delivered by the date specified in this section or sent by certified mail with a return receipt requested and post-marked no later than the date specified in this section.
E. Each taxpayer shall timely supply all information the Department deems necessary to properly determine the allowable Credit amount. Such information shall include, but shall not be limited to, the following:
1. A copy of the statement issued by the qualified business asserting the type and amount of investment at issue (i.e., equity or debt) and that the investment meet the definition of a "qualified investment" for purposes of the Credit.
2. A copy of the qualified business certification granted by the Department.
3. The date on, and the taxable year during which the qualified investment was made.
4. The name, address, federal identification number, and Virginia account number of the taxpayer.
5. A certification by the taxpayer, under penalty of perjury, that the qualified investment meets all conditions outlined in § 58.1-339.4 of the Code of Virginia and these guidelines.
F. In the case of a partnership, electing small business corporation (S corporation), or limited liability company, notification of the allowable Credit amount shall be sent to the entity by the Department. A copy of such notification, together with the entity's statement specifying the allocated share of the credit to the individual taxpayer, shall be attached to each individual taxpayer's Virginia income tax return on which the credit is claimed.
1. Each S corporation shall attach to its annual income tax return, when filed, a schedule listing the name, address, social security number, and allocable credit amount for each of its individual shareholders.
2. Each partnership and limited liability company shall provide a schedule listing the name, address, social security number, and allocable credit amount for each of its individual partners or members to the Department within 60 days of the Department's notice certifying the amount of allowable Credit.
G. Eligible taxpayers who will not receive the notification of their Credits prior to the due date of their individual Virginia income tax returns must either file the appropriate return extension request or amend their return after receiving a Credit notification. Amended returns to claim the Credit must be filed within the applicable statute of limitations.
Required Holding Period
A. Equity received in connection with a qualified business investment must be held by the taxpayer for at least five full calendar years following the calendar year for which a Credit for a qualified investment is allocated, except in any of the following instances: (i) the liquidation of the qualified business issuing such equity, (ii) the merger, consolidation or other acquisition of such business with or by a party not affiliated with such business, or (iii) the death of the taxpayer.
B. If the five calendar year holding period requirement is not met, the taxpayer shall immediately notify the Department and forfeit all used and unused tax credits. The forfeiture of all used credits shall be deemed a tax assessment, to which the Department shall add a penalty equal to the amount of the used credits. In addition thereto, interest on the outstanding tax and penalty shall be assessed at the rate of one percent per month, compounded monthly, from the date the tax credits were claimed by the taxpayer.
C. Upon written request, the Department shall have the discretion to abate any assessed penalty, in full or in part, if the taxpayer establishes reasonable cause for the failure to hold such equity for the five calendar year holding period. The reason for any such abatement shall be preserved among the records of the Department.
Requests for Applications
Forms QBA and EDC are available from the Department of Taxation, Forms Request Unit, 4790 Eubank Road, Richmond, VA. 23231, (800) 236-2760 or 1-888-268-2829 (toll-free outside the Richmond area). Fax requests should be sent to (804) 236-2759. Applications are also available at the Department's site on the World Wide Web at http://www.tax.state.va.us.
Requests for Information
Further information concerning this Credit program (and the address to which applications should be submitted) may be obtained by contacting:
Department of Taxation
Office of Customer Services
Capped Credit Unit
P.O. Box 715
Richmond, Virginia 23218-0715
804-786-2992
Related Documents
Tax Bulletins