Tax Type
Individual Income Tax
Description
Professional limited liability company, Earned income
Topic
Basis of Tax
Computation of Tax
Date Issued
09-16-2004
September 16, 2004
Re: § 58.1-1821 Application: Individual Income Tax
Dear *******
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2000.
FACTS
The Taxpayers, a husband and wife, are residents of Virginia and file a Virginia resident individual income tax return. The husband is a member of a professional limited liability company ("PLLC") that operates offices in both Virginia and ********* ("State A"). The husband reports his income from the PLLC on a federal Schedule E.
On the income tax return for taxable year 2000, the Taxpayers claimed a credit for taxes paid to another state equal to the amount of income tax they paid to State A. The Department adjusted this credit to the amount of Virginia tax actually imposed on the income earned in State A, resulting in additional Virginia income tax liability and interest. The Department made this adjustment on the basis that the husband's income from the PLLC was not salary, wage, or Schedule C business income.
The Taxpayers contend that the husband's compensation from the PLLC is earned income because it is received as compensation for professional services. In addition, the Taxpayers contend that the husband's income from the PLLC is no different from the income of a sole practitioner in the same profession who can take the credit for taxes paid to another state because he reports his income on a federal Schedule C.
DETERMINATION
Virginia Code § 58.1-332(A) allows Virginia residents a credit against their income tax liability when they pay income tax to another state on earned or business income, or any gain from the sale of a capital asset. The intent of the credit is to grant Virginia residents relief in situations were they are taxed by both Virginia and another state on these types of income.
As a general rule, the credit for income tax paid to another state by a Virginia resident is limited to the lesser of: (1) the amount of tax actually paid to the other state, or (2) the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state. In the case of a Virginia resident who pays income tax to a state bordering Virginia, a special rule can apply.
If certain criteria are met, the limitation that restricts the credit to the amount of Virginia income tax actually imposed on the taxpayer on the income derived in the other state is disregarded. The special rule will apply if the income subject to tax in a single state contiguous to Virginia is less than Virginia taxable income and all of the income from sources outside Virginia is earned income or business income reported on federal form Schedule C from that single contiguous state. In such instances, the Virginia resident will be entitled to a credit equal to the lesser of: (1) the amount of income tax actually paid to the contiguous state; or (2) 100% of their Virginia income tax liability. See Va. Code § 58.1-332(A).
Title 23 of the Virginia Administrative Code ("VAC") 10-110-221 specifically defines the term earned income as "wages, salaries, or professional fees and other amounts received as compensation for professional services actually rendered . . . ." In this case, the Taxpayers did not receive earned income from State A. The income from Schedule E represents income received as a member of a professional limited liability company.
The Taxpayers contend that the husband's income from the PLLC represents compensation earned for professional services actually rendered. In addition, the Taxpayers contend that the income the husband receives, as a member of a PLLC is no different from the income of an individual in the same profession who reports his income on a federal Schedule C.
The language in Va. Code § 58.1-332(A) clearly limits the border state out-of-state tax credit to earned income and business income reported on a Schedule C. As noted above, the Taxpayers did not have earned income from State A, but instead received income as a member of the PLLC. Furthermore, the Taxpayers reported the income from the PLLC on a Schedule E; therefore, the Taxpayers did not report business income on Schedule C, as required by the statute. Based on the facts presented and the statutory language cited, the out-of-state tax credit for tax actually paid to a single state contiguous to Virginia is not available. The Department was correct in adjusting the Taxpayer's out-of-state tax credit to the amount of Virginia income tax actually imposed on the Taxpayer on the income derived in State A.
Accordingly, the Department's assessment is upheld. Please remit the tax and updated interest as shown on the enclosed schedule to: Virginia Department of Taxation, Office of Policy and Administration, Appeals and Rulings, P.O. Box 1880, Richmond, Virginia 23218-1880, Attention: *****. Payment must be received within 30 days from the date of this letter to avoid the accrual of additional interest.
The Code of Virginia sections and regulations cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ***** at *****.
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Tax Commissioner -
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AR/50213B
Rulings of the Tax Commissioner