Tax Type
Individual Income Tax
Description
Taxpayers not permitted to claim Credits earned by pass-through entities in this case.
Topic
Credits
Date Issued
05-05-2010
May 5, 2010
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 your clients, ***** (the "Taxpayers"), for the taxable year ended December 31, 2005. I apologize for the delay in the Department's response.
FACTS
The Taxpayers, a husband and wife, claimed a tax credit for the purchase of machinery and equipment for processing recyclable material (the "Credit") on their 2005 Virginia income tax return. The Credit was earned in 2004 by a corporation that later elected by be treated as an S corporation. The Credit was passed through to the Taxpayers from an S corporation.
The Department disallowed a portion of the Credit that was earned by the S corporation during the 2004 taxable year. An assessment for additional tax and interest was issued. The Taxpayers paid the assessment, but filed an appeal contending that the statute permits the Credit to be claimed by individuals when received from a pass-through entity.
DETERMINATION
In 1990, the General Assembly enacted the Credit. See Chapter 709, 1990 Acts of Assembly. Under this chapter, the Credit was permitted for individual income taxpayers under Va. Code § 58.1-338 and for corporate income taxpayers under Va. Code § 58.1-445.1.
The Credit for both individuals and corporations included a sunset provision that was extended several times by the General Assembly. For the individual income tax credit, Va. Code § 58.1-338 was last extended through taxable years beginning before January 1, 2004 (Chapter 91, 2001 Acts of Assembly). Thus, the Credit for individual income taxpayers expired after the 2003 taxable year.
In 1998, the General Assembly (Chapter 253, 1998 Acts of Assembly) repealed and reenacted the Credit for corporations under Va. Code §§ 58.1-439.7 and 58.1-439.8. In 2007, the General Assembly enacted legislation (Chapters 529 and 593, 2007 Acts of Assembly) to permit, the credit to be passed through to individuals for taxable years beginning on or after January 1, 2008.
In this case, a corporation, earned the Credit in 2001, 2003, and 2004 when it was a taxable entity and carried the Credit forward into a taxable year in which it elected to be treated as an S corporation. The Taxpayers received their proportionate share of the Credit carryforward. The Taxpayers were granted the Credit carried forward from 2001 and 2003 as permitted by the statute. However, because the corporation earned the Credit after its 2003 taxable year and individuals were not permitted to claim Credits earned by pass-through entities until the 2008 taxable year, the Department properly denied the 2004 Credit carryforward on the Taxpayers' 2005 return. Accordingly the assessment for the 2005 taxable year is upheld and no refund will be issued.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have questions concerning this determination, you may contact ***** at *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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AR/1-3534200880.D
Rulings of the Tax Commissioner