February 24, 2015
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, 2009. I apologize for the delay in responding to your appeal.
FACTS
The Taxpayers amended their 2009 Virginia individual income tax return and claimed a fixed date conformity subtraction for depreciation expense related to the S Corporation they own. Under review, the Department disallowed the subtraction because there was no evidence of bonus depreciation carried forward from prior years. The Taxpayers filed an appeal, contending their intent was to claim depreciation deduction unrelated to bonus depreciation.
DETERMINATION
Virginia Code § 58.1-301 provides terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia conforms to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.
The Taxpayers state that the Internal Revenue Service (IRS) disallowed certain business expenses reported under Internal Revenue Code (IRC) § 179 but allowed a depreciation deduction for vehicles placed in service during the taxable year at issue. The Taxpayers admit that they improperly claimed the deduction as a fixed date conformity subtraction, but assert the depreciation deduction should be included in the computation of Virginia taxable income.
IRC § 167 provides an allowance for the exhaustion, wear and tear, and obsolescence of property used in a trade or business or of property held by the taxpayer for the production of income shall be allowed as a depreciation deduction. Thus, conformity under Va. Code 58.1-301 includes the provisions of IRC § 167 in the definition of federal adjusted gross income and federal taxable income.
In accordance with Virginia law, the depreciation deduction should be reported in the Taxpayer's share of ordinary business income, reported on federal form K-1 filed by the S Corporation. Therefore, any adjustments to the depreciation deduction would be reflected in the Taxpayer's FAGI. The Taxpayers incorrectly reported this deduction as a fixed date conformity subtraction. Accordingly, the Department properly disallowed the subtraction and the assessment is upheld.
If the Taxpayers' FAGI was reduced during the federal audit, the Taxpayers must provide proof of such reduction. Virginia Code §§ 58.1-311 and 58.1-1823 A (ii) permit the filing of an amended return to correct the Virginia liability and request a refund within one year of the final determination by the IRS. Such amended return should be substantiated with a copy of the Revenue Agent Report (RAR) or similar document from the IRS detailing the adjustment. Once the federal audit is complete, the Taxpayers must file an amended Virginia income tax return pursuant to Va. Code § 58.1-311.
The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1-5373490258.D