Document Number
18-94
Tax Type
Corporation Income Tax
Description
Credit, Telework Expenses and Eligible Employees
Topic
Appeals
Date Issued
05-21-2018

 

May 21, 2018

 

 

Re:     § 58.1-1821 Application:  Corporate Income Tax

 

Dear *****:

 

This will reply to your letter in which you dispute the Department's denial of the Telework Expenses Tax Credit (the “Credit”) claimed by ***** (the “Taxpayer”), for the taxable year ended December 31, 2016.

 

FACTS

 

The Taxpayer, a Subchapter S corporation operating in Virginia, applied for the Credit for the 2016 taxable year.  The Department denied the Credit on the basis that the individual listed on the application as an eligible employee should be considered an ineligible self-employed individual because he was 100% owner of the Taxpayer.  The Taxpayer appealed, contending that it met all of the requirements to claim the Credit.

 

DETERMINATION

 

Virginia Code § 58.1-301 provides, with certain exceptions, that 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.  Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia.  For corporate income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income with federal taxable income (FTI).  Income properly included in the FTI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Virginia Code § 58.1-402.

 

The Credit is an individual and corporate income tax credit for employers who incur eligible telework expenses pursuant to a telework agreement or conduct telework assessments.  See Virginia Code 58.1-439.12:07.  The Credit is equal to the amount of expenses incurred during the calendar year that ends during the taxable year, not to exceed $50,000 total. The Credit can be claimed for up to $1,200 of eligible telework expenses for each participating employee.  Self-employed individuals are not considered participating employees.  See Virginia Code 58.1-439.12:07 A.

 

There is no definition of “self-employed” for purposes of the Credit.  In the absence of a controlling definition, the Department believes it is appropriate to refer to how the term is used in the IRC.  “Net earnings from self-employment” refers to the gross income from a trade or business carried on by a taxpayer.  See IRC § 1402(a). When used with reference to self-employment income or net earnings from self-employment, trade or business has the same meaning as it has in IRC § 162 and does not include the performance of service by an individual as an employee.  See IRC § 1402(c).  Therefore, in the Department's opinion, the question becomes whether the individual was an employee of the Taxpayer.

 

The available information indicates that the individual was a 100% owner of the Taxpayer, an S corporation.  The individual performed services for the Taxpayer for compensation and received a W-2.  When shareholders of S corporations perform services for the corporation for which they receive compensation, they are considered employees of the corporation, and as such, their wages are subject to taxes under the Federal Insurance Contributions Act (FICA), taxes under the Federal Unemployment Tax Act (FUTA) and state and federal income tax withholding.  See, e.g., Internal Revenue Service (IRS) Revenue Ruling 74-44, 1974-1 C.B. 287, and Radtke v. United States, 712 F. Supp. 143 (E. D. Wash., 1989), aff'd 895 F.2d 1196 (8th Cir. 1990).  Therefore, the Department finds that the individual was a participating employee under Virginia Code § 58.1-439.12:07. Accordingly, the Credit application will be processed and the Credit will be granted as warranted.

 

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/1460.M

 

Rulings of the Tax Commissioner

Last Updated 06/14/2018 08:11