August 10, 2021
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessments issued to ***** (the “Taxpayer”) for the taxable years ended December 31, 2016, and 2017. I apologize for the delay in responding to your request.
FACTS
The Taxpayer maintained an ownership interest in a pass-through entity (PTE) during the 2016 and 2017 taxable years. Both years, the PTE applied for and was granted the Research and Development Expenses Tax Credit (“R&D credit”). Accordingly, the Taxpayer claimed his share of the R&D credits on his 2016 and 2017 Virginia individual income tax returns. Under review, the Department reduced the Taxpayer’s credits based on the prorated amount granted by the Department and issued assessments. The Taxpayer appealed, contending that he is entitled to the amount of the credits originally claimed.
DETERMINATION
The R&D credit is a refundable individual and corporate income tax credit for conducting qualified research and development in Virginia. See Virginia Code § 58.1-439.12:08. If the total eligible credit requests exceed the annual cap, each taxpayer is granted a pro rata amount of credit as determined by the Department. See Public Document (P.D.) 20-120 (7/7/2020) (“R&D credit guidelines”).
To claim the R&D credit, a taxpayer must submit an Application for the Research and Development Expenses Tax Credit, Form RDC, and any supporting documentation to the Department in the year following the credit year. The Department subsequently notifies all eligible taxpayers of the amount of credit that they may claim. Upon receiving notification of the credit amount from the Department, a taxpayer must claim the credit on the appropriate Virginia income tax return.
In this case, the Department’s records indicate that the Taxpayer claimed R&D credits on his individual income tax returns for the 2016 and 2017 taxable years based upon the amount of credit applied for by the PTE. However, since the total amount of approved R&D credit requests exceeded the annual cap for both taxable years, the PTE was granted a prorated amount of credit that was less than the amount requested.
The Department, therefore, correctly adjusted the Taxpayer’s individual income tax returns to reflect the prorated amount of R&D credit granted by the Department. Accordingly, the assessments for the 2016 and 2017 taxable years are upheld.
The Taxpayer will receive updated bills, which will include accrued interest to date. The balance due for 2017 reflects a lien payment that was already applied to that assessment. The Taxpayer should remit the balance due within 30 days of the bill date to avoid the accrual of additional interest.
The Code of Virginia sections and public document cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. 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/3412-C