March 8, 2022
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 “Taxpayer”) for the taxable year ended December 31, 2020.
FACTS
The Taxpayer, the owner of a farm, claimed an agricultural best practices management tax credit on his 2020 Virginia individual income tax return. Under review, the Department disallowed the credit and issued an assessment. The Taxpayer appealed, contending that he could claim the credit as the sole proprietor of the farm.
DETERMINATION
Virginia Code § 58.1-339.3 provides:
[A]ny individual who is engaged in agricultural production for market, or has equines that create needs for agricultural best management practices to reduce nonpoint source pollutants, and has in place a soil conservation plan approved by the local Soil And Water Conservation District (SWCD), shall be allowed a refundable credit against . . . [individual income tax] . . . in an amount equaling 25 percent of the first $100,000 expended for agricultural best management practices by the individual.
The credit was disallowed on the 2020 Virginia individual return because it was claimed by the Taxpayer under his social security number while the farm itself had a federal employer ID number (FEIN). The Department found that the credit certificate had been issued to the farm, but was not allocated through a pass-through entity (PTE). The Taxpayer contends that he could claim the credit on his individual Virginia income tax return because the farm was operated as a sole proprietor.
Virginia Code § 58.1-301 provides, with certain exceptions, that the 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 individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with federal adjusted gross income (FAGI). Income properly 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 Chapter 3 of Title 58.1 of the Code of Virginia.
For purposes of allocating the credit, Virginia Code § 58.1-339.3 D provides that the owners of the PTE, which may include a partnership, limited liability company or S corporation, will receive the credit in proportion to their ownership share. Generally, a sole proprietor is someone who owns an unincorporated business by himself or herself that does not require an FEIN. Treas. Reg. § 301.7701-2(c)(2)(i), however, provides that a business entity that has a single owner is disregarded as an entity separate from its owner. As such, items of income, gain, loss or deduction are considered as belonging to the individual owner of a sole proprietorship. Typically, individuals report income from a sole proprietorship that is a farm on a federal Schedule F.
In addition, Virginia Code § 58.1-339.3 allows any qualifying “individual” to claim the credit. Because single owner PTEs are disregarded as entities separate from their owner for federal income tax purposes, the owner is permitted to claim the credit even if the certificates are issued under the business’ name and FEIN.
Because the farm in this case was disregarded as an entity separate from the Taxpayer and thus a sole proprietorship, the Taxpayer was eligible to claim the credit granted to the farm on his Virginia individual income tax return. Therefore, the case will be returned to the unit that made the adjustment in order to reinstate the credit, abate the assessment, and issue a refund 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/3887.B