April 16, 2025
Re: § 58.1-1821 Application: Corporate Income Tax
Dear *****:
This will respond to your letter in which you contest the denial of an application for the ***** (the “Credit”) submitted by ***** (the “Taxpayer”) for the taxable year ended December 31, 2023.
FACTS
The Taxpayer filed an Application for the Credit (Form RMC) for the 2023 taxable year. The Department denied the application because the Taxpayer had not paid for the equipment in 2023. The Taxpayer appeals the denial of the Credit, contending that the Credit for the 2023 taxable year should account for costs paid in 2021 and 2022.
DETERMINATION
Guidelines
During the 2015 Session, the Virginia General Assembly enacted House Bill 1554 (2015 Acts of Assembly, Chapter 49) and Senate Bill 1205 (2015 Acts of Assembly, Chapter 94), which made several changes to the Credit. These changes included increasing the amount of the Credit, imposing an annual cap, and amending certain qualification requirements. In April 2017, the Department issued its Recyclable Materials Processing Equipment Tax Credit Guidelines as Public Document (P.D.) 17-42 (4/3/2017) (the “Guidelines”).
Effective for the 2015 taxable year and thereafter, the Credit is capped at $2 million per fiscal year. If the total amount of all approved credits exceeds the $2 million credit cap for credits, each taxpayer is granted a pro rata amount of credits as determined by the Department. Prior to the 2015 taxable year, the Credit was uncapped and, therefore, the proration of approved credits was unnecessary.
The Guidelines explain that a taxpayer may claim the Credit only for the taxable year in which such taxpayer purchases qualifying machinery or equipment. If such machinery or equipment does not qualify for the Credit in the year of purchase, the taxpayer may not claim the Credit for a later taxable year when the machinery or equipment meets the Credit requirements. A taxpayer that does not qualify for the Credit in the taxable year of purchase or that fails to meet the application deadlines may neither claim the Credit for the year of purchase nor claim original or carryover credits for years following the year of purchase.
In P.D. 04-190 (10/20/2004), the Department addressed a situation where a taxpayer purchased otherwise qualifying equipment in one year but did not produce a sufficient quantity of recycled materials for the Virginia Department of Environmental Quality (DEQ) to certify the machinery and equipment as integral to the recycling process for several years. In such case, the Department provided that a taxpayer that did not qualify for the Credit in the year of purchase may later amend its tax return for the taxable year of purchase and claim the Credit, as long as the amended return is filed within the three-year statute of limitations. The Department also provided that a taxpayer that did not claim the Credit on an amended return within the three-year statute of limitations may amend its tax returns for the taxable years following the year of purchase to claim carryover credits that would have been available if the Credit had been claimed for the year of purchase, as long as such returns are filed within the three-year statute of limitations. The Department issued similar guidance in P.D. 10-136 (7/12/2010) and P.D. 10-227 (9/29/2010).
This guidance was issued prior to the imposition of an annual credit cap, which requires the establishment of deadlines in order to allocate credits. Accordingly, for machinery or equipment purchased in taxable years beginning on or after January 1, 2015, the Guidelines expressly superseded the rules set forth in P.D. 04-190, P.D. 10-136, and P.D. 10-227, as applied to the Credit.
Certification by the DEQ
Prior to claiming the Credit, a taxpayer must receive written certification from the DEQ stating that the machinery or equipment is integral to the recycling process. When determining whether an item of machinery or equipment is integral to the recycling process, the DEQ will determine whether the machinery or equipment is being used predominantly in or on the premises of manufacturing facilities or plant units that manufacture, process, compound, or produce items of tangible personal property from recyclable materials within Virginia for sale. The DEQ will also determine whether the machinery or equipment is being used to manufacturer, process, compound, or produce items of tangible personal property from recyclable materials. See Virginia Code § 58.1-439.7 A 2 and Title 9 of the Virginia Administrative Code (VAC) 15-30-10 et seq.
To apply for certification, a taxpayer is required to submit a completed application (Form DEQ50-11S) to the DEQ by March 1 of the year following the year it purchased the machinery or equipment. This is similar to the process required prior to the 2015 taxable year, except that taxpayers must now apply to the DEQ by the March 1 deadline. No taxpayer may claim the Credit unless it has received written certification from the DEQ stating that the machinery or equipment is integral to the recycling process.
In this case, the Taxpayer explains that it could not obtain the DEQ certification until after the equipment was finally placed into service in 2023. As such, the Taxpayer was not able to obtain DEQ certification until the Taxpayer submitted its DEQ application in early 2024. The Taxpayer, however, purchased the equipment in the 2021 and 2022 taxable years. Although the Department empathizes with the Taxpayer’s circumstances, the Guidelines are clear that a taxpayer may only claim the Credit for the taxable year in which the taxpayer purchased qualified machinery or equipment. See also Virginia Code § 58.1-439.7 A 1. In addition, the Guidelines clearly provide that if such machinery or equipment does not qualify for the Credit in the year of purchase, a taxpayer may not claim the Credit for a later taxable year when the machinery and equipment meet the Credit requirements.
Idle Machinery and Tools
The Taxpayer cites P.D. 14-55 (4/24/2014), apparently in an attempt to support its position that the purchase price date should be tied to the date the equipment was finally placed in service. P.D. 14-55 was an advisory opinion regarding the application of the local Machinery & Tools (M&T) tax to idle equipment purchased by one business from another. The Credit at issue is governed by its own statute and Guidelines separate and distinct from local M&T tax. As such, P.D. 14-55 has no bearing on the outcome of this determination.
CONCLUSION
Taxpayers may claim the Credit for a taxable year only for machinery and equipment purchases made during that year. The Guidelines clearly state, “[I]f such machinery or equipment does not qualify for the credit in the year of purchase, the taxpayer may not claim the credit for a later taxable year when the machinery or equipment meets the credit requirements.” In this case, the Taxpayer claimed the Credit in the 2023 taxable year but did not make purchases during that taxable year. The fact that DEQ certification was not available before the 2023 taxable year does not impact the determination of the year of purchase. Additionally, the treatment of idle machinery and tools for purposes of the local M&T tax is not relevant to determinations related to the Credit. Accordingly, the denial of the Credit is upheld.
The Code of Virginia sections and regulations cited are available online at law.lis.virginia.gov. The public documents cited are available at 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 and Legal Affairs, Tax Adjudication and Resolution Division, at ***** or *****@tax.virginia.gov.
Sincerely,
James J. Alex
Tax Commissioner
Commonwealth of Virginia
AR 5067.Q