Tax Type
Individual Income Tax
Description
Federal adjustments to income; Net operating loss deductions
Topic
Taxable Income
Date Issued
05-28-1985
May 28, 1985
RE: Virginia Code Section 58.1-1821 Application
Individual Income Tax
Dear ****
FACTS
Taxpayer timely filed an amended 1978 Virginia individual income tax return as the result of a 1980 federal net operating loss. Taxpayer later timely filed a second amended 1978 Virginia individual income tax return and an amended 1979 Virginia individual income tax return as the result of a 1981 federal net operating loss. The Department of Taxation reduced the amount of loss available for carryback from the 1980 and 1981 returns by the amount of state and local income tax claimed as an itemized deduction on the Schedule A and included in the net operating loss deduction (NOLD). You protest this reduction in the amount of NOLD and the resulting reduced refunds.
DETERMINATION
There is no express statutory authority in the Code of Virginia for a separate Virginia net operating loss. However, under Virginia Code Section 58.1-322 the computation of Virginia taxable income begins with federal adjusted gross income. Federal law allows a deduction for net operating losses in computing federal adjusted gross income. Since the starting point on a Virginia individual income tax return is federal adjusted gross income and the federal carryback or carryforward of a net operating loss is reflected in federal adjusted gross income; therefore, Virginia taxable income is indirectly affected by federal net operating losses to the extent that they are reflected in federal adjusted gross income.
While Virginia accepts the Internal Revenue Service definitions and determinations of federal adjusted gross income, number of exemptions, itemized deductions and many other items; there are certain statutorily defined modifications to these items that are required to be made in arriving at Virginia taxable income. These modifications are what differentiate Virginia taxable income from federal taxable income. These same modifications must be made to any item that is a component of the federal NOLD, which is used to recompute federal adjusted gross income in either the carryback year and/or the carryover tax year.
The first component of the federal NOLD, that must be modified, is the federal adjusted gross income of the loss year. Virginia Code Section 58.1-322 B enumerates certain items that shall be added to federal adjusted gross income to the extent that they are excluded from federal adjusted gross income. Virginia Code Section 58.1-322 C enumerates certain items that shall be subtracted from federal adjusted gross income to the extent that they are included in federal adjusted gross income.
The second component of the federal NOLD, that must be modified, is the amount of federal itemized deductions from the loss year included in the federal NOLD. Virginia Code Section 58.1-322 D 1.a excludes the amount of state and local income tax, claimed as a federal itemized deduction, from the amount allowed as a deduction on the Virginia return.
The addition, subtraction and state and local income tax modifications are to be combined. The net result of these modifications, which relates to the loss year, will follow the federal loss to the year in which the loss is utilized. It will be applied in the same proportion as the amount of loss that is used. Thus if the federal net operating loss is fully utilized in a carryback or carryover year, the net amount of Virginia modifications will be applied to such year. If, however, the federal net operating loss is partially utilized in each of several years, the net Virginia modifications will be applied in the same ratio to the several years.
In this case, both the department and the taxpayer failed to make all of the necessary modifications. Subsequently, the recomputed Virginia taxable income and the amount of refund in each of the carryback years was incorrect. In order to arrive at the proper amount of refund in each of the years involved, it was necessary to recompute the 1977 and 1978 refunds resulting from the carryback of the 1980 net operating loss, the 1978 and 1979 refunds resulting from the carryback of the 1981 net operating loss and the 1979 refund resulting from the carryback of the 1982 net operating loss. I am enclosing work sheets showing the proper method of carrying back the Virginia modifications and the correct amount of refunds due the taxpayer. The taxpayer should receive the refunds in six to eight weeks.
As you know, the Department is currently in the process of regulating individual net operating losses. This determination is consistent with the proposed regulation, as it is currently written. We will send you a notice of the public hearing on this regulation which will be held in early August in Richmond. If the final regulation is changed and the result would be more advantageous to your clients, we will adjust this determination accordingly.
Sincerely,
W. H. Forst
Tax Commissioner
RE: Virginia Code Section 58.1-1821 Application
Individual Income Tax
Dear ****
FACTS
Taxpayer timely filed an amended 1978 Virginia individual income tax return as the result of a 1980 federal net operating loss. Taxpayer later timely filed a second amended 1978 Virginia individual income tax return and an amended 1979 Virginia individual income tax return as the result of a 1981 federal net operating loss. The Department of Taxation reduced the amount of loss available for carryback from the 1980 and 1981 returns by the amount of state and local income tax claimed as an itemized deduction on the Schedule A and included in the net operating loss deduction (NOLD). You protest this reduction in the amount of NOLD and the resulting reduced refunds.
DETERMINATION
There is no express statutory authority in the Code of Virginia for a separate Virginia net operating loss. However, under Virginia Code Section 58.1-322 the computation of Virginia taxable income begins with federal adjusted gross income. Federal law allows a deduction for net operating losses in computing federal adjusted gross income. Since the starting point on a Virginia individual income tax return is federal adjusted gross income and the federal carryback or carryforward of a net operating loss is reflected in federal adjusted gross income; therefore, Virginia taxable income is indirectly affected by federal net operating losses to the extent that they are reflected in federal adjusted gross income.
While Virginia accepts the Internal Revenue Service definitions and determinations of federal adjusted gross income, number of exemptions, itemized deductions and many other items; there are certain statutorily defined modifications to these items that are required to be made in arriving at Virginia taxable income. These modifications are what differentiate Virginia taxable income from federal taxable income. These same modifications must be made to any item that is a component of the federal NOLD, which is used to recompute federal adjusted gross income in either the carryback year and/or the carryover tax year.
The first component of the federal NOLD, that must be modified, is the federal adjusted gross income of the loss year. Virginia Code Section 58.1-322 B enumerates certain items that shall be added to federal adjusted gross income to the extent that they are excluded from federal adjusted gross income. Virginia Code Section 58.1-322 C enumerates certain items that shall be subtracted from federal adjusted gross income to the extent that they are included in federal adjusted gross income.
The second component of the federal NOLD, that must be modified, is the amount of federal itemized deductions from the loss year included in the federal NOLD. Virginia Code Section 58.1-322 D 1.a excludes the amount of state and local income tax, claimed as a federal itemized deduction, from the amount allowed as a deduction on the Virginia return.
The addition, subtraction and state and local income tax modifications are to be combined. The net result of these modifications, which relates to the loss year, will follow the federal loss to the year in which the loss is utilized. It will be applied in the same proportion as the amount of loss that is used. Thus if the federal net operating loss is fully utilized in a carryback or carryover year, the net amount of Virginia modifications will be applied to such year. If, however, the federal net operating loss is partially utilized in each of several years, the net Virginia modifications will be applied in the same ratio to the several years.
In this case, both the department and the taxpayer failed to make all of the necessary modifications. Subsequently, the recomputed Virginia taxable income and the amount of refund in each of the carryback years was incorrect. In order to arrive at the proper amount of refund in each of the years involved, it was necessary to recompute the 1977 and 1978 refunds resulting from the carryback of the 1980 net operating loss, the 1978 and 1979 refunds resulting from the carryback of the 1981 net operating loss and the 1979 refund resulting from the carryback of the 1982 net operating loss. I am enclosing work sheets showing the proper method of carrying back the Virginia modifications and the correct amount of refunds due the taxpayer. The taxpayer should receive the refunds in six to eight weeks.
As you know, the Department is currently in the process of regulating individual net operating losses. This determination is consistent with the proposed regulation, as it is currently written. We will send you a notice of the public hearing on this regulation which will be held in early August in Richmond. If the final regulation is changed and the result would be more advantageous to your clients, we will adjust this determination accordingly.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner