Tax Type
Corporation Income Tax
Individual Income Tax
Description
Urban Enterprise Zone Credit; Effect of a change in taxable year
Topic
Accounting Periods and Methods
Credits
Date Issued
12-14-1987
December 14, 1987
Re: Ruling Request
Dear ****************
This is in reply to your letter dated June 12, 1987 in which you requested a ruling concerning how S corporations, which have qualified for Urban Enterprise Zone tax credits, will be treated if they are required to change taxable years as the result of the federal Tax Reform Act of 1986.
FACTS
Virginia Code §59.1-280 provides a State Business Income Tax Credit to qualified business firms equal to 80% of the tax due in the first qualifying year, 60% of the tax due in the second qualifying year, 40% of the tax due in the third qualifying year, and 20% of the tax due in the fourth and fifth qualifying years. Presently, once a business firm is qualified by the Department of Housing and Community Development, its certification and qualifying year is based upon its taxable year at the time that it qualifies.
Section 806 of the federal Tax Reform Act of 1986 may require that certain entities (partnerships, S corporations and certain personal service corporations) change their taxable year. In general this change requires that all partnerships, S corporations and personal service corporations must conform their taxable year to the taxable year of their owners, unless such entities can establish to the satisfaction of the Secretary of the Treasury, a business purpose for having a different taxable year. This requirement was effective for taxable years beginning after December 31, 1986.
You express the concern in your letter that certain business firms may lose a portion of their tax incentives if they are required to change their taxable year to a year that does not correspond to their Urban Enterprise Zone qualification year.
RULING
In order that such business firms are not deprived of the full amount of their potential tax credits, the Department of Taxation has determined that such firms may compute their Urban Enterprise Zone tax credit by applying the appropriate qualification period credit percentage to the income earned during the corresponding period of the taxable year. This means that for any taxable year in which the qualification year does not coincide with the taxable year, the business firm will be required to make two separate computations based upon two different percentage amounts. For example, if the first half of the taxable year falls within the 60% qualification year and the second half of the same taxable year falls within the 40% qualification year, the firm would compute the applicable credit by applying the 60% credit to the tax on the income earned during the first half of the taxable year and by applying the 40% credit to the tax on the income earned during the second half of the taxable year. If the accounting method used by such a business firm is unable to identify the amount of income attributable to activity within the Urban Enterprise Zone by period, the firm may proportionally allocate income based upon the number of months that the appropriate credit percentage was applicable during their taxable year. In the above example, the firm would compute the credit by applying a 60% credit to half of the tax and a 40% credit to half of the tax.
Since two of the three types of business entities affected by this change in federal law are "pass-thru" entities (partnerships and S corporations), any tax credit based upon income earned within an Urban Enterprise Zone is claimed on the individual income tax return filed by the partners or shareholders in such business firms. Therefore, in order that such firm's partners or shareholders may compute their share of the credit, such business firms must provide their partners or shareholders with sufficient information regarding the appropriate qualification period credit percentage and the amount of income earned during the corresponding period of the taxable year. Individuals claiming the credit must attach a schedule to Form 301 which sets forth this information.
I hope that this ruling will assist you in the administration of the Urban Enterprise Zone Act. If you will provide the Department of Taxation with the names of the affected business firms, we will contact them and assist them in the filing of the returns. If you have any further questions, please do not hesitate to contact this office.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner