Tax Type
Corporation Income Tax
Description
Capitalized interest; Safe harbor leasing
Topic
Allocation and Apportionment
Date Issued
02-27-1987
February 27, 1987
Re: §58.1-1821 Application; Corporation Income Tax
§58.1-416 Sales Factor; Interest Income
Dear *****************
This in response to your letter of May 16, 1986, and a conference held on November 17, 1986. In response to my letter dated March 17, 1986 (copy enclosed), you submitted additional information on capitalized interest and safe harbor leasing interest.
Capitalized Interest
In your accounting system interest on construction projects in progress is accumulated in a contra accounts to the general interest expense accounts. In preparing your federal return the credit balances in the contra accounts were erroneously reported as interest income. Since this interest was not interest income it will be removed from the sales factor.
Safe Harbor Leasing
A number of assets were sold for what the taxpayer paid and then leased back under the federal Safe Harbor Leasing provisions. The rent paid by the taxpayer was set equal to the debt service payments received by the taxpayer so that no money actually changed hands after the initial transaction. The interest portion of the debt service payments was included in the sales factor.
Although you characterize this as "fictitious" lease payments, the amounts are included in federal taxable income as interest income and rent expense and are therefore included in the income subject to apportionment. The regulations have adopted the policy that amounts included in federal taxable income and Virginia apportionable income shall be reflected in the apportionment formula. See also the letter dated June 25, 1982, to **************** (copy enclosed).
Accordingly, the safe harbor interest was properly included in the sales factor.
Determination
The audit report will be returned to the Technical Services Division and revised to remove the capitalized interest from the sales factor. You will shortly receive a revised audit report and a revised bill for any balance outstanding.
Sincerely.
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner