Individual Income Tax
Taxes paid by residents to other states; S corporation shareholders
November 23, 1994
Re: Ruling Request: Individual Income Tax
This will reply to your letter requesting a ruling whether Virginia resident shareholders of************(the Taxpayer") may claim a credit on their individual Virginia income tax returns for their prorata share of taxes the Taxpayer paid to another state on behalf of its shareholders.
The Taxpayer, a Virginia S corporation, also operates in a reciprocity state and files a "consolidated nonresident return" with that state. On this return, a multi-state S corporation may file one consolidated nonresident return on behalf of all shareholders in lieu of each shareholder filing an individual nonresident return. However, when the consolidated nonresident return is filed with the reciprocity state by the Taxpayer, the out-of-state credit is not allowed on the return for taxes paid to Virginia. The Taxpayer is requesting that, in such instances, Virginia shareholders be allowed to claim an out-of-state credit on their Virginia resident return for taxes paid to the other state.
When a state practices reciprocity with Virginia pursuant to Code of Virginia,§ 58.1-332, a Virginia resident receiving income from that state may typically claim an out-of-state credit on that state's nonresident income tax return for taxes paid to Virginia. However, as a clarification of the department's policy, if a reciprocity state does not allow an out-of-state credit on a consolidated nonresident return, the shareholders may claim a credit on the Virginia Individual Income Tax Return. The basis of the credit should be for their prorata share of the taxes paid to the reciprocity state on the consolidated nonresident return. When claiming the credit, the shareholder must attach to the 'Virginia return a statement from the S corporation verifying (1) the shareholder's prorata portion of the consolidated return's taxable income and (2) the shareholder's prorata portion of the tax paid to the other state by the S corporation on behalf of the shareholder. In addition, documentation must be attached to the Virginia return to verify that the other state disallows the out-of-state credit to Virginia shareholders.
If other assistance is needed, please do not hesitate to contact the department.
Danny M. Payne