Tax Type
Individual Income Tax
Description
Taxes paid by residents to other states; New York alternative minimum tax on business expenses
Topic
Credits
Date Issued
08-30-1996
August 30, 1996
Re: § 58.1-1821 Application: Individual Income Tax
Dear*********
This will reply to your letter in which you protest the disallowance of a credit for income tax paid to another state as claimed by your clients, ******** , (the "Taxpayers") for taxable year 1991.
FACTS
The Taxpayers were residents of Virginia during taxable year 1991. As shareholders in a New York Subchapter S Corporation, they were required to pay the New York minimum income tax. The Taxpayers sustained losses on their New York allocated business income and had a negative New York allocated federal adjusted gross income. They filed a 1991 Virginia individual income tax return and claimed a credit for income tax paid to another state.
The Taxpayers' 1991 Virginia income tax return was the subject of an office audit. The credit for New York tax was disallowed, and an assessment was issued. You protest the denial of this credit and request that the payment of the assessment be refunded.
DETERMINATION
Code of Virginia § 58.1-332(A) provides a credit when a Virginia resident becomes liable to another state for income tax paid on any "earned or business" income derived from sources outside of Virginia. This Code section, in pertinent part, limits the amount of the credit:
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- Whenever a Virginia resident has become liable to another state for income tax on any earned or business income . . . for the taxable year, derived from sources outside the Commonwealth and subject to taxation under this chapter, the amount of such tax payable by him shall, upon proof of such payment, be credited on the taxpayer's return with the income tax so paid to the other state. (Emphasis added)
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- Virginia Regulation (VR) 630-2-332(2)(c) further provides:
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- For purposes of this credit, the term "business income" shall mean income derived from an activity which constitutes a "business" for federal income tax purposes for which a federal Schedule C, E, or F must be filed, for example, a sole proprietorship, provided that if the business incurred a loss, such loss would be allowable under federal law....
The Virginia out-of-state credit, therefore, would be allowed to the extent that the same business income would be taxed on the New York and Virginia returns.
The New York minimum tax is levied in addition to the New York personal income tax and is based on federal tax preference items, such as capital gains, depreciation, stock options, etc. In this instance, the minimum tax was not computed based on the business income. Instead, the minimum tax was calculated solely on the accelerated depreciation of real property and leased personal property placed in service before 1987, which is a business expense. There is no provision in Code of Virginia § 58.1-332 to allow an out-of-state credit for taxes paid on business expenses since such expenses are deducted from gross income in arriving at Virginia taxable income. Since the deduction was not subject to Virginia income taxation and Virginia does not have a corresponding minimum tax, a Virginia out-of-state credit would not be justified.
Unfortunately, based on the information presented, there is no basis to allow the out-of--state credit claimed on the Taxpayers' 1991 Virginia return for alternative minimum tax paid to New York. Accordingly, your application for relief must be denied. A review of the Taxpayers' account shows the 1991 assessment has been paid in full. Should you have questions regarding this matter, please contact
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/8489M
Rulings of the Tax Commissioner