Tax Type
Individual Income Tax
Description
Virginia Accelerated Cost Recovery System
Topic
Computation of Tax
Taxable Income
Date Issued
07-12-2004
July 12, 2004
Re: § 58.1-1821 Application: Individual Income Tax
Dear *************:
This will reply to your letter regarding the individual income tax assessment issued to ***** (the "Taxpayer") for the taxable year ended December 31, 2001. Based on the circumstances surrounding this matter, I find it is appropriate to treat your letter as an administrative appeal filed pursuant to Va. Code § 58.1-1821. I note that the Taxpayer has paid the assessment.
FACTS
The Taxpayer, a nonresident of Virginia, owned two rental properties in Virginia that incurred operating losses prior to 2001. The Taxpayer reported these losses on her federal income tax return, but did not file Virginia income tax returns because the rental properties were her only source of income from Virginia and she experienced losses on the properties. In 2001, both rental properties were sold and the gains were reported on federal and Virginia individual income tax returns. On the Virginia return, the Taxpayer claimed a subtraction for depreciation not previously deducted on prior Virginia returns. The Department disallowed the subtraction and issued an assessment. The Taxpayer contends that the subtraction is appropriate and cites a number of authorities to support her position.
DETERMINATION
Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code unless a different meaning is clearly required. The Virginia individual income tax "conforms" to federal law because it starts the computation of Virginia taxable income with federal adjusted gross income ("FAGI"). To the extent that income is included in FAGI, it is also subject to taxation by Virginia.
The Virginia taxable income of an individual equals FAGI along with the modifications enumerated in Va. Code § 58.1-322. There is no provision in Va. Code § 58.1-322 to allow a subtraction for depreciation related to the gain on the sale of rental property. Accordingly, the Department properly disallowed the subtraction claimed on the 2001 Virginia income tax return. See Public Document ("P.D.") 95-109 (5/9/95).
The Taxpayer cites Virginia Tax Bulletin 82-15 and P.D. 84-269 (5/25/84) for the proposition that Virginia allows the modification of depreciation on Virginia returns by providing an addition and a subtraction over a period of years to bring both federal and state depreciation amounts back into alignment. The Virginia Accelerated Cost Recovery System ("ACRS") modifications were a specific deviation from the Internal Revenue Code enacted under Va. Code § 58.1-323 in 1982. Taxpayers were required to make an addition equal to 30% of the ACRS deduction for the 1982 through 1987 taxable years. Taxpayers were later permitted to subtract these additions in increments of 20% over a five-year period. Accordingly, neither Virginia Tax Bulletin 82-15 nor P.D. 84-269 apply to the taxpayer.
The Taxpayer also avers that P.D. 88-288 (10/26/88), P.D. 93-85 (3/26/93) and Title 23 of the Virginia Administrative Code ("VAC") 10-120-66(A) provide that taxpayers are entitled to a refund of taxes paid on the outstanding balance of Virginia ACRS additions that had not yet been recovered. Effective for taxable years beginning on and after January 1, 1988, the Virginia ACRS addition was repealed and Va. Code § 58.1-323.1 was enacted to provide for the recovery of outstanding ACRS additions. This section allowed individuals to recover previous additions through subtractions claimed in taxable years 1988 and 1989. The last taxable year that qualified for the subtraction was 1989 for individuals. Virginia Code § 58.1-323.1 was repealed in 2000. As such, the statute underlying the public documents and regulations cited are no longer in effect.
The Taxpayer also asserts that Tax Bulletin 02-3 validates the concept of a "Virginia basis." This bulletin addressed the interaction between the "Job Creation and Worker Assistance Act of 2002" ("JCWAA") and Virginia's fixed-date conformity provision enacted by the General Assembly in 2002.
The JCWAA affected the calculation of federal adjusted gross income on the 2001 Virginia returns. This legislation contained a provision for a special 30% depreciation allowance at the federal level for property acquired after September 10, 2001 and before September 11, 2004. It permitted a taxpayer to claim an additional first-year depreciation allowance equal to 30% of the adjusted basis of the property after allowing for any expense allowance in accordance with § 179 of the Internal Revenue Code. Virginia taxpayers who had taken this special 30% depreciation allowance on their federal returns were required to make an addition on their 2001 Virginia income tax return. The addition was equal to the difference between the total amount of depreciation deducted on a taxpayer's 2001 federal return and the total amount of depreciation that the taxpayer would have deducted for federal tax purposes under the Internal Revenue Code as it existed on December 31, 2001.
While Virginia's fixed-date conformity provision appears to create a different depreciation computation for federal and state income tax returns, Virginia taxpayers are still required to follow all the rules pertaining to depreciation, as they existed in the Internal Revenue Code as of December 31, 2001. Under those rules, the Taxpayer properly deducted the depreciation on the rental properties in the taxable years prior to 2001, and, if she was a resident of a "conformity" state, benefited from those deductions on her state individual income tax return. Under Internal Revenue Code rules, the Taxpayer could not carry forward the depreciation deductions from prior years.
Based on the foregoing, the Department properly disallowed the subtraction claimed by the Taxpayer on the 2001 Virginia individual income tax return for depreciation not previously deducted on a Virginia individual income tax return for the rental properties sold. Accordingly, the individual income tax assessment for 2001 is correct, and there is no basis to refund the tax paid.
The Code of Virginia sections, regulations, and public documents cited, along with other reference documents, are available on-line in the Tax Policy Library section of the Department's web site, located at www.tax.state.va.us. If you have any questions regarding this determination, you may contact ************ in the Office of Policy and Administration, Appeals and Rulings, at ***************.
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- Sincerely,
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- Kenneth W. Thorson
Tax Commissioner
- Kenneth W. Thorson
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AR/49463B
Rulings of the Tax Commissioner