Tax Type
Individual Income Tax
Description
Job Creation and Worker Assistance Act does not apply
Topic
Tangible Personal Property
Taxability of Persons and Transactions
Taxable Income
Date Issued
06-24-2009
June 24, 2009
Re: § 58.1-1821 Application: Individual Income Tax
Dear *****:
This will reply to your letter in which you seek correction of the individual income tax assessment issued to ***** (the "Taxpayers") for the taxable year ended December 31, 2004.
FACTS
The Taxpayers, a husband and wife, filed a joint Virginia income tax return and itemized their deductions for the taxable year at issue. The Taxpayers placed office furniture and equipment into service for their businesses in April 2004 and elected to expense the cost in the first year pursuant to Internal Revenue Code (IRC) § 179. In 2004, the Taxpayers reported an additional 30% depreciation allowance on their 2004 Virginia itemized deductions that they did not claim an their federal return.
The Taxpayers' 2004 Virginia return was audited and the itemized deductions were adjusted to reflect the itemized deductions reported on their federal return. The Taxpayers contest the adjustment, contending that under the federal Job Creation and Worker Assistance Act of 2002 (JCWAA), they were entitled to claim an additional 30% depreciation allowance.
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). There are only two exceptions to this conformity. The first exception is for the special depreciation allowance for certain property provided for under IRC § 168(k). The second exception is for the carryback of certain net operating losses for five years under IRC § 172(b)(1)(H).
Virginia Code § 58.1-322 D 1 provides that any taxpayer who itemizes his deductions for federal income tax purposes must also itemize deductions for Virginia income tax purposes. Itemized deductions for Virginia purposes must equal itemized deductions for federal purposes.
In the instant case, the Taxpayers' itemized deductions on their Virginia return were greater than on their federal return. The Taxpayers assert that they were entitled to claim greater itemized deductions because Tax Bulletin (VTB) 02-3 (4/8/2002) permits them to claim an additional 30% depreciation allowance on certain business property.
Under the JCWAA, IRC §168(k) provides a special 30% depreciation allowance at the federal level for property acquired after September 10, 2001 and before September 11, 2004. It permits 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 IRC.
VTB 02-3 addresses the interaction between the JCWAA and Virginia's fixed-date conformity provisions enacted by the General Assembly. This provision essentially disallows the bonus depreciation deduction permitted on federal income tax returns. Taxpayers who claimed the bonus depreciation allowance on their federal returns are required to make an addition on their Virginia income tax return. A fixed-date conformity addition for depreciation is equal to the difference between the total amount of depreciation deducted on a taxpayer's federal return and the total amount of depreciation that the taxpayer would have deducted for federal tax purposes had IRC §168(k) not been enacted. VTB 02-3 modifies the federal bonus depreciation deduction, it does not permit an additional depreciation deduction for Virginia income tax purposes.
Taxpayers who claimed a bonus depreciation deduction in 2004 were required to make the corresponding adjustments as described in VTB 02-3 and VTB 05-1 (3/7/2005) on their 2004 Virginia income tax return. Based on the information provided, the Taxpayers placed business property in service in April 2004 and deducted the full cost of the property on their federal income tax return under IRC § 179. A portion of the § 179 expense was required to be reported on their Schedule A. As such, the Taxpayers claimed no bonus depreciation deduction on which to base a Virginia fixed-date conformity addition. Such an addition would have essentially decreased the Taxpayers' Virginia itemized deductions, not increased them.
Further, fixed-date conformity under Virginia law means that a fixed-date conformity subtraction may be available for taxable years subsequent to the year in which a bonus depreciation deduction was taken for federal income tax purposes. For depreciation, taxpayers may be entitled to a fixed-date conformity subtraction equal to the difference between the total amount of depreciation deducted on a taxpayer's federal return and the total amount of depreciation that the taxpayer would have deducted for federal tax purposes had IRC §168(k) not been enacted.
There is no indication that the Taxpayers took a bonus depreciation deduction on their federal income tax returns for the 2001 through 2003 taxable years or made a corresponding fixed-date conformity addition on their Virginia returns. As such, they were not entitled to claim a fixed-date conformity subtraction on their 2004 Virginia return.
Accordingly, the auditor's adjustment is correct and the assessment is upheld. A revised bill, with interest accrued to date, will be sent to the Taxpayers. No additional interest will accrue provided the outstanding balance in paid within 30 days from the date of the revised bill.
The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
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- Sincerely,
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Janie E. Bowen
Tax Commissioner
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AR/1-2510687287.B
Rulings of the Tax Commissioner