November 16, 2017
Re: Request for Ruling: Individual Income Tax
Corporate Income Tax
Dear *****:
This will respond to your letter in which you seek a ruling on behalf of a group of taxpayers (the “Taxpayers”) regarding whether a subtraction is allowed in computing their Virginia taxable income (VTI).
FACTS
The Taxpayers are restaurants that may claim a credit against their federal income tax liability pursuant to Internal Revenue Code (IRC) § 45B for Social Security taxes paid on employee tips. The statute does not permit the Taxpayers to claim a deduction for any amount taken into account to compute the credit, effectively lowering the amount of payroll expenses the Taxpayers can claim as business expense deductions. The Taxpayers request a ruling regarding whether they are permitted to subtract the amount of the foregone deductions in computing their VTI.
RULING
Virginia's conformity to federal income tax law is set forth in Va. Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (IRC). Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia. For Virginia, federal taxable income (FTI) and federal adjusted gross income (FAGI), the starting points for determining income taxable in Virginia for corporations and individuals, respectively, are identical to that as defined by the IRC.
For individual income tax purposes, any income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322. Virginia Code § 58.1-402 provides that a corporation's VTI for any given taxable year is the FTI and any other income taxable to the corporation under federal law for such year, adjusted and modified by certain specified additions, subtractions, and exemptions.
IRC § 45B provides a credit against federal income tax to employers who pay Social Security taxes on employee tips that exceed the amount of federal minimum wage employees must be paid. Employers who claim the credit, however, may not also claim a deduction for any amount taken into account in determining the credit. See IRC § 45B (d). The Taxpayers explain that this has the effect of lowering their payroll expense deductions that would otherwise be allowable as business expense deductions for federal income tax purposes.
The ruling request does not specify whether the Taxpayers report their income on individual or corporate tax returns. For corporate income tax purposes, because payroll expense deductions are already accounted for in the computation of FTI, the Taxpayers would effectively lose a portion of the deductions in computing VTI but not gain the benefit of the federal credit on their Virginia returns.
Similarly, for individual income tax purposes, the allowable portion of the deductions would be reported on Schedule C of their federal income tax returns or would have been included in the computation of income reported for a pass-through entity and, thus, already be accounted for in their FAGI. The Taxpayers ask whether they may subtract the portion of the deductions disallowed under IRC § 45B in computing their VTI.
By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Dep't of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983).
Virginia does not allow a taxpayer to claim a subtraction for expenses offset by a credit at the federal level unless allowed by statute. See Public Document (P.D.) 91-59 (3/29/1991) and P.D. 16-34 (3/23/2016). Subtractions allowable in the computation of VTI are expressly set forth in Va. Code § 58.1-322 C and § 58.1-402 C for individual and corporate income tax purposes, respectively. Virginia statutes do not allow taxpayers to claim a subtraction for the amount of business expense deductions that may be reduced by claiming the federal credit under IRC § 45B. Therefore, to the extent a Taxpayer's payroll expenses may be reduced by claiming such credit, the amount of the reduction may not be claimed as a subtraction on the Virginia income tax return.
The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department's web site. If you have any questions regarding this ruling, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/1302.M