April 6, 2021
Re: § 58.1-1821 Appeal: Individual Income Tax
Dear *****:
This will respond to your letter in which you seek correction of the individual income tax assessment issued to ***** (the “Taxpayer”) for the taxable year ended December 31, 2016 and 2018, as well as, the denied refund for the taxable year ended December 31, 2017. I apologize for the delay in responding to your request.
FACTS
The Taxpayer filed Virginia individual income tax returns for the 2016 through 2018 taxable years claiming subtractions for qualified research expenses. Under audit, the Department disallowed the subtractions, resulting in assessments being issued for the 2016 and 2018 taxable years and a refund request being denied for the 2017 taxable year. The Taxpayer appeals the assessments and denial of the refund, asserting that he was entitled to the subtractions as originally claimed.
DETERMINATION
Virginia’s conformity to federal income tax law is set forth in Virginia 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.
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 P.D. 91-59 (3/29/1991), P.D. 94-164 (5/25/1994), and P.D. 16-34 (3/23/2016). Under Virginia Code § 58.1-322.02 10, individuals are permitted to subtract the amount of qualified research expenses eligible for deduction for federal purposes, but which were not deducted, on account of the provisions of IRC § 280C (c) and which are available to partners, shareholders of S corporations, and members of limited liability companies to the extent and in the same manner as other deductions may pass through to them. See P.D. 18-201 (12/7/2018), and P.D. 19-89 (8/15/2019).
In denying the subtractions, the Department’s auditor relied on P.D. 94-88 (3/25/1994), which states that there is no adjustment for research expenses provided for in the Code of Virginia. However, P.D. 94-88 also notes that legislation was passed by the Virginia General Assembly that would allow a subtraction for research expenses in subsequent years. Statutory changes generally either create new policy, reinforce established policy, or amend existing policy. In this particular case, the General Assembly enacted legislation that changed the applicability of P.D. 94-88 in subsequent taxable years.
The evidence provided shows that the Taxpayer was a member of a limited liability company (LLC), and the LLC claimed a federal tax credit for qualified research. Because of the LLC’s nature as a pass-through entity, a subtraction for the qualified research expenses proportional to the Taxpayer’s ownership interest was available. Consistent with the information on the LLC’s return, the Taxpayer’s individual Virginia income tax returns subtracted the Taxpayer’s proportional share of the total research expenses claimed by the LLC. Pursuant to Virginia Code § 58.1-322.02 10, the Taxpayer is entitled to the subtractions at issue. Accordingly, the adjustments are reversed and a refund will be issued as warranted.
Please note that, as an administrative convenience, the Department allows overpayments of tax to be credited against an estimated tax liability for the next succeeding taxable year when an original income tax return is filed on or before the due date. See Title 23 of the Virginia Administrative Code (VAC) 10-110-320 C. When an individual’s liability is increased as a result of an adjustment to an original return, the credit to estimated payments may be reduced or eliminated. The Department will send a notice of the reduction in the overpayment credit to estimated tax. It is incumbent upon the individual to be aware that the overpayment credit reported on their return may be adjusted by the Department and ensure that any amounts reported on future returns are correct.
The Code of Virginia sections, regulation, and public documents cited are available online at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s website. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings at *****.
Sincerely,
Craig M. Burns
Tax Commissioner
AR/ 3351.C