Tax Type
Corporation Income Tax
Individual Income Tax
Description
Accelerated Cost Recovery System (ACRS)
Topic
ACRS Modifications
Date Issued
05-25-1984
May 25, 1984
Dear ****
Thank you for your letter of May 10, 1984, in which you express several concerns in regard to amendments enacted by the 1982 General Assembly which provide for the addback and subsequent subtraction of excess cost recovery resulting from the federal Accelerated Cost Recovery System.
As you know, since 1972 our law has provided that Virginia taxable income is federal taxable income, subject only to changes deemed appropriate by the General Assembly and specifically set forth by law as Virginia modifications to federal taxable income. Accordingly, any amendments enacted by Congress to federal income tax laws directly impact the tax revenues of Virginia unless modifications are specifically provided by the General Assembly.
With enactment of the Economic Recovery Tax Act of 1981 (ERTA), Congress amended federal income tax laws to replace the class Life ADR System of depreciation with the Accelerated Cost Recovery System (ACRS), a system allowing substantial acceleration in the recovery of depreciable costs (estimated at thirty percent in the overall).
The General Assembly deemed it appropriate to defer the negative impact on Virginia income tax revenues resulting from federal legislation by providing an addition in each of the years 1982 and 1983 equal to thirty percent of the ACRS deduction in such years and providing recovery by subtraction in each of the next five succeeding years equal to twenty percent of the total additions in 1982 and 1983.
The deferral of revenue loss by simple provision of addition and subtraction modifications has been considered by most taxpayers to be a desirable alternative to the complexities of laws requiring the maintenance of separate depreciation schedules and separate tax bases for Virginia tax purposes or to laws imposing additional tax rates on all taxpayers. However, as with any tax system, unusual circumstances may result in perceived inequities. You have referred to several such circumstances.
You first refer to a taxpayer with zero federal taxable because of utilization of a net operating loss carryover and you perceive inequity in the required addition for thirty percent of the ACRS deduction and the resulting Virginia tax liability from such addition. I recognize no inequity in this circumstance. While Virginia law does not provide for the carryover of a separately computed Virginia net operating loss, it does permit full utilization of federal net operating loss deductions. Accordingly, non-recognition of the ACRS addback or any other required modification in the circumstances referred to would permit such modification to inequitably escape Virginia taxation forever.
You then note that the cost recovery period for certain individual items of property may even be extended rather than shortened by ACRS. I agree, but it is a well established fact that cost recovery periods in the overall have been substantially shortened by ACRS.
You have also posed several questions, each of which will be fully answered by regulations currently in process of publication under procedures prescribed by the Administrative Process Act. However, as previously noted in this letter, the law provides a simple addition to federal taxable income for two years and subtractions for recovery in the next five succeeding years. While the additions are measured by the federal ACRS deduction, they do not affect the tax basis of property, and the subsequent subtractions for recovery of additions are associated with the taxable entity required to make the additions and not the underlying property. Accordingly, in the event of death or corporate dissolution prior to the recovery period, the statutorial subtractions will not generally be available to a subsequent property owner. Furthermore, the sale of property will not affect the subtractions provided for recovery of ACRS additions.
I hope this will be helpful in answering your questions. Also, I am enclosing a copy of (proposed) Corporation Income Tax Regulations which express our interpretation and applications of law in greater detail. If I can be of further assistance, please let me know.
Sincerely,
W. H. Forst
State Tax Commissioner
Rulings of the Tax Commissioner