Tax Type
Individual Income Tax
Description
Energy income tax credit
Topic
Credits
Date Issued
12-23-1987
December 23. 1987
Re: Virginia Code §58.1-1821 Application
Individual Income Tax
Dear *****************
This is in reply to your letter of May 12, 1987 in which you apply for relief from the individual income tax assessment issued to your clients, *********** (Taxpayers) and to your letter of October 2, 1987 in which you provided additional information.
FACTS
In 1983, during a major renovation of their principal residence located within Virginia, the Taxpayers added a sun room and a sun porch. In order to compute the amount of the total expenditure applicable to these two rooms, they apportioned an amount of the total expenditure to these areas based upon the number of square feet contained in these areas. Based upon this method of apportioning the total expenditure, the taxpayers claimed a credit for renewable energy source expenditures on both their federal and their Virginia individual income tax return for taxable year 1983.
The entire amount of the federal credit was used to offset the tax shown on the 1983 federal income tax return. The Taxpayers computed a total Virginia credit of ********* (25% of the apportioned expenditure for the sun room and the sun porch). They claimed a credit equal to********* on their 1983 Virginia income tax return and carried over the balance of their computed credit and claimed a carryover credit equal to ********** on their 1984 and 1985 Virginia income tax returns.
The department disallowed the credit on the Taxpayers' 1985 Virginia return, thus reducing the requested refund by the amount of the credit claimed and issued an assessment for taxable year 1984 equal to the amount of the credit claimed. The assessment for taxable year 1984 has since been paid.
DETERMINATION
The Virginia energy income tax credit was enacted as Virginia Code §58-151.014:2 by Chapter 324 of the 1982 Acts of Assembly (Recodified as Virginia Code §58.1-331 effective January 1, 1984). For expenditures made during taxable year 1983, a credit was available that was equal to 25% of the amount of the qualified renewable energy source expenditures. For purposes of determining what constitutes a renewable energy source expenditure, this section specifies that the definitions in §44 C of the Internal Revenue Code and the accompanying regulations will be used. However, subsection C of this section imposes the following limitation on the amount of this credit.
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- The amount of such credit shall not exceed $1,000 for a qualified renewable energy source expenditure or the tax imposed by this chapter, whichever is less. In determining such expenditures, the labor of the taxpayer shall not be included.
- The amount of such credit shall not exceed $1,000 for a qualified renewable energy source expenditure or the tax imposed by this chapter, whichever is less. In determining such expenditures, the labor of the taxpayer shall not be included.
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- Only one credit, not to exceed $1,000 per expenditure, is allowable. Such credit is nonrefundable and may not exceed the lesser of $1,000 or the actual tax liability computed without respect to the credit. If any portion of an otherwise allowable energy income tax credit is not used solely because it exceeds the individual's income tax liability, the unused portion of the credit may be carried to the succeeding taxable year and added to any credit allowable for that taxable year until used. No excess credit may be carried forward to a taxable year beginning on or after January 1, 1989. (Emphasis added.)
It is clear from the applicable statute and Regulation that, even though in computing the credit the individual must begin by calculating 25% of the qualified expenditure, the maximum credit may not exceed $1,000 per expenditure or the amount of income tax liability, whichever is lesser.
Therefore, assuming that the expenditures for the sun room and the sun porch each were sufficient in amount and met the necessary criteria to qualify as qualifying expenditures, a total maximum credit of $2,000, based on two expenditures, would have been generated. Your clients' 1983 income tax liability, without considering the credit, exceeded $2,000; therefore, any applicable credit should have been claimed as a credit against their 1983 Virginia income tax liability. Only if the Taxpayers' income tax liability for taxable year 1983 was less than $2,000 would there be a carryover of any credit necessary.
Based upon the information that you have provided, the Internal Revenue Service allowed the credit, as claimed, on the Taxpayers' 1983 federal income tax return. However, it appears that a significant portion of the expenditure that the credit was based upon did not qualify as a renewable energy source expenditure under Treasury regulations. This is because a significant portion of the amount apportioned to the sun room and to the sun porch was for a "dual purpose." Section 1.44C-2(f)(4) of the Regulations provides that to the extent that a system utilizes portions of the structure of a residence, only the materials and components whose sole purpose is to transmit or to use solar radiation are included within the term solar energy property. Many of the components of the sun room and the sun porch, attached to the Taxpayers' residence, are a part of the structure and serve purposes other than to provide heating and cooling through the use of solar radiation.
While the fact that the credit was allowed by the Internal Revenue Service may be a factor to be considered regarding your contention that the Taxpayers' expenditures qualified as renewable energy source expenditures, the department is not bound by the action of the Internal Revenue Service. Based upon the information provided to the department, it is not apparent that the Taxpayers would be entitled to a full $2,000 credit for taxable year 1983. Your clients have provided neither the department nor the Internal Revenue Service with detailed information to substantiate that the expenditures were for components, whose sole purpose was to transmit or to use solar radiation.
Accordingly, the department has determined that there will be no further adjustment made to the credit for taxable year 1983. Furthermore, regardless of the correct amount of credit applicable to taxable year 1983, there can be no carryover of any credit to taxable years 1984 or 1985 since the Taxpayers had sufficient tax liability to absorb the maximum credit for two expenditures in taxable year 1983. The assessment for taxable year 1984 and the refund reduction for taxable year 1985 are proper.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner