Tax Type
Individual Income Tax
Description
Out-of-state tax credit; California S-corporation shareholder
Topic
Credits
Date Issued
01-11-1990
January 11, 1990
Re: Ruling Request/ Individual Income Tax
Credit for Income Taxes Paid to Another State
Dear **************
This will reply to your letter dated October 31, 1989 in which you request a ruling on the computation of the Virginia Individual Income Tax credit for an "S" Corporation shareholder for income taxes paid by the corporation to a state which does not recognize the federal "S" corporation election.
FACTS
You represent a taxpayer who files a multistate corporate income tax return for a subchapter "S" corporation in California and Virginia. You state that California does not recognize the federal "S" election, nor does it recognize the accounting method opted for federal purposes for reporting income from long-term contracts. Virginia recognizes both elections.
For taxable years 1986 - 1988, for federal purposes, the "S" corporation used the completed contract method for recognizing income received from a contract entered into during 1985. This method resulted in the recognition of the entire contract gain in the year of completion. While Virginia conformed to the federal accounting method, California required the use of the percentage-of-completion method.
The taxpayer requests a ruling for the provision of Virginia credit for all of the taxes paid to California even though significant amounts of tax have been paid to California in years prior to the year of completion.
RULING
In accordance with Virginia Regulation §630-2-332(1)(A) (enclosed), "[t]he credit [for income tax paid to another state] for residents and nonresidents is allowable only with respect to income tax liability to another state incurred within the same taxable year as the liability is incurred to Virginia.
As such, your client may not claim a credit against Virginia income tax for tax paid to California.
As part of the California Personal Income Tax Fairness, Simplification, and Conformity Act of 1987, the federal concept of the "S" corporation was adopted. Under the new California law, a corporation which has adopted "S" corporation status for federal income tax purposes, may elect to be taxed either as an "S" corporation or as a "C" corporation. If "S" corporation status is elected, the income, losses, deductions and credits of the "S" corporation are passed through to the shareholders in the same manner as for federal purposes; however, California also imposes a 2.5% tax on the net income of the corporation. A copy of a previous ruling dated May 27, 1988 which specifically addresses the applicability of the credit to Virginia resident shareholders in light of the California law change is enclosed for your information.
Also enclosed is a ruling dated December 23, 1987, which discusses the application of the credit to taxpayers with income from a multistate "S" corporation.
If you have any further questions, please do not hesitate to contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner