Tax Type
Corporation Income Tax
Description
Change in accounting method; Additional income recognized
Topic
Accounting Periods and Methods
Subtractions and Exclusions
Date Issued
11-15-1990
November 15, 1990
Re: §58.1-1821 Application; Corporation Income Tax
Dear ****
This will reply to your letter of August 21, 1990, in which you seek correction of a corporation income tax assessment for ****** (the "Taxpayer").
FACTS
The taxpayer was required to change from the cash basis method of accounting to the accrual method. The change required the recognition of additional income at the state and federal levels. Income tax on the additional income was paid to the state of the taxpayer's commercial domicile. The IRS permitted the taxpayer to prorate the recognition of the additional income over three successive years, in accordance with Internal Revenue Code (IRC) §481(a). These changes occurred prior to the taxpayer becoming liable for Virginia corporation income taxes.
The taxpayer claimed a subtraction for the income recognized in a subsequent year due to the proration, asserting that the prorated income should not be subject to Virginia tax. The subtraction was disallowed upon audit.
DETERMINATION
Va. Code §58.1-440 (copy enclosed) provides that any accounting adjustments made for federal income tax purposes for any taxable year shall be applied in computing the taxpayer's Virginia taxable income for the same year.
In this case, the method of accounting was changed to the accrual method for both federal and Virginia purposes. Adjustments were made for federal purposes, in accordance with IRC §481(a), allowing the taxpayer to prorate over a three year period the additional income resulting from the new accounting method. Because Virginia taxable income is based upon federal taxable income the adjustments made to federal taxable income for any taxable year also apply to the computation of Virginia taxable income for the same taxable year. The additional income included in federal taxable income must be included in Virginia taxable income.
You contend that, because income taxes were paid to another state and the income was earned when the taxpayer was not active in Virginia, the income recognized on the federal return due to the §481(a) adjustment should not be subject to Virginia tax.
The Virginia corporation income tax is imposed on the Virginia taxable income of every corporation having income from Virginia sources. Virginia taxable income is defined as federal taxable income with certain specified additions, subtractions and exemptions. For purposes of computing Virginia taxable income, the term "federal taxable income" means all income from whatever source derived and however named on which a federal tax is imposed. There is no modification to allow the subtraction you claim for additional income recognized as a result of a change in accounting methods.
Accordingly, the assessment is correct as made and is now due and payable. You will shortly receive an updated bill with interest accrued to date. The bill should be paid within thirty days to avoid the accrual of additional interest.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner