Tax Type
Individual Income Tax
Description
Out-of-state tax credit; S corporation
Topic
Credits
Date Issued
03-20-1990
March 20, 1990
Re: Ruling Request/ Individual Income Tax
Credit for Income Taxes Paid to Another State
Dear*****************
This will reply to your letter of February 7, 1990 in which you request reconsideration of a ruling by the Department dated January 11, 1990, due to errors of fact which were presented in that ruling. You request a ruling with respect to a credit against the Virginia income tax for taxes paid by your client *****("taxpayer") to California.
FACTS
The taxpayer, a Virginia resident, is a shareholder in a California subchapter S corporation. The corporation, which does business solely in California, has elected to file as a subchapter C corporation in California in that state. The corporation recognized income on its long term construction contract using the percentage-of-completion method of accounting for California purposes and the completed-contract method of accounting for Virginia and federal purposes for a contract entered into in 1984 and completed in 1988.
The taxpayer was a Virginia resident for all of the years of the contract. Therefore, using the completed contract method, the taxpayer was required to recognize and subject to Virginia income tax the entire contract income in 1988, the year of completion. Accordingly, the taxpayer became liable to Virginia for 100% of the tax attributable to the long term contract in one year, 1988, while for California purposes, he paid taxes ratably, over the entire contract period, as a percentage of the contract's completion for each respective year.
RULING
Even in light of the additional and corrected facts that you have presented since my previous ruling, I do not find basis for changing such previous determination to allow the taxpayer to claim a credit against his 1988 Virginia return for taxes paid to California in previous years.
In accordance with Virginia Code §58.1-322(A) and Virginia Regulation 630-2-332(1)(A) thereunder, the credit for income tax paid to another state for residents of Virginia is allowable only with respect to income tax liability to such other state incurred within the same taxable year as the liability is incurred to Virginia.
Therefore, absent specific statutory authority, the taxpayer will be allowed credit only for his prorata share of the California income tax imposed on the S corporation (see Commissioner's Ruling dated May 27, 1988) in the same year that such income is also recognized for Virginia purposes.
Furthermore, the credit taken on the Virginia return must be limited to the lesser of:
-
- (i) the tax actually paid to California on the non-Virginia source income for the same taxable year., or
(ii) the amount of tax actually paid to California for the same taxable year which is equivalent to the proportion of income taxable in California to Virginia taxable income (computed prior to the credit).
- (i) the tax actually paid to California on the non-Virginia source income for the same taxable year., or
Finally, it should be noted that had the corporation made the "S" election for California purposes, California would normally have allowed a credit for tax paid to Virginia by a Virginia resident on income taxed at the shareholder level by both states (see Va. Reg. §630-2-322).
I hope that the foregoing has responded to your inquiries. If you have further questions, please contact the department.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner