23VAC10-110-142. Virginia taxable income; subtractions.
To the extent included in FAGI, the items enumerated below shall be subtracted from FAGI in determining Virginia taxable income. If an item was partially excluded or deducted in determining FAGI, it shall be subtracted from FAGI only to the extent included therein. If an item has already been excluded from Virginia taxable income, it shall not be subtracted again pursuant to this section.
1. Interest or dividends on obligations of the United States or Virginia.
a. "Obligation" means a debt obligation or security issued by the United States or any authority, commission or instrumentality of the United States or by the Commonwealth of Virginia or any of its political subdivisions, which obligation or security is issued in the exercise of the borrowing power of the United States or Virginia and is backed by the full faith and credit of the United States or Virginia.
b. Guarantees by the United States or Virginia of obligations of private individuals or corporations are merely contingent obligations of the United States or Virginia even though the guarantees may be backed by the full faith and credit of the United States or Virginia. The obligation does not become an obligation of the United States or Virginia because of the guarantee and interest and dividends paid on such guaranteed obligations do not qualify for the subtraction unless specifically exempted by statute.
c. Specific statutory exemptions exist for certain securities issued by particular federal or Virginia agencies or political subdivisions. If a federal or Virginia statute exempts from state taxation the interest or dividends on specific securities of a particular agency or political subdivision then such interest or dividends qualify for the subtraction.
d. Repurchase agreements are usually obligations issued by financial institutions which are secured by U.S. obligations exempt from Virginia income taxation under subdivisions 1 a and c of this section. In such cases the interest paid by the financial institutions to purchasers of repurchase agreements does not qualify for the subtraction. Repurchase agreements issued following current commercial practice will invariably be regarded as obligations of the issuing financial institution. However, if the purchaser is regarded as the true owner of the underlying exempt obligation, the interest will qualify for the subtraction even though collected by the seller and distributed to the purchaser. Any claim of such ownership must be substantiated by a taxpayer claiming a subtraction.
e. Interest received from regulated investment companies. Interest on exempt obligations received by a regulated investment company and passed through to the stockholders in qualifying distributions, as defined in IRC § 852, will retain its exempt status in the hands of the shareholders. If a shareholder receives a distribution which includes interest from both exempt and non-exempt obligations, all distributions will be deemed taxable unless the shareholder can substantiate the exempt portion of the distributions. Any individual requiring advice as to the taxable status of distributions from any regulated investment company should contact such company. Due to the turnover in investments held by such companies and the commingling of interest from exempt and non-exempt obligations, the Department cannot render such advice.
f. Expenses. The subtraction for interest on exempt obligations must be reduced by any expenses attributable to such interest and by interest or indebtedness incurred or continued to purchase or carry exempt obligations pursuant to IRC § 265.
2. Interest or dividends from pass-through entities.
a. Under federal law certain income received by a partnership, estate, trust or regulated investment company (pass-through entity) and distributed to a partner, beneficiary or shareholder (recipient) retains the same character in the hands of the recipient. If a pass-through entity receives interest or dividends on U.S. or Virginia obligations which is distributed to the recipients in a manner that the distributions retain their character in the hands of the recipients under federal law, then such interest or dividends may be subtracted by the recipients in computing Virginia taxable income.
b. A pass-through entity may invest in several types of securities, some of which are U.S. or Virginia obligations. When taxable income is commingled with exempt income all income is presumed taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. The determination must be made for each distribution to each shareholder. For example, if distributions are made monthly then the determination must be made monthly. As a practical matter, only pass-through entities which invest exclusively in U.S. or Virginia obligations, or which have extremely stable investment portfolios, will be likely to make such determinations.
(1) ABC Fund, a regulated investment company, invests exclusively in U.S. Treasury notes and bills which are exempt from state taxation under 31 USC § 3124. All distributions are considered to be interest on U.S. obligations and may be subtracted by the recipient.
(2) Va. Fund, a regulated investment company, invests exclusively in obligations of Virginia and its political subdivisions. Distributions are considered to be interest on Virginia obligations and qualify for the subtraction to the extent that such distributions are included in the recipient's federal taxable income.
(3) XYZ Fund, a regulated investment company, invests in a variety of securities including obligations of the U.S., Virginia, other states, corporations and financial institutions (repurchase agreements). Due to the commingling of taxable and exempt income, the turnover in XYZ Fund's investments and the fluctuation in a shareholder's investment in XYZ Fund, all distributions are considered taxable income and do not qualify for the subtraction unless XYZ Fund determines the portion of distributions which is interest and dividends from U.S. and Virginia obligations for each distribution to each shareholder. Note that any portion of XYZ Fund's distributions which are excluded from federal taxable income as interest on obligations of other states must be added to Virginia taxable income.
3. Pension and retirement income. Income received by officers or employees of the Commonwealth, its political subdivisions or agencies as a pension or retirement income shall be subtracted from FAGI in determining Virginia taxable income to the extent that such income is specifically exempted from state taxation by law. Income specifically exempt from state taxation includes that received pursuant to provisions of the Virginia Retirement System, the Judicial Retirement System (§ 51.1-300 et seq. of the Code of Virginia and prior law), State Police Officers Retirement System (§ 51.1-200 et seq. of the Code of Virginia), and the special retirement system for officers and employees of counties, cities and towns (§ 51.1-800 et seq. of the Code of Virginia).
Qualified retirement income or pensions, as defined above, received by the retiree or his surviving spouse may be subtracted to the extent included in FAGI. No person claiming a deduction pursuant to this section may also claim the retirement income tax credit set forth in 23VAC10-110-200 nor may such person claim the disability income exclusion set forth in subdivision 4 of this section.
4. Disability income. Federal law (IRC § 37) allows retired individuals who are under age 65 and who qualified for retirement on the basis of a permanent and total disability a credit against federal tax liability for a specified percentage amount of a disability income base. Persons who qualify for such federal credit may deduct from FAGI in computing Virginia taxable income the amount on which the federal credit is based. This credit base amount to be deducted is limited to the amount actually allowed in computing the federal credit. Example follows:
Example: For the taxable year beginning January 1, 1984, Taxpayer A, a disabled retired single individual has FAGI of $12,500. Under federal law A is entitled to a 15% disability credit based upon a base of $5,000 less ½ of the amount by which FAGI exceeds $7,500. Since A's FAGI exceeds $7,500 by $5,000, his credit base for computing the federal credit is $5,000 (initial credit base)--½ X 5,000 (amount by which FAGI exceeds $7,500) or $2,500. Thus A may deduct $2,500 from FAGI in computing Virginia taxable income.
No person claiming a deduction pursuant to this section may also claim the retirement income tax credit set forth in 23VAC10-110-200 nor may such person claim a state or local retirement subtraction as set forth in subdivision 3 of this section.
5. Social Security and Railroad Retirement benefits. The amount of any Social Security benefits received under Title II of the Social Security Act (Old Age and Survivors Disability Insurance) and any other benefits included in FAGI solely by virtue of IRC § 86 shall be subtracted from FAGI in computing Virginia taxable income. "Other benefits" under IRC § 86 includes Tier 1 Railroad Retirement benefits and workers' compensation to the extent that it reduces OASDI benefits. Tier 2 Railroad Retirement benefits shall be subtracted from FAGI in computing Virginia taxable income by virtue of the Railroad Retirement Act.
6. Income tax refunds. The amount of any income tax refund or credit for overpayment of income tax to Virginia or any other taxing jurisdiction shall be deducted from FAGI to the extent included therein. For purposes of determining Virginia taxable income, the amount of federally allowable itemized deductions is reduced by the amount of income tax imposed by Virginia or other taxing jurisdictions. (See subdivision 1 of 23VAC10-110-143.) Therefore, any refunds or credits for overpayments of such taxes which are required, by federal law, to be included in FAGI, may be deducted in computing Virginia taxable income.
7. WIN or targeted jobs tax credit. Federal law permits employers to claim an income tax credit based upon certain wages paid under IRC §§ 40 and 44B. If such credit is elected, IRC § 280C bars the deduction of the wages on which such credit is based. To the extent such wages were not deducted from FAGI, they shall be subtracted therefrom in the computation of Virginia taxable income.
8. Foreign source income.
a. Generally. Foreign source income as defined in 23VAC10-110-30 shall be subtracted from FAGI, to the extent included therein, in determining Virginia taxable income.
b. Earned income. Federal law allows individual taxpayers to exclude in the computation of FAGI a portion of earned income from foreign sources. To the extent that this exclusion is elected, such earned income will similarly be excluded from Virginia taxable income. However, if a taxpayer does not elect, or is not eligible to elect, to exclude foreign source income from FAGI, he may not deduct such income from FAGI in computing Virginia taxable income.
c. Taxes paid to foreign country. Federal law generally allows an individual who has paid or accrued foreign income tax to elect to either treat such tax as a deduction from FAGI or to apply such taxes as a credit against federal tax liability. If a taxpayer elects to treat foreign taxes as a deduction from FAGI, his allowable itemized deductions will be reduced by such amount in computing Virginia taxable income. (See subdivision 1 of 23VAC10-110-143.)
9. Qualified agricultural contributions.
a. Generally. The amount of any qualified agricultural contribution shall be subtracted from FAGI in determining Virginia taxable income.
b. Qualified contributions. Contributions that qualify for subtraction from FAGI are contributions of agricultural products made between January 1, 1985, and December 31, 1987, by an individual who is engaged in the trade or business of growing or raising such products. Thus, contributions of agricultural products by an individual who is not engaged in the business of farming (for instance, contributions of goods raised in a family garden) do not qualify for subtraction.
To be subtractible, a contribution must be made to an organization exempt from federal income taxation under IRC § 501(c)(3) and must meet the following (i) the product contributed must be fit for human consumption; i.e. edible; (ii) the use of the product by the donee must be related to the purpose tests: or function for which the donee was granted exemption under IRC § 501(c)(3) (for instance, contributions of crops to a foundation organized for scientific or literary purposes would not qualify, but contributions of crops to a nonprofit food bank would qualify); (iii) the contribution is not made in exchange for money, property or service; and (iv) the donor must obtain from the donee a written statement representing that the donee's use and disposition of the product will be in accordance with its charitable mission. Such written statements also must list the type and quantity or volume of products contributed, state that the products donated are fit for human consumption, and state the use to which the donations will be put. Such written statements must be filed with the taxpayer's income tax return when the subtraction for qualified agricultural contributions is claimed.
To be subtractible from FAGI under the above tests, the donee must make use of the agricultural products donated to it consistent with the purpose for which it was granted exemption under IRC § 501(c)(3). Therefore, contributions of crops to a charitable organization which provides food to the needy would qualify. However, contributions of crops to an organization that does not itself provides food to the needy would not qualify, even if the donee in turn contributes the crops to an organization that provides food to the needy.
c. Agricultural product. Crops are the only agricultural products eligible for subtraction when donated. Thus, the subtraction is limited to contributions of products of the soil and does not include contributions of animal products.
d. Computation of subtraction. The subtraction for qualified agricultural contributions is equal to the lowest wholesale market price in the nearest regional market of the type of products donated during the months in which donations are made. For the purpose of determining the lowest wholesale market price for a particular product, a taxpayer must use the lowest wholesale market price, regardless of grade or quality, published in the month of contribution by the U.S. Department of Agriculture Market News Service on Fruits, Vegetables, Ornamentals, and Specialty Crops for the regional market nearest the taxpayer's place of business.
e. Limitation on subtraction. The subtraction for qualified agricultural contributions shall be reduced by the amount of any other charitable deductions relating to qualified agricultural contributions if the deductions are claimed on the donor's federal return for the taxable year in which the contribution is made, or if the deductions are eligible for carryover to subsequent taxable years under IRC § 170. For example, a farmer who itemizes deductions for federal and state income tax purposes and who claims a charitable deduction of qualified agricultural products on his federal return must reduce his Virginia subtraction for qualified agricultural contributions by the amount of his federal charitable deduction for the same products. If the farmer's total charitable contributions of qualified agricultural products exceed the deduction ceiling set by federal law and the farmer is eligible to carryover deductions to subsequent years, the farmer must also subtract the deductions eligible for carryover from the value of his qualified agricultural contributions.
Example: Farmer contributes fifty 50-pound sacks of round white potatoes to a local nonprofit food bank. The farmer's basis in the contributed property is $10, of which he claims $5 as a charitable contribution on his 1986 federal and state income tax returns and will carryover $5 as a charitable deduction on his 1987 federal and state income tax returns. During the month in which the contribution was made, the lowest wholesale market price for a 50-pound sack of round white potatoes published by the U.S. Department of Agriculture Market News Service in the regional market nearest the farmer's place of business was $2. The farmer's deduction for his qualified agricultural contribution would be computed as follows:
Derived from VR630-2-322 § 3, eff. January 21, 1987; amended, eff. February 1, 1987.