Could an individual claim a recycling-equipment credit passed through from an S corporation for the 2005 tax year?

Subject

2005 recycling-equipment credit was unavailable to an S-corporation shareholder

Plain-English summary

Virginia denied an individual recycling-equipment credit passed through from an S corporation for 2005. The married taxpayers claimed the credit on their Virginia individual return through the husband's ownership interest in a Virginia S corporation.

The ruling traced two separate statutory credit tracks. The individual credit had been extended only through taxable years ending before January 1, 2004, so it expired after 2003. A corporate credit continued, but legislation authorizing that credit to pass through to individuals applied only to tax years beginning on or after January 1, 2007.

Because 2005 fell after expiration of the individual credit and before the pass-through authorization, the shareholder could not claim it. The additional tax and interest were upheld.

What this means for you

• A business-level credit does not automatically pass through to an individual owner.
• Check both the credit's sunset date and the effective date of any pass-through provision.
• Later legislation allowing a pass-through did not retroactively make the credit available for 2005.
• This ruling concerns a historical tax year and should not be used as current credit guidance.

Common questions

Did the S corporation have a corporate credit provision?

The ruling says the corporate credit continued under reenacted provisions, but that did not by itself authorize an individual shareholder's 2005 claim.

When did individual pass-through authority begin?

For taxable years beginning on or after January 1, 2007.

What happened to the 2005 assessment?

Virginia upheld the additional tax and interest.

Citations and references

• 1990 Va. Acts ch. 709.
• 2001 Va. Acts ch. 91.
• 1998 Va. Acts ch. 253.
• 2007 Va. Acts chs. 529 and 593.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-174

Original ruling text

October 23, 2009

Re: § 58.1-1821 Appeal: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to your clients, * (the "Taxpayers"), for the taxable year ended December 31, 2005.

FACTS

The Taxpayers, husband and wife, are Virginia residents who claimed a tax credit for the purchase of machinery and equipment for processing recyclable materials (the "Credit") on their 2005 Virginia individual income tax return, Form 760. The Credit was passed through to the husband from his interest in a Virginia S Corporation (VSC).

Under audit, the Credit was disallowed because it is not available for individual taxpayers for the 2005 taxable year. An assessment was issued for additional tax and interest. The Taxpayers contest the assessment, asserting that the statute allows the Credit to be passed through to individual shareholders of S corporations.

DETERMINATION

In 1990, the General Assembly enacted the Credit for the purchase of machinery and equipment for processing recycled materials. See Chapter 709, 1990 Acts of Assembly . Under this chapter, two separate sections were added. Virginia Code § 58.1337 allowed the Credit against the individual income tax and Va. Code § 58.1-445.1 allowed the Credit against the corporate income tax.

The Credit for both individuals and corporations included a sunset provision. This provision was extended several times. For the individual income tax credit, the provision was Extended through taxable years ending before January 1, 2004 (Chapter 91, Acts of Assembly ) by the 2001 General Assembly. No further extensions were enacted and the Credit for individuals expired after the 2003 taxable year.

In 1998, the General Assembly (Chapter 253, Acts of Assembly ) repealed and reenacted the Credit for corporations under Va. Code §§ 439.7 and 439.8. The 2007 General Assembly enacted legislation (Chapters 529 and 593, Acts of Assembly ) to permit the Credit to be passed through to individuals for taxable years beginning on or after January 1, 2007.

Because the Credit for individuals expired after 2003 and was not permitted as a pass through credit until 2007, the Credit could not be claimed by individuals for the 2005 taxable year. Accordingly, the assessment is upheld, and is now due and payable. Payment of the remaining balance due, as shown on the enclosed schedule, should be mail to : Virginia Department of Taxation, Appeals and Rulings, Post Office Box 27203, Richmond, Virginia 23261-7203, Attention: *. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter.

The Code of Virginia and regulation sections cited, along with other reference documents, are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have questions concerning this determination, you may contact * at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

AR/1-3438037078.C