How should a semi-retired nonresident allocate salary and management fees for days worked in Virginia?

Subject

Nonresident salary and management fees followed documented Virginia workdays

Plain-English summary

Virginia allocated both the husband's salary and his management fees according to the documented days he actually performed services in Virginia. The semi-retired owner worked 140 days each year for a Virginia corporation but lived outside the Commonwealth.

The audit had allocated salary using 20 Virginia days out of 140 total workdays and used the corporation's apportionment factors for the management fees. The couple documented that only 10 of the Virginia days were spent working for the corporation and filed amended nonresident returns using a 10-of-140 ratio for both kinds of compensation.

Virginia explained that a nonresident's wages are generally apportioned by Virginia service days divided by total service days. The usual denominator for a full-time employee is 260 days, but a person working fewer days uses actual days worked. Hours may be a better measure for part-time workers, semi-retired individuals, and consultants.

Because the management fees paid for the husband's own services, they were sourced where he was physically located while performing them. The corporation's apportionment factors were not appropriate. Virginia found the amended 2005-2007 returns reflected the proper amounts and sent them for processing and assessment adjustment.

What this means for you

• Nonresident service income generally follows where the individual performs the work.
• A business's corporate apportionment factors do not automatically source an owner's separate management-fee income.
• Full-time, part-time, consulting, and semi-retired schedules may require different day or hour denominators.
• Detailed logs, calendars, or schedules should show work location, hours, and days.

Common questions

What ratio applied to the salary?

The documented Virginia service days divided by the husband's 140 total workdays.

How were management fees sourced?

By the days he performed management services in Virginia, not by the corporation's apportionment factors.

What records did Virginia recommend?

A log, calendar, or schedule showing which days he worked, hours worked each day, and the Virginia workdays.

Citations and references

• Va. Code § 58.1-325.
• Virginia Public Documents 85-134, 94-219, and 09-66.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-28

Original ruling text

March 31, 2010

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessments issued to * (the "Taxpayers") for the taxable years ended December 31, 2005 through 2007. I apologize for the delay in the Department's response.

FACTS

The Taxpayers, a husband and wife, reside in * (State A) and *** (State B). The husband owns 80% of a corporation (VC) that operated in Virginia. For the taxable years at issue, VC paid the husband a salary and management fees.

The Taxpayers filed nonresident Virginia returns for the taxable years at issue that did not allocate any of the husband's salary or management fee income to Virginia. Under audit, the Department determined that the husband worked 140 days for VC and 20 of those days were in Virginia. The auditor allocated the husband's salary to Virginia based on a ratio of 20 days in Virginia to the 140 total days worked. The auditor also attributed management fee income to Virginia based on VC's apportionment factors.

The Taxpayers filed an appeal, contending that the husband spent only 10 of the 20 days in Virginia working on behalf of VC. The Taxpayers filed amended nonresident returns in which they allocated they ratio of 10 days to the 140 total days worked to both the husband's salary and the management fee income.

DETERMINATION

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as "an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources."

Typically, the factor that most equitably determines the apportionment of salaries and wages is the ratio of the number of days services were performed in Virginia to the number of days services were performed elsewhere. See Public Document (P.D.) 94­219 (7/13/1994). The Department has previously ruled that a nonresident who works in Virginia may apportion his or her salary to Virginia using a ratio of (1) the number of days or portion thereof spent in Virginia performing duties for his or her employer, divided by (2) the number of days or portion thereof spent anywhere performing duties for his or her employer. See P.D. 85-134 (6/18/1985).

As a general rule, the Department uses 260 days in the denominator of the ratio for determining wages attributable to Virginia for full-time employees. Taxpayers who claim to have worked more than 260 days during a given taxable year must document that claim. Likewise, taxpayers who worked less than 260 days are limited to using days actually worked in the denominator of the ratio. For part-time employees, semi-retired individuals, and consultants, a ratio of hours worked in Virginia divided by hours worked anywhere may be a better indicator of income from Virginia sources. See P.D. 09-66 (5/13/2009).

In the instant case, the husband is semi-retired and worked a total of 140 days per year during the taxable years at issue. For the taxable years at issue, the Taxpayers have provided sufficient documentation to ascertain the number of days the husband worked in Virginia. As such, the husband's salary from VC will be adjusted based on the documentation provided.

In addition, the management fee income was earned by the husband for services he provided to VC. Such services are considered to be performed where the husband was located at the time of the services. Accordingly, using VC's apportionment factors to attribute management fees to Virginia was not appropriate in this case.

Again, the Taxpayers have provided documentation to show when he performed services under the management fee agreement in Virginia. Thus, the management fee income will be attributed to Virginia based on the ratio of days the husband worked in Virginia divided by the number of days he provided management services.

The Taxpayers have filed amended returns for the 2005 through 2007 taxable years reflecting the appropriate amount of salary and management fee income from Virginia sources. As such, the Taxpayers' amended nonresident Virginia returns will be forwarded for processing and the assessments will be adjusted accordingly. Revised assessments will be issued if any outstanding liabilities remain.

For future taxable years, the husband should document the time he worked in Virginia and elsewhere. Such documentation should be in the form of a log, calendar, or schedule providing sufficient details to determine which days the husband worked, the number of hours worked each day, and the number of days worked in Virginia.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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