Could a Virginia corporation subtract health-insurance premiums that were not federally deductible because it claimed the federal Small Business Health Care Tax Credit?

Subject

Small Business Health Care Tax Credit

Plain-English summary

A Virginia corporation claimed the federal Small Business Health Care Tax Credit for employee insurance premiums. Because those premiums were not deducted in federal taxable income, the corporation filed an amended Virginia return seeking a state subtraction and refund.

Virginia denied the subtraction. Corporate Virginia taxable income starts with federal taxable income and then applies only the additions, subtractions, and exemptions specified by Virginia law. Deductions, subtractions, and credits are legislative grants that are strictly construed, so the taxpayer had to identify a statute authorizing the adjustment.

Virginia law expressly allows a subtraction for wages or salaries that cannot be deducted federally because of the federal jobs credit, now called the Work Opportunity Credit. But Virginia had enacted no comparable subtraction for health-insurance expenses offset by the federal Small Business Health Care Tax Credit.

Because no Virginia statute authorized the requested premium subtraction, the Department denied the corporation's 2012 refund claim.

Common questions

Does Virginia automatically restore every expense that a federal credit makes nondeductible? No. A Virginia subtraction must be authorized by state statute.

Why did the federal jobs-credit comparison fail? Virginia law specifically authorizes a subtraction for wages affected by that credit, but it contains no similar provision for small-employer health-insurance premiums.

What was the result of the appeal? The requested subtraction was denied and no refund was issued.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-402, including § 58.1-402 C 6.
• IRC §§ 45R and 280C(a); 23 VAC 10-120-100 A.
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Law No. 82-0846 (Roanoke City Circuit Court, Oct. 27, 1983).
• P.D. 91-59 and P.D. 00-166.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-34

Original ruling text

March 23, 2016

Re: § 58.1-1821 Application: Corporate Income Tax

Dear *:

This will reply to your letter in which you seek a refund of corporate income tax paid by * (the "Taxpayer") for the taxable year ended December 31, 2012.

FACTS

The Taxpayer, a Virginia corporation, claimed a credit for small employer health insurance premiums (the "Small Business Health Care Tax Credit") on its 2012 federal income tax return. Because its premiums were not deducted in determining federal taxable income (FTI), the Taxpayer filed an amended Virginia income tax return to claim a subtraction for the premiums. The Department disallowed the subtraction and reduced the amount of refund claimed by the Taxpayer. The Taxpayer appeals, contending that it should be allowed to subtract the employee health expenses because it would have been able to deduct the premiums as an ordinary business expense had the Small Business Health Care Tax Credit not been created.

DETERMINATION

Virginia Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code (IRC), unless a different meaning is clearly required. As such, Virginia's conformity to federal law is limited to the actual use of a specific term in a Virginia statute. Further, conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia . For corporate income tax purposes, Virginia generally "conforms" to federal law in that it starts the computation of Virginia taxable income with FTI.

Virginia Code § 58.1-402 provides that a corporation's Virginia taxable income for any given taxable year is the FTI and any other income taxable to the corporation under federal law for such year, adjusted and modified by certain specified additions, subtractions, and exemptions. For purposes of this statute, the term "federal taxable income" means all income from whatever source derived and however named on which a federal tax is imposed. See Title 23 of the Virginia Administrative Code (VAC) 10­-120-100 A.

Under IRC § 45R, effective beginning January 1, 2010, a credit is permitted for qualifying businesses that provide health insurance for their employees. Prior to the 2010 taxable year, these businesses could deduct these insurance costs as ordinary business expenses.

The Taxpayer asserts that it should be able to subtract the health insurance premiums on its Virginia return if paid on behalf of its employees because the creation of the Small Business Health Care Tax Credit eliminated its ability to deduct these premiums on the federal return as ordinary business expenses. The Taxpayer claims its situation is similar to taxpayers claiming a federal jobs credit.

By reason of their character as legislative grants, statutes relating to deductions and subtractions allowable in computing income and credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell's Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983). As such, it is incumbent upon the taxpayer to prove they are entitled to a subtraction reported on a Virginia return.

Virginia does not allow a taxpayer to claim a subtraction for expenses offset by a credit at the federal level unless allowed by statute. See Public Document (P.D.) 91-59 (3/29/1991). Virginia Code § 58.1-402 provides the subtractions from FTI that taxpayers may claim. Specifically, Va. Code § 58.1-402 C 6 allows corporate employers to subtract the amount of "wages or salaries eligible for the federal Targeted Jobs Credit which was not deducted for federal purposes on account of the provisions of § 280C(a) of the Internal Revenue Code." Legislation enacted by Congress in 1996 renamed the credit the Work Opportunity Credit. In P.D. 00-166 (9/6/2000), the Department ruled Virginia law specifically allows a subtraction to taxpayers for wages and salaries disallowed because of the federal Work Opportunity Tax Credit. Virginia statutes, however, permit no subtraction for small employer health insurance expenses.

Accordingly, the Taxpayer's request to be allowed to subtract small employer health insurance premiums for the 2012 taxable year is denied. As such, no refund will be issued.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,

Craig M. Burns
Tax Commissioner

AR/1-6180904116.B