My subsidiary was already filing separate Virginia returns, and now our parent company has to start filing too -- do we need the Department's permission to file a combined return together?

Plain-English summary

A corporation asked the Department for permission to file a combined Virginia corporate income tax return with its wholly owned subsidiary, which had been filing its own separate returns, starting with the taxable year ended January 28, 2023, and going forward.

Virginia lets affiliated groups choose their filing method -- but the choice usually locks in. Va. Code § 58.1-442 lets corporations elect to file separate, combined, or consolidated Virginia returns, regardless of how they file federally. Normally, once an affiliated group makes that election, EVERY later year must follow the same method unless the Department grants permission to change.

The "election year" exception. There's an important exception: in the FIRST full taxable year that two or more members of an affiliated group are actually required to file Virginia returns together, the group is free to choose separate, combined, or consolidated filing WITHOUT needing the Department's permission (23 VAC 10-120-320). Here, the parent corporation only became subject to Virginia corporate income tax starting in the 2022 taxable year -- so that year was the group's election year, even though the subsidiary had already been filing on its own before the parent existed as a Virginia taxpayer.

Result and a practical note. Because this was a free election year, the parent didn't actually need to request permission at all -- so the $100 fee it had paid for a filing status change request was refunded. Going forward, whichever method the group chooses (with the parent as the lead corporation if combined or consolidated is elected) will lock in for all future years unless the Department later grants permission to change, and any NEW affiliate that later becomes subject to Virginia tax must conform to the same election.

What this means for you

Corporate groups where a new entity is just becoming subject to Virginia tax

If your newly-taxable entity is joining an affiliated group where other members already file in Virginia, check whether this is your group's very FIRST full year of required combined filing -- if so, you can freely choose separate, combined, or consolidated status without paying for or waiting on Department permission, even if some group members were already filing separately before.

Businesses that already submitted a filing status change request and fee

If it turns out your situation actually qualifies as an election year rather than a true "change," ask the Department to refund the filing-change fee -- as happened here.

Any affiliated group about to make its filing status election

Choose carefully: once the election year passes, all future returns must follow the same method unless the Department grants permission to change, and any new affiliate added later must conform to the group's existing election.

Common questions

Q: My subsidiary already files separate Virginia returns -- if our parent company now also becomes subject to Virginia tax, do we need permission to file a combined return with the subsidiary?
A: No, if this is the parent's (and thus the group's) first full taxable year of required Virginia filing together -- that's a free "election year" under 23 VAC 10-120-320, with no Department permission needed.

Q: I paid the $100 fee to request a filing status change, but it turns out I was in a free election year -- can I get it back?
A: Yes -- as in this ruling, the Department refunded the fee once it determined permission wasn't actually required.

Q: Can we change our filing status again next year if we don't like our election-year choice?
A: Not without the Department's permission. Once your election year passes, your chosen filing method (separate, combined, or consolidated) locks in for all future years unless the Department grants a change.

Citations and references

Statutes and regulations:

• Va. Code § 58.1-442 -- corporations may elect separate, combined, or consolidated Virginia filing status
• 23 VAC 10-120-320 -- in the group's first full required taxable year, no Department permission is needed to elect a filing method

Prior rulings referenced (described here, not linked): P.D. 96-214.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-66

Original ruling text

July 9, 2024

Re: Corporate Income Tax: Request for Filing Status Change

Dear *:

This will respond to your letter in which you request permission for * (the “Taxpayer”), to file a combined corporate income tax return with a wholly owned subsidiary, *** (the “Subsidiary”), for the taxable year ended January 28, 2023, and for all subsequent years.

FACTS

The Subsidiary has been filing separate corporate income tax returns. The Taxpayer first became subject to Virginia corporate income tax during the 2022 taxable year.

RULING

Virginia Code § 58.1-442 allows corporations to elect to file returns as separate, combined, or consolidated entities regardless of how the corporations file their federal income tax returns. Title 23 of the Virginia Administrative Code (VAC) 10-120-320 provides that, in the first full taxable year two or more members of a group of corporations affiliated pursuant to Virginia Code § 58.1-302 are required to file Virginia returns, the group may elect to file separate returns, a combined return, or a consolidated return. All returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department.

Because the 2022 taxable year was the first full taxable year for which the Taxpayer was required to file a Virginia corporate income tax return, it is an election year in which the affiliated group of companies may choose to file separate returns, a combined return, or a consolidated return. Accordingly, permission to change filing status is not required.

If combined or consolidated is elected, the return should be filed with the Taxpayer as the lead corporation. Once an election is made, all returns for subsequent years must be filed on the same basis unless permission to change is granted by the Department. Any new affiliates that become subject to Virginia income tax in succeeding years must conform to the election made by the Taxpayer and the Subsidiary.

Because the Taxpayer is eligible to make an election, it was not required to pay the fee for a filing change request. The $100 fee paid for requesting a change in filing status will be refunded to the Taxpayer.

The Code of Virginia sections and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this response, you may contact *, in the Department’s Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

James J. Alex

Tax Commissioner

Commonwealth of Virginia

AR/4922.X

Related Documents

96-214