TAX NEWS - may 2010
Multistate Tax Alert: Virginia
Updated IRC Conformity, but Decoupling from IRC §§ 108(i) and 199
On May 7, 2010, Virginia Governor McDonnell signed House Bill 29 (Chapter 872 of the 2010 Acts of Assembly), which updates Virginia's federal tax conformity to the IRC as enacted on January 22, 2010. However, the bill departs from IRC conformity in two key respects: (i) deferral of recognition of income from discharge of certain business indebtedness under IRC § 108(i) as enacted by the federal American Recovery and Reinvestment Act of 2009 ("ARRA"), and (ii) the amount of the federal domestic production activities deduction available under IRC § 199.
IRC § 108(i), as added by the ARRA, provides taxpayers a federal election to defer cancellation of indebtedness income inclusion from a "reacquisition" of an "applicable debt instrument" in 2009 and 2010. For federal income tax purposes, the deferred amount is included in income ratably from 2014-2018. Although the new Virginia law references a definitional provision of IRC § 108(i), Virginia does not adopt the federal law as a whole. Under Virginia law, income from the discharge of indebtedness in connection with the reacquisition of an "applicable debt instrument" (as defined under IRC § 108(i)) must generally be included in income currently. However, with respect to an applicable debt instrument reacquired in taxable year 2009, taxpayers may elect to include such income in Virginia taxable income ratably over a three-taxable-year period beginning with taxable year 2009. No Virginia election or deferral is available for applicable debt instruments reacquired after 2009.
The new Virginia law will also limit the amount of the deduction allowed for domestic production activities pursuant to IRC § 199 for taxable years beginning on or after January 1, 2010. For Virginia income tax purposes, two thirds of the amount deducted pursuant to IRC § 199 for federal income tax purposes may be deducted for taxable years beginning on and after January 1, 2010. The federal deduction was scheduled to increase from 6% to 9% of qualified production activities income in 2010. The new Virginia law essentially caps the deduction at the 2009 level.
Note that Virginia law continues to decouple from certain IRC § 168(k) bonus depreciation provisions, and the five-year net operating loss carryback provisions under IRC § 172(b)(1)(H).
Major Business Facility Job Tax Credit
Chapter 363 of the 2010 Virginia Acts of Assembly (adopted, April 10, 2022) changes the Virginia Major Business Facility Job Tax Credit (Va. Code Ann. § 58.1-439) in three key respects: (i) the threshold for claiming a credit is reduced from 100 to 50 new jobs for qualified full time employees, (ii) the threshold for claiming a credit is reduced from 50 to 25 new jobs for qualified full time employees when the jobs are located in an economically distressed area or an enterprise zone, and (iii) credits allowed may be claimed over two years (in lieu of the usual three) for taxable years beginning January 1, 2022 through December 31, 2012.
These changes are applicable to qualified full time employees first hired on or after January 1, 2010.
Green Job Creation Tax Credit
Chapters 722 and 727 of the 2010 Acts of Assembly (adopted, April 13,, 2010) create a new credit for "green" jobs (Va. Code Ann. § 58.1-439.12:03). For taxable years beginning on or after January 1, 2010, but before January 1, 2015, a credit shall be allowed against the corporate or individual income tax for each new green job created within Virginia by the taxpayer. The amount of the annual credit shall be $500 for each new green job with an annual salary that is $50,000 or more.
The credit shall be allowed starting in the taxable year in which the job has been filled for at least one year, and for each of the four succeeding taxable years, provided the job is continuously filled during the respective taxable year. Each taxpayer qualifying under this section shall be allowed a credit for up to 350 green jobs.
A "green job" qualifying for the credit means employment in industries relating to the field of "renewable alternative energies, including the manufacture and operation of products used to generate electricity and other forms of energy from alternative sources that include hydrogen and fuel cell technology, landfill gas, geothermal heating systems, solar heating systems, hydropower systems, wind systems, and biomass and biofuel systems." A list of jobs that qualify for the credit shall be posted on the Virginia Secretary of Commerce and Trade's website.
A qualifying job is employment of an indefinite duration of an individual whose primary work activity is related directly to the field of renewable alternative energies and for which the standard fringe benefits are paid by the taxpayer, requiring a minimum of either: (i) 35 hours of an employee's time per week for the entire normal year of such taxpayer's operations, which "normal year" must consist of at least 48 weeks; or (ii) 1,680 hours per year. Positions created when a job function is shifted from an existing location in Virginia do not qualify for the credit.
The credit is limited to the tax imposed with a five-year carryover of unused credit. Credits granted to a partnership, limited liability company, or electing small business corporation (S corporation) are allocated to the individual partners, members, or shareholders.
The tax credit does not apply to any green job for which the taxpayer is allowed: (i) a major business facility job tax credit pursuant to Va. Code Ann. § 58.1-439, or (ii) a federal tax credit for investments in manufacturing facilities for clean energy technologies that would foster investment and job creation in clean energy manufacturing.