Time for takeoff: 2014 tax season begins

By Warren Chapman, CPA

For a full report on all the changes (this list is not all-inclusive), read the “2014 Legislative Summary” from the Virginia Department of Taxation (TAX), available as a PDF at www.tax.virginia.gov.

All changes went into effect July 1, 2014, unless otherwise stated.

Tax conformity

The 2014 General Assembly did not advance Virginia’s date of conformity to the U.S. Internal Revenue Code (IRC). Therefore, Virginia’s date of conformity remains Jan. 2, 2013. However, Congress did not enact any federal tax legislation that would have an impact on Virginia returns after Jan. 2, 2013. Taxpayers may still use their federal adjusted gross income (or federal taxable income, for corporations) as the starting point for calculating their Virginia taxable income for Taxable Year 2013, except as provided in Tax Bulletin 13-3 [Public Document 13-19 (2/15/2013)] and Tax Bulletin 13-13 [Public Document 13-209 (11/08/2013)].

Virginia still disallows any bonus depreciation allowed for certain assets under federal income taxation and any five-year carry-back of federal net operating losses (NOL). In addition, Virginia will continue to deconform from certain applicable high-yield discount obligations and cancellation of debt income provisions.

Advancement of Virginia’s Fixed Date Conformity to the Federal Enhanced Earned Income Tax Credit (EITC)

Previously, Congress temporarily increased the federal EITC amount for individuals with three or more qualifying children from 40 percent to 45 percent and reduced the EITC marriage penalty by increasing the phase-out amount for married couples. During the 2010, 2011, 2012 and 2013 sessions, the General Assembly elected to advance the date of conformity to these provisions one year at a time, to taxable years 2009, 2010, 2011 and 2012.

The 2014 General Assembly extended Virginia’s conformity to the federal enhanced EITC to taxable years ending before Jan. 1, 2018. That is, through taxable year 2017, when the federal enhanced provisions are currently set to expire.

First-Time Homebuyer Savings Accounts

For tax years beginning on and after Jan. 1, 2014, an individual may designate a bank account as a tax-exempt first-time home buyer savings account. An individual may then use distributions from that account for the purpose of paying or reimbursing the down payment and allowable closing costs for the purchase of a single-family residence in the Commonwealth by a qualified beneficiary.

All interest or other earned income attributable to such account may be excluded from the Virginia taxable income of the account holder. An account holder may claim a subtraction for any income that is taxed as 1) a capital gain for federal income tax purposes attributable to such person’s first-time homebuyer savings account and 2) interest income or other income for federal income tax purposes attributable to such person’s first-time homebuyer savings account.

There are recapture requirements in the event that funds withdrawn from an account are used for any purpose other than the payment of eligible costs, and a required addition to an account holder’s federal

adjusted gross income (AGI) for any loss related to a first-time homebuyer savings account that was deducted as a capital loss for federal income tax purposes by an account holder.

The amount of principal for which an account holder may claim first-time homebuyer savings account status is limited to $50,000 per account. Only cash and marketable securities may be contributed to an account. The amount of principal and interest or other income on the principal that may be retained within an account is limited to $150,000

Tax Contributions for Chesapeake Bay Restoration

In addition to the voluntary contributions taxpayers are already permitted to make from Virginia income tax refunds, they may now contribute their refunds as donations to the Chesapeake Bay Restoration Fund.

Individual Estimated Payments

Taxpayers are now permitted to file declarations of estimated tax with the Virginia Department of Taxation instead of local tax officials. This item also requires local tax officials with who estimated income tax returns have been filed and payments have been made to transmit such returns electronically.

This is effective for taxable years beginning on or after Jan. 1, 2015.

Accelerated Due Date for Employer Withholding

Beginning with returns for calendar year 2014, Virginia employers will be required to file the annual employer withholding return and copies of the written statements furnished to employees with TAX by Jan. 31 of each year. If the tax commissioner finds that this requirement creates an unreasonable burden on the taxpayer, waivers will be granted. All requests for waivers must be submitted to the commissioner in writing.

This is a change from the previous requirement to file these forms by Feb. 28. The IRS requirement for federal returns has not changed.

Business, Professional, and Occupational License Tax — Appeals of Classification

Business taxpayers are now allowed to appeal to the locality and TAX the Business, Professional and Occupational License tax (BPOL), a tax classification or subclassification applicable to a business, regardless of whether the appeal is in conjunction with an appealable event such as an assessment, examination, audit or any other action taken by the locality. Additionally, these taxpayers are allowed to request written rulings from the locality and TAX regarding the classification or subclassification applicable to a business.

Previously, in order to appeal BPOL tax issues, taxpayers were required to file an Application for Review within one year of the last day of the tax year for which such assessment was made or within one year from the date of the appealable event, whichever was later. Upon the timely filing of an Application for Review, the local assessing officer made a final written determination on the taxpayer's application. The taxpayer then had 90 days from the date of the local assessing officer's final written determination to appeal that determination to TAX.

Real Property Tax Exemption for Spouses of Soldiers Killed in Action

There will be a referendum on the Nov. 4, 2014, statewide ballot to approve or reject an amendment to the Constitution of Virginia to allow the General Assembly to exempt from taxation the real property of the surviving spouse of any member of the armed forces of the United States killed in action, where the surviving spouse occupies the real property as his or her principal place of residence and has not remarried.

Exemption for Religious Bodies from Real Property and Tangible Personal Property Tax

The definition of real property and personal property of churches and religious bodies that qualifies for exemption was changed to include: 1) property used primarily for outdoor worship activities; 2) property used for ancillary and accessory purposes as allowed under the local zoning ordinance, the dominant purpose of which is to support or augment the principal religious worship use; and 3) property used as required by federal, state or local law.

Under prior law, buildings with land actually occupied and personal property owned by churches or religious bodies are exempt from local taxes when exclusively occupied or used either for religious worship or for the residence of the minister of the church or religious body. Additional adjacent land reasonably necessary for the convenient use of any such building was also exempt from state and local tax.

Separate Classification for New Business Property

A separate classification for the tangible personal property of a business for its first two taxable years was created. A business must meet the requirements of a “qualifying business” for purposes of the local business incentive program, even if the locality at issue does not currently provide such a program.

A “qualifying business” is one that locates for the first time in the locality adopting a business license incentive program ordinance, excluding businesses that first locate in the locality as a result of a merger, acquisition, similar business combination, name change, or a change in business form.

Localities are authorized to impose the tax on this tangible personal property at a lower rate than that applicable to the general class of tangible personal property.

Under previous law, much of the tangible personal property of a business falls under the general class of tangible personal property. Localities were required to tax this property at the same rate as imposed on all other tangible personal property in the general class.

Practitioners should check with the appropriate localities to see if the appropriate ordinances have been enacted.

Tax Credit News

Research and Development Expenses Tax Credit

During the 2014 session, the General Assembly increased the annual cap for the Research and Development Expenses Tax Credit from $5 million to $6 million. The credit was also to 15 percent of the first $234,000 in Virginia qualified research and development expenses paid or incurred by the taxpayer, or 20 percent of the first $234,000 in such expenses if the Virginia qualified research was conducted in conjunction with a Virginia public or private college or university, to the extent the expenses exceed the Virginia base amount for the taxpayer.

This is an increase from the prior credit amounts of 15 percent for the first $167,000 of expenses, or 20 percent of the first $175,000 of expenses for research conducted in conjunction with a Virginia college or university.

For those with clients who wish to avail themselves of this credit, it is recommended that practitioners review the statute in detail to ensure compliance and to take advantage.

This is effective for taxable years beginning on and after Jan. 1, 2014, except that the provisions

increasing the annual credit cap would be effective for fiscal years beginning on or after July 1, 2014.

Local Meals Tax and Food and Beverage Tax

The first $100,000 in gross receipts per calendar year of meals sold by nonprofit entities at fundraising sales are now exempt from county food and beverage and city meals taxes, beginning with the fourth such sale in a calendar year, and excluding gross receipts from the first three sales. The gross proceeds from such sales must be used by the organization exclusively for nonprofit, educational, charitable, benevolent or religious purposes in order for the exemption to apply.

Under prior law, volunteer fire departments and rescue squads, nonprofit religious bodies and educational, charitable, fraternal or benevolent organizations could have made sales of meals as a fundraising activity exempt of the local food and beverages and meals taxes, provided such sales occurred on an occasional basis, not exceeding three times per calendar year, and provided the proceeds of such sales were used by the organization exclusively for nonprofit educational, charitable, benevolent or religious purposes.

Other Tax Credit Changes

The 2014 General Assembly enacted legislation affecting other Virginia tax credits. Practitioners with clients who may be affected by these changes are encouraged to review the 2013 Legislative Summary to ensure that they are aware of these credits and the opportunities that they offer. The following credits were affected by 2014 legislation:

• Neighborhood Assistance Act Tax Credit
• Tax Credit for Donations to Scholarship Foundations
• Virginia Port Tax Credits
• Motion Picture Production Tax Credit