May 23, 2013
Ms. Nathalie Molliet-Ribet
Joint Legislative Audit and Review Commission
201 North 9th Street
General Assembly Building, Suite 1100
Richmond, Virginia 23219
Via email: [email protected]
RE: Comments regarding JLARC Study of the Change in BPOL Tax Basis
Dear Ms. Molliet-Ribet:
The Tax Advisory Committee of the Virginia Society of CPAs (VSCPA) welcomes the opportunity to comment on the study in progress regarding the change in the Business, Professional and Occupational License Tax (BPOL) to a net income basis.
We have reviewed the worksheets that were provided for our meeting on May 10 in further detail and offer the following comments. The major change that we recommend for the worksheets is to use Virginia Taxable Income as a starting point for C Corporations and Pass-Through Entities (PTE) and to calculate the equivalent starting point for Sole Proprietors (SP). Beginning with Virginia Taxable Income eliminates many of the adjustments that you considered in your worksheets. Using this as a premise, we have arrived at the following proposed calculations:
A. C Corporations
a. Virginia Taxable Income (Line 7 or Line 8a if multistate)
b. Subtract investment income and related expense
B. Pass-Through Entities
a. Virginia Taxable Income less deductions (Line 1 less Line 2)
b. Add Total Additions (Line 13)
c. Subtract Total Subtractions (Line 18)
d. Subtract investment income and related expenses
e. Subtract Virginia net operating loss (NOL). This will have to be a separate calculation.
f. Subtract owner's compensation allowance (Partnerships/LLCs only)
C. Sole Proprietors — note that each Schedule C operation should have a separate calculation
a. Business income (Schedule C, line 31)
b. Add gain or loss on sales of business property from Form 4797
c. Subtract charitable deductions paid from business
d. Subtract SE Health insurance, SE Tax, Domestic Production Activities Deduction (DPAD) and business-related self-employed person (SEP)/Keogh
e. Add/Subtract business related conformity adjustments for depreciation and DPAD
f. Subtract Virginia NOL. This will have to be a separate calculation.
g. Subtract owner's compensation allowance
h. Allocate Virginia portion of business income (versus Non-Virginia)
After considerable discussion, the Committee concluded that it was necessary to include the deduction for NOLs. The study was mandated because of the perception that a business tax on gross receipts is inequitable because businesses are subject to it whether or not the business is profitable. To disallow NOLs only partially ameliorates the issue — businesses would not be subject to tax in the loss year itself, but would not be able to carry over any such losses. The effect is taxing arbitrarily determined reporting periods (e.g., the calendar year) while ignoring the economic realities of the life cycle of a business. To accommodate this in a manner that is equitable for PTEs and SPs will require a separate calculation of the Virginia NOL that is not currently available on existing tax returns.
We also discussed the difficulty of adjusting owner/officer compensation and determined that it was best to provide an allowance for Partnerships and SPs rather than limiting the compensation for Corporations. We believe that this concept is in keeping with the theory of arriving at a “net income for BPOL purposes.”
The above calculations will require the development of definitions and calculations that do not currently exist in tax codes or policies. These include the following:
a. What constitutes investment income and related expenses?
b. The calculation of an entity-level NOL for PTEs and SPs
c. The determination of an owner’s compensation allowance for Partnerships and SPs
The policies will also need to provide for an equitable method of allocation among jurisdictions and transition rules for implementation.
As noted earlier, the Committee appreciates the opportunity to comment on this matter. We look forward to working collaboratively with your office to assist in any way. Please feel free to contact me or VSCPA Government Affairs Director Emily Walker at (804) 612-9428 or [email protected] if we can be of further assistance.
Julia W. Rogers, CPA, CVA
VSCPA Tax Advisory Committee
2013–14 VSCPA Tax Advisory Committee:
Julia Rogers, CPA — Chair
Nicholas Harrison, CPA — Vice Chair
Robert Baldassari, CPA
Rebecca Bartholomae, CPA
Alvin Carpenter III, CPA
Kenneth Dance, CPA
Damon DeSue, CPA
Duane Dobson, CPA
David Ellwanger, CPA
Ryan Losi, CPA
William Pilc, CPA
Kimberly Ruiz, CPA
Wayne Sine, CPA
Mark VanDeveer, CPA