Could Virginia taxpayers claim 2004 depreciation on a business automobile after electing federal IRC § 179 expensing for the vehicle in 2003?

Subject

Federal IRC § 179 election also controlled Virginia depreciation

Plain-English summary

Virginia disallowed a 2004 depreciation deduction for a business automobile that the taxpayers had already elected to expense under IRC § 179 in 2003. The taxpayers argued that the § 179 election applied only for federal purposes.

The Department rejected that argument because Virginia conformity under Va. Code § 58.1-301 included IRC § 179. The automobile's cost should have entered the Virginia calculation in the 2003 year of the federal election. Depreciation for the same automobile could not be claimed again in 2004 or later returns.

The 2004 assessment therefore remained due, with interest.

What this means for you

• A federal § 179 election can carry through to Virginia under conformity rules.
• Do not expense property in one year and claim depreciation on the same cost in later years unless a specific rule permits it.
• Match Virginia deductions to the applicable federal election and Virginia conformity exceptions for that year.

Common questions

Was IRC § 179 only a federal election?

No. Virginia conformity made it part of the state calculation applied in this ruling.

Could the taxpayers depreciate the vehicle in 2004?

No. They had elected to expense its cost in 2003.

What happened to the assessment?

It was upheld.

Citations and references

• Va. Code § 58.1-301.
• IRC §§ 179, 168(k), and 172(b)(1)(H).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-182

Original ruling text

October 17, 2008

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayers") for the taxable year ended December 31, 2004.

FACTS

The Taxpayers, a husband and wife, filed a joint Virginia income tax return and itemized their deductions for the taxable year at issue. The husband put an automobile into service for his business in September 2003 and elected to expense the cost in the first year pursuant to Internal Revenue Code (IRC) § 179. In 2004, the Taxpayers reported no depreciation expense on the husband's business automobile in calculating their itemized deductions, but reported the depreciation for purposes of calculating itemized deductions on their Virginia return.

The Taxpayers' 2004 Virginia return was audited and the itemized deductions were adjusted to reflect the itemized deductions reported on their federal return. The Taxpayers contest the adjustment, contending that IRC § 179 election is only applicable for federal purposes.

DETERMINATION

Virginia Code § 58.1-301 provides that, "Any reference in this chapter to the laws of the United States relating to federal income taxes shall mean the provisions of the Internal Revenue Code of 1954, and amendments thereto, and other provisions of the laws of the United States relating to federal income taxes . . . ." Currently, Virginia conforms to the Internal Revenue Code as it existed on December 31, 2007. There are only two exceptions to this conformity. The first exception is for the special depreciation allowance for certain property provided for under IRC § 168(k). The second exception is for the carryback of certain net operating losses for five years under IRC § 172(b)(1)(H).

Conformity under Va. Code § 58.1-301 has always included the provisions of IRC § 179 in the definition of federal adjusted gross income and federal taxable income. In accordance with Virginia law, the cost of an automobile should have been included in determining the Taxpayers' employee business expenses reported as itemized deductions for the 2003 taxable year. Therefore, the depreciation deduction reported on the 2004 taxable year cannot be allowed. The same would be true for any depreciation deductions for the same automobile reported on subsequent returns.

Based on the foregoing, the Department properly adjusted the Taxpayers' itemized deductions on their 2004 Virginia individual income tax return. Accordingly, the assessment at issue is correct and remains dine and payable. The Taxpayer will receive an updated bill with accrued interest. The bill should be paid within 30 days of the bill date to avoid the accrual of additional interest.

The Code of Virginia section cited is available on-line at www.tax.virginia.gov in the Tax Policy Library 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,

Janie E. Bowen

Tax Commissioner

AR/1-2409266699.B