Did Virginia conform to federal GO Zone bonus depreciation and the special five-year net-operating-loss carryback?

Subject

Virginia's conformity to certain federal provisions that deal with Gulf Opportunity ("GO") Zone property.

Plain-English summary

Virginia conformed to the federal GO Zone provisions at issue. A Virginia resident had acquired qualified GO Zone residential rental property in December 2007 and claimed the federal 50% additional depreciation deduction along with the special five-year net-operating-loss carryback.

Virginia's conformity statute then generally adopted the Internal Revenue Code as of December 31, 2007, with two stated exceptions. Because it did not specifically deconform from IRC § 1400N, the GO Zone bonus depreciation flowed through to the Virginia return without a fixed-date conformity adjustment.

The special five-year GO Zone loss carryback was also allowed. Virginia's separate deconformity from another five-year NOL provision did not bar this independently authorized GO Zone carryback. The ruling assumed the property actually qualified; that determination belonged to the IRS.

What this means for you

• For the period addressed, Virginia followed IRC § 1400N's GO Zone depreciation and loss-carryback rules.
• The 50% depreciation deduction required no separate Virginia fixed-date adjustment.
• The five-year GO Zone NOL carryback flowed through despite Virginia's deconformity from a different federal five-year carryback provision.
• Federal qualification as GO Zone property remained essential and was outside the Department's ruling.
• This ruling applies historical 2007 conformity law and is not current GO Zone guidance.

Common questions

Q: Was the 50% GO Zone depreciation deduction added back on the Virginia return?
A: No. Virginia had not specifically deconformed from IRC § 1400N(d), so no fixed-date adjustment was required.

Q: Did Virginia allow the five-year GO Zone NOL carryback?
A: Yes. The Department found that the separate deconformity language did not reach this GO Zone provision.

Q: Did Virginia decide whether the rental property qualified?
A: No. The ruling expressly assumed qualification and said that determination rested with the IRS.

Citations and references

• Gulf Opportunity Zone Act of 2005, Pub. L. 109-135.
• IRC §§ 1400N(d), 1400N(k), 168(k), and 172(b)(1)(H).
• Va. Code § 58.1-301.
• P.D. 04-198 (October 28, 2004).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 08-89

Original ruling text

June 17, 2008

Re: Ruling Request: Fixed Date Conformity

Dear *:

This is in response to your letter in which you requested clarification regarding Virginia's conformity to the federal income tax code on behalf of your client (the "Taxpayer"). In particular, you asked about Virginia's conformity to certain federal provisions that deal with Gulf Opportunity ("GO") Zone property.

FACTS

The Taxpayer is a Virginia resident who acquired qualified GO Zone residential rental property in December of 2007. As such, he received several federal tax benefits, including an additional fifty percent depreciation deduction on his federal income tax return for 2007. He was also able to take advantage of special five-year net operating loss ("NOL") GO Zone carryback rules.

You now ask if the additional fifty percent depreciation deduction is subject to Virginia fixed date conformity rules and whether it requires an adjustment on the Virginia income tax return. You also ask if the special five-year NOL carryback is allowed for Virginia income tax purposes.

Please note that this ruling assumes that the property acquired by the taxpayer was, in fact, qualified GO Zone property. Such a determination, however, rests with the Internal Revenue Service.

RULING

Gulf Opportunity Zone Act of 2005

The Gulf Opportunity Zone Act of 2005 (Public Law 109-135), which was signed by President Bush on December 21, 2005, established tax incentives and bond provisions in order to provide assistance for areas affected by hurricanes Katrina, Rita, and Wilma. In part, the Act created a new section in the Internal Revenue Code (the "IRC") titled section 1400N. Among other tax benefits, IRC § 1400N(d) currently allows taxpayers who acquired qualified GO Zone property on or after August 28, 2005, to claim a fifty percent bonus depreciation deduction. In addition, IRC § 1400N(k) provides that if a portion of any net operating loss of the taxpayer for any taxable year is a qualified GO Zone loss, that portion may be carried back to each of the five taxable years preceding the taxable year of the loss.

Virginia Conformity to the Internal Revenue Code

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. This first is for the special depreciation allowance for certain property provided for under IRC § 168(k). The second is for the carryback of certain net operating losses for five years under IRC § 172(b)(1)(H).

Because Va. Code § 58.1-301 does not specifically deconform from the provisions in I RC § 1400N, Virginia will conform to those provisions. Therefore, the additional fifty percent depreciation deduction will flow through to the Virginia income tax return. Because of this, the taxpayer will not be required to make a fixed-date conformity adjustment on his Virginia income tax return.

In addition, the special five-year NOL carryback will be allowed for Virginia income tax purposes. Although the Commonwealth has deconformed from the carryback of certain NOL's for five years under Va. Code § 58.1-301, TAX has ruled that this does not prevent the carryback of all NOL's for five years. For example, in Public Document 04-198 (10/28/04), TAX ruled that, because the specific provision creating the five-year carryback in that case was unaffected by Virginia's conformity law, the farming loss of the taxpayer that was carried back for five years would be allowed to flow through to the Virginia income tax return. The same is true in this case.

I trust that this reply answers your ruling request. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the TAX's web site located at www.tax.virginia.gov . If you should have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner