Could individual owners claim Virginia's recyclable-materials processing equipment credit for equipment purchased by a business in 2005?

Subject

Individuals could not claim the recyclable-equipment credit for 2005 but could use a qualifying carryover from 2008

Plain-English summary

Virginia upheld the denial of a recyclable-materials processing equipment credit claimed by individuals for 2005 because the statutory authority allowing individuals to claim it had expired. The business's recycling equipment was certified by the Virginia Department of Environmental Quality, but certification alone did not overcome the gap in individual eligibility.

The individual-credit authority expired after the 2003 tax year. Virginia described 2004 through 2007 as a period when individuals owning interests in businesses that purchased qualifying equipment could not claim the credit. A 2007 amendment restored pass-through allocation to partners, LLC members, and S-corporation shareholders for tax years beginning on and after January 1, 2008.

The 2005 assessment therefore stood. But the ruling also noted a 10-year carryover for unused credit. Because the 2005 equipment had received the required VDEQ certification, the taxpayers could potentially use carried-over amounts in tax years beginning in 2008.

What this means for you

• Agency certification of equipment does not by itself establish that the person claiming the credit is eligible for that tax year.
• Virginia had a specific 2004-2007 gap in individual pass-through eligibility under the statutes discussed in this ruling.
• Pass-through allocation resumed for tax years beginning in 2008.
• An invalid current-year claim may still leave a usable carryover when the statute allows it and the underlying purchase was properly certified.
• Credit-year, owner type, certification date, and carryover records all matter.

Common questions

Why was the 2005 credit denied if VDEQ certified the equipment?

The equipment qualified, but the statutory authority for individuals to claim the credit had expired after 2003 and had not yet been restored for 2005.

When did pass-through credits become available again?

For tax years beginning on and after January 1, 2008, under the 2007 amendment described in the ruling.

Was the 2005 credit permanently lost?

Not necessarily. The ruling said unused certified credit could be carried for up to 10 succeeding tax years and could be used by the taxpayers beginning in 2008, subject to the applicable requirements.

Citations and references

• Va. Code § 58.1-439.7.
• Former Va. Code § 58.1-338.
• 2007 Acts of Assembly, Chapters 529 and 593.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-136

Original ruling text

July 12, 2010

Re: Request for a Ruling: Recyclable Materials Processing Equipment Credit

Dear *:

This is in response to your letter of April 28, 2009, in which you seek correction of an individual income tax assessment. This issue is whether a tax credit for recyclable materials processing equipment claimed by your clients * (the "Taxpayers") is allowed under Va. Code § 58.1-439.7. I apologize for the delay in this response.

FACTS

In 2005, * (the "Recycler") purchased several pieces of equipment for the purposes of recycling automotive materials. On April 24, 2006, the Virginia Department of Environmental Quality ("VDEQ") approved the Recycler's Form DEQ 50-11S, Recycling Machinery and Equipment Certification, and certified that the machinery and equipment is integral to the recycling process and eligible for the recyclable materials processing equipment credit.

The Taxpayers' 2005 Virginia Individual Income Tax Return claimed a credit in

the amount of * for the equipment purchased by the Recycler. After a review of the income tax return, the Virginia Department of Taxation ("TAX") disallowed the credit on the grounds that the authorizing statute at that time did not permit credits to flow through to individual partners, members or shareholders of a business entity that purchased recyclable equipment. In a letter dated April 22, 2009, TAX informed the Taxpayers that the credit had been disallowed and that they would be receiving an assessment in the amount of *** plus interest.

You contend that the Taxpayers were entitled to the credit and request that TAX abate the assessment.

RULING

Under Va. Code § 58.1-439.7, a taxpayer "shall be allowed a credit . . . in an amount equal to 10 percent of the purchase price paid during the taxable year for machinery and equipment used exclusively in or on the premises of manufacturing facilities . . . . . The Department of Environmental (duality shall certify that such machinery and equipment are integral to the recycling process before the taxpayer shall be entitled to the tax credit under this section." Since 1998, the sunset date for this statute has been extended three times by the General Assembly. Currently, the statute is due to expire on January 1, 2015.

When the Taxpayers claimed this tax credit in 2005, the statutory authority for this credit that related to individuals, allowed under Va. Code § 58.1-338, had already expired. In 2003, the General Assembly did not extend the sunset date for Va. Code § 58.1-338, thereby allowing the credit for individuals to expire after the 2003 taxable year. Because the sunset date was not extended, individuals with ownership or interest in business entities that purchased qualified recyclable processing equipment could no longer claim the credit. The period in which individuals could not claim the credit lasted from 2004 through 2007.

In 2007, the General Assembly amended Va. Code § 58.1-439.7 to allow individuals to claim the credit (See 2007 Acts of Assembly, Chapters 529 and 593). The 2007 statutory amendment provided that "[c]redits earned by a partnership, limited liability company, electing small business corporation (S corporation), or a predecessor corporation entitled to such credits, shall be allocated to the individual partners, members, or shareholders, respectively, in proportion to their ownership or interest in such business entities." This provision was effective for taxable years beginning on and after January 1, 2008. Therefore, credits could be passed through to individuals beginning in the 2008 taxable year.

Based on the information that was provided„ the credits were claimed on the Taxpayers' 2005 income tax return, prior to the 2007 statutory amendment. Therefore, the Taxpayers do not qualify for the credit for that taxable year, and the assessment is upheld.

According to TAX records, the balance of the assessment is *. Payment of the remaining balance due should be made to: Virginia Department of Taxation, Office of Customer Relations, Customer Service Section, Post Office Box 1115, Richmond, Virginia 23218-1115. No additional interest will accrue provided the outstanding balance is paid within 30 days from the date of this letter.

The Taxpayers may still be able to claim the credit for the Recycler's purchase of recyclable processing equipment made in 2005, however. Under Va. Code § 58.1-439.7 "[a]ny tax credit not used for the taxable year, in which the purchase price on recycling machinery and equipment was paid may be carried over for credit against the taxpayer's income taxes in the 10 succeeding taxable years until the total credit amount is used." Therefore, because the Recycler received the necessary certification from the VDEQ for equipment that it purchased in 2005, the Taxpayers would be allowed to utilize any carried over credit amounts for taxable years beginning in 2008.

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

Sincerely,

Linda Foster

Deputy Tax Commissioner