Could an employee subtract his own Form W-2 wages under Virginia's federal jobs-credit or Work Opportunity Credit subtraction?

Subject

Employee could not subtract his own wages under the jobs-credit rule

Plain-English summary

Virginia disallowed the subtraction because the taxpayer subtracted his own Form W-2 wages rather than employer wage expenses tied to the federal Work Opportunity Credit.

Federal law generally prevents an employer from receiving both a wage deduction and a Work Opportunity Credit on the same wage dollars. IRC § 280C(a) reduces the federal business deduction for wages used to calculate the credit. Virginia's subtraction lets the employer remove that federal add-back effect because the federal credit itself cannot offset Virginia income tax.

The taxpayer did not incur wage or salary expenses and did not claim the federal credit. His employee wages therefore did not qualify, and the 2010 assessment remained due.

What this means for you

• The subtraction belongs to the employer affected by IRC § 280C(a), not the employee receiving wages.
• A Form W-2 amount is not automatically a Virginia jobs-credit subtraction.
• The underlying federal Work Opportunity Credit and disallowed wage deduction must exist.
• Respond promptly to a proposed-assessment notice; this taxpayer received one but did not respond within 30 days.

Citations and references

• Va. Code §§ 58.1-301 and 58.1-322 C 6.
• IRC § 280C(a).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 14-109

Original ruling text

July 16, 2014

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will respond to your letter in which you seek correction of the individual income tax assessment issued to * (the "Taxpayer") for the taxable year ended December 31, 2010.

FACTS

On his 2010 Virginia individual income tax return, the Taxpayer claimed a subtraction for the federal jobs credit. Under review, the Department disallowed the subtraction because income reported on a Form W-2 is not eligible for the credit. An assessment for taxes due plus interest was issued. The Taxpayer appealed, contending that the Department has not provided a sufficient explanation to enable him to respond to the assessment.

DETERMINATION

Notice of Proposed Assessment

Department records indicate the Department mailed a notice of proposed assessment to the Taxpayer to the address cited in his appeal. This notice clearly explained why the subtraction was being disallowed and gave the Taxpayer 30 days to respond before the assessment would be issued. When the Taxpayer failed to respond, the assessment was issued.

Jobs Credit Subtraction

Virginia Code § 58.1-301 provides that terminology and references used in Title 58.1 of the Code of Virginia will have the same meaning as provided in the Internal Revenue Code (IRC) unless a different meaning is clearly required. For individual income tax purposes, Virginia "conforms" to federal law in that it starts the computation of Virginia taxable income with federal adjusted gross income (FAGI). Income included in the FAGI of a Virginia resident is subject to taxation by Virginia, unless it is specifically exempt as a Virginia modification pursuant to Va. Code § 58.1-322.

Virginia Code § 58.1-322 C 6 allows individuals to subtract the amount of "wages or salaries eligible for the federal Targeted Jobs Credit which was not deducted for federal purposes on account of the provisions of § 280C(a) of the Internal Revenue Code." Legislation enacted by Congress in 1996 renamed the Targeted Jobs Credit, the "Work Opportunity Credit."

Normally, wages or salaries paid by an employer are deductible as business expenses. To the extent the employer may also claim the same wages or salaries as a tax credit, however, the employer would receive a double tax benefit. IRC § 280C(a), therefore, disallows the federal deduction for wage and salary expenses to the extent such expenses are utilized in computing the federal Work Opportunity Credit. The employer's taxable income is effectively increased to the extent the deduction is disallowed.

As a federal tax credit only, however, the Work Opportunity Credit cannot be credited against an employer's Virginia income tax liability. The same risk of a double benefit, therefore, does not exist for Virginia income tax purposes. As such, Va. Code § 58.1-322 C 6 allows employers to subtract the amount of wages and salaries that is disallowed on account of IRC § 280C(a). See Public Document (P.D.) 00-166 (9/6/2000) and P.D. 04-95 (9/8/2004).

The information available indicates the Taxpayer did not incur any wage or salary expenses or attempt to claim the Work Opportunity Credit on his federal income tax return for the taxable year at issue. Instead, it appears that the Taxpayer subtracted his own wages. As such, the Taxpayer was not eligible to claim the subtraction provided by Va. Code § 58.1-322 C 6.

Accordingly, the assessment for 2010 is upheld. A revised bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the outstanding assessment is paid within 30 days from the date of the revised bill.

The Code of Virginia sections and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions 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,

Craig M. Burns

Tax Commissioner

AR/1-5596236063.M