Could an out-of-state capital loss make a Virginia nonresident's income apportionment factor equal 100%?

Subject

Statutory rules for determining the Virginia source income of a nonresident

Plain-English summary

Virginia concluded that the nonresident apportionment factor was 100% in the example presented. The taxpayer had a $500 Virginia-source capital gain, $200 of wages from outside Virginia, and a $200 capital loss from outside Virginia.

Virginia began with federal adjusted gross income and located each item in either the all-source denominator or the Virginia-source numerator. The out-of-state capital loss reduced income from all sources, but it did not reduce Virginia-source income. The result was $500 divided by $500, or 100%.

The ruling also explained that Virginia generally follows federal capital-gain and capital-loss treatment. A capital loss can reduce capital gains included in federal adjusted gross income, subject to the federal rules applied in the ruling.

What this means for you

• A loss sourced outside Virginia can reduce the all-source denominator without reducing the Virginia-source numerator.
• That interaction can push the nonresident factor to 100% even when the taxpayer also has out-of-state income.
• The calculation follows the amount and character reported on the federal return and Virginia additions or subtractions.
• Preserve federal schedules, capital-loss carryover records, wage sourcing, and support for the source of every gain and loss.

Common questions

Q: What were the numerator and denominator in the ruling's example?

A: Both were $500, producing a 100% factor.

Q: Why did the outside-Virginia loss not reduce Virginia-source income?

A: The loss was attributable only to sources outside Virginia, so it reduced all-source income but not the Virginia-source amount.

Q: Did Virginia create a separate capital-loss rule?

A: No. The ruling said Virginia generally conformed to federal terminology and began the individual-income-tax calculation with federal adjusted gross income.

Citations and references

• Va. Code §§ 58.1-301, 58.1-322(A), and 58.1-325.
• IRC § 1211(b).

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-94

Original ruling text

May 5, 2015

Re: Request for Ruling: Individual Income Tax

Dear *:

This will reply to your letter in which you request a ruling concerning capital loss carryovers by nonresidents for Virginia individual income tax purposes. I apologize for the delay in responding to your request.

FACTS

A nonresident taxpayer has wages and a capital loss carryover from outside of Virginia. It also has a capital gain derived from Virginia source income. Under the statutory rules for determining the Virginia source income of a nonresident, the proportion of income from all sources to Virginia sources would equal 100%. The taxpayer asks whether Virginia source capital gains would be limited to federal capital gains on the nonresident proportion calculation.

RULING

Capital Losses

In general, Virginia income tax laws do not address capital losses. Nonetheless, Va. Code § 58.1-301 provides, with certain exceptions, that terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code, 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). See Va. Code § 58.1-322 A.

For federal income tax purposes, capital gains and losses are netted together. Under IRC § 1211(b), an individual may deduct capital losses in excess of capital gains up to $3,000. Individuals my carry forward unused capital losses indefinitely. Because Virginia conforms to this federal provision, a capital loss can only be used to reduce capital gains included in a taxpayer's FAGI.

Nonresident Virginia Taxable Income

Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as "an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources."

Virginia relies on the amount and character of each item of income, gain, loss and deduction reported on the federal return and supporting schedules to determine net income, gain, loss and deductions included in the nonresident apportionment factor for computing nonresident taxable income. For purposes of computing the factor, each item of income, gain, loss and deduction is located to either Virginia source income or to all sources in the same manner as it is included in FAGI and Virginia modifications (additions and subtractions). When income from all sources, as a result of losses attributable to sources outside Virginia, is less than income from Virginia sources, the nonresident apportionment factor will be equal to 100%.

In this example provided, the taxpayer had a $500 capital gain from Virginia sources and $200 wages and $200 in capital losses from outside Virginia. The following table shows the computation of the nonresident apportionment factor.

A. Income from All Sources

B. Virginia Source Income

Wages

$200

Capital Gain

$500

$500

Capital Losses

($200)

Total

$500

$500

Factor (B/A)

100%

Because the capital losses are attributable only to income from outside Virginia, they would reduce income from all sources but not Virginia source income. Thus, the losses have the effect of increasing the percentage of the nonresident apportionment factor.

This ruling is based on the facts presented as summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections 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/1-5752052468.B