Could a fixed-date conformity subtraction create a Virginia corporate net operating loss even when the corporation reported no federal loss?

Subject

Fixed date conformity additions and subtractions

Plain-English summary

A corporation had a federal net operating loss for 2013, but a Virginia fixed-date conformity addition produced positive Virginia income. In 2014, it reported no federal taxable income and a fixed-date conformity subtraction large enough to produce negative Virginia income. It asked whether that excess subtraction could be carried forward.

Virginia explained that fixed-date conformity additions and subtractions are part of calculating federal taxable income for Virginia purposes, not separate Virginia modifications. The formula was:

Federal taxable income + fixed-date conformity addition - fixed-date conformity subtraction = Virginia federal taxable income.

A Virginia NOL exists only when that result is below zero. Thus an addition can eliminate a federal loss for Virginia purposes, while a large subtraction can create a Virginia loss even if the federal return reports no NOL.

Here, the 2014 subtraction exceeded federal taxable income plus the addition, creating a Virginia NOL. Virginia said the loss could be carried back and then forward under its conformity to IRC § 172, and any Virginia NOL deduction modification would travel with it, except for the federal five-year carryback excluded by Virginia law.

Common questions

Can Virginia's NOL differ from the federal return's NOL? Yes. Fixed-date conformity additions and subtractions can make Virginia federal taxable income positive or negative independently of the federal result.

Was the 2014 loss eligible for carryover treatment? Yes. It could be carried back and then forward under the applicable IRC § 172 rules incorporated by Virginia.

Citations and references

• Va. Code § 58.1-301, including § 58.1-301 B 2.
• 23 VAC 10-120-325.
• IRC § 172.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 16-22

Original ruling text

March 8, 2016

Re: Ruling Request: Corporate Income Tax

Dear *:

This will reply to your letter in which you request a ruling concerning net operating loss deductions (NOLDs).

FACTS

For the 2013 taxable year, a corporation (the "Taxpayer") reported a net operating loss (NOL) on its federal income tax return. The Taxpayer had a fixed date conformity addition (FDCA) that created taxable income on the Virginia return. The federal NOLD was carried back, but the loss was not carried back for Virginia income tax purposes.

For 2014, the Taxpayer reported no federal taxable income and a fixed dated conformity subtraction (FDCS), resulting in negative income on the Virginia return. The Taxpayer requests a ruling as to whether the excess FDCS can be carried forward.

RULING

Generally, Virginia income tax law does not address the NOLD. 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 (IRC), with certain exceptions, unless a different meaning is clearly required. Because Virginia starts its computation of corporate income tax with federal taxable income (FTI), the Department allows an NOLD to the extent it is allowable in computing FTI as calculated for Virginia income tax purposes.

Title 23 of the Virginia Administrative Code (VAC) 10-120 325 provides the methodology that a corporation must use to calculate the NOLD carrybacks and carryforwards for purposes corporate income tax. Under this regulation, a Virginia NOLD modification must be determined for the taxable year in which an NOL occurred. This Virginia NOLD modification must be carried back and forward in the same manner as the NOLD.

Fixed date conformity additions and subtractions are not considered to be Virginia modifications. Rather, these exceptions identified in Va. Code § 58.1-301 are added to or subtracted from FTI as computed under the IRC in order to determine a corporation's FTI for Virginia income tax purposes. A corporation's Virginia FTI is calculated by starting with FTI as reported on the federal income tax return, adding the FDCA, and then subtracting any FDCS. The formula for determining Virginia FTI would be as follows:

FTI + FDCA — FDCS = Virginia FTI

For Virginia income tax purposes, a corporation will have an NOL only if the formula results in a number that is less than zero. If FDCA exceeds the total of a loss reported on a federal return plus FDCS, the corporation will not have an NOL for Virginia income tax purposes. Conversely, if FDCS exceeds FTI plus FDCA, the taxpayer will have NOL for Virginia even if it does not report an NOL on its federal return. Such an NOL can be carried back and forward in accordance with the rules established under IRC § 172, except for the five year carryback allowed under IRC § 172(b)(1)(H). See Va. Code § 58.1-301 B 2.

Under the facts presented, the Taxpayer's FDCS exceeds the total of FTI and FDCA. As such, the Virginia FTI would be negative resulting in an NOL for the 2014 taxable year. Under Virginia policy, the 2014 NOL could be carried back and then forward as an NOLD pursuant to Virginia's conformity to IRC § 172. Further, any Virginia NOLD modification would be carried back and forward in the same manner as the NOLD.

The Code of Virginia sections and regulations 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 ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner

AR/1-6168882207.o