Does a Virginia S corporation need a special limitations extension while another state audits income that may change its shareholders' Virginia credit?

Plain-English summary

A Virginia S corporation's 2014 and 2015 returns were under audit by another state. A change could increase income taxed there and make the shareholders eligible for a Virginia credit. The company asked Virginia to extend the amended-return deadline while the audit remained open.

Virginia said a special extension was unnecessary: the statute already allows one year after another state's final determination to file an amended Virginia return attributable to that change.

Why the shareholders, not the S corporation, bear the tax

Virginia generally follows federal S corporation treatment. The entity itself is not subject to Virginia income tax; its income, gain, loss, deductions, and credits flow through to shareholders (Va. Code § 58.1-401; 23 VAC 10-120-90(E)).

The S corporation still files a Virginia informational return under Va. Code § 58.1-392. Any State A change affecting pass-through income could alter the shareholders' Virginia taxable income and their out-of-state credit.

The one-year exception after another state's change

Va. Code § 58.1-1823 generally permits amended returns within three years of the original filing deadline. Subsection (A)(v) creates a separate period: a taxpayer has one year from another state's final determination to request a refund attributable to that change, capped at the Virginia tax decrease caused by the change.

Because the S corporation itself generally owes no Virginia income tax, it would not be the refund claimant. But if State A's final audit change affected the shareholders' Virginia taxable income:

• the S corporation would have one year to amend the Virginia pass-through returns; and
• the shareholders could file the necessary amended Virginia individual returns for the credit.

If the State A audit produced no change affecting the shareholders' Virginia taxable income, no amended return would be required. The ruling noted that an entity amendment could still be helpful when shareholder amendments are needed.

What this means for you

• Calendar the final determination date, not just the original return date. The one-year exception begins when the other state's change becomes final.
• Separate entity and owner filings. The S corporation supplies corrected pass-through information; shareholders claim their own tax relief.
• The refund is limited to the effect of the other-state change. The exception does not reopen unrelated Virginia issues.
• No affected Virginia income means no required amendment. Wait for the substantive audit result, but preserve the one-year deadline afterward.

Common questions

Q: Can Virginia extend the statute while another-state audit is pending?

A: The ruling did not grant a special extension because the statute already provides one year after the other state's final determination.

Q: Does the S corporation claim the Virginia refund?

A: Generally no. The entity is not subject to Virginia income tax; affected shareholders amend their individual returns, supported by corrected pass-through information.

Q: What if State A's audit makes no change relevant to Virginia?

A: Then no amended Virginia return is required on that basis.

Citations and references

• Va. Code § 58.1-301 — federal conformity
• Va. Code § 58.1-401 — S corporation treatment
• 23 VAC 10-120-90(E) — S corporation pass-through items
• Va. Code § 58.1-392 — informational return
• Va. Code § 58.1-1823(A)(v) — one-year amended-return period after another state's final change
• Related Virginia rulings cited: P.D. 88-165, P.D. 07-99

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 19-73

Original ruling text

July 15, 2019

Re: Request for Ruling: Pass-Through Entity

Dear *:

This will reply to your letter in which * (the “Taxpayer”) requests an extension of time to file amended returns for the taxable years ended December 31, 2014 and 2015.

FACTS

The Taxpayer, a Virginia S corporation, timely filed its Virginia pass-through entity returns of income for the 2014 and 2015 taxable years. These two years are currently under audit by * (State A). The Taxpayer indicates that the audit may result in an adjustment in income. As such, its shareholders, and **, (the “Shareholders”), may be eligible to claim an out-of-state credit for 2014 and 2015. You request that Virginia allow an extension of the statute of limitations to file amended returns.

RULING

Virginia’s conformity to federal income tax law is set forth in Virginia Code § 58.1-301, which provides that the terms used in the Virginia income tax statutes will have the same meaning as used in the Internal Revenue Code (IRC). Further conformity does not extend to terms, concepts, or principles specifically provided for in Title 58.1 of the Code of Virginia . For Virginia, federal taxable income (FTI) and federal adjusted gross income (FAGI), the starting points for determining income taxable in Virginia for corporations and individuals, respectively, are identical to that as defined by the IRC.

In following federal tax policy with respect to S corporations, Virginia Code § 58.1-401 provides that such corporations are not subject to income tax in Virginia. Thus, Virginia has elected to treat S corporations in substantially the same manner as has the Internal Revenue Service (IRS), i.e. the corporate entity itself is not subject to taxation, but the shareholders will be taxed as individuals on their pro rata share of S corporation income to the extent includable in FAGI. See Title 23 of the Virginia Administrative Code (VAC) 10-120-90 E, Public Document (P.D.) 88-165 (6/29/1988) and P.D. 07-99 (6/27/2007). As such, the Taxpayer’s items of income, gain, loss, deduction and credit flow through to its shareholders. Under Virginia Code § 58.1-392, however, pass-through entities (including S corporations, partnerships and limited liability companies) doing business in Virginia or having income from Virginia sources are required to file an informational return with the Department.

Generally, Virginia Code § 58.1-1823 allows a taxpayer to file an amended return within three years from the last day prescribed by law for the timely filing of the return. However, there a number of exceptions to the general rule when specific circumstances are present. Under Virginia Code § 58.1-1823 A (v), a taxpayer has one year from the final determination of a change made by any other state to file an amended return to request a refund, provided that the refund does not exceed the amount of the decrease in Virginia tax attributable to such change. Again, because S corporations are not generally subject to Virginia income tax, it would not be able to file an amended return requesting a refund.

If the audit results in a change that impacts Virginia taxable income (VTI) of the Shareholders, the Taxpayer would have one year from the final State A determination to file amended Virginia returns. If the State A audit does not affect the VTI of the Shareholders, there would be no requirement to file amended returns. However, if the Shareholders are required to file amended Virginia individual returns, it may be beneficial for the Taxpayer to file amended returns even if not required.

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

Sincerely,

Craig M. Burns

Tax Commissioner

AR/2016.B

Related Documents

88-165

07-99