I run my farm as a sole proprietorship, but the agricultural best-management-practices tax credit certificate was issued under the farm's own employer ID number rather than my Social Security number -- can I still claim it on my personal return?

Plain-English summary

This ruling is a taxpayer win that resolves a paperwork mismatch that could easily trip up any farmer or small-business owner operating as a sole proprietorship: what happens when a tax credit certificate is issued under the BUSINESS's name and ID number, but the business itself has no separate legal or tax identity from its owner?

Virginia gives farmers a refundable credit equal to 25% of the first $100,000 spent on agricultural best management practices (measures that reduce nonpoint source pollution), when the farmer has an approved soil conservation plan. A farm owner claimed this credit on his personal Virginia income tax return using his Social Security number. The Department initially denied it, because the credit certificate had been issued to the farm under its own federal employer ID number (FEIN) rather than through a formal pass-through-entity allocation, the mechanism Virginia's statute normally uses to divide a credit among the owners of a partnership, LLC, or S corporation.

The Department reversed on appeal. A sole proprietorship -- a business with a single owner and no separate legal structure -- is treated under federal tax rules as a "disregarded entity," meaning it isn't recognized as separate from its owner for tax purposes at all. As a result, all of the farm's income, gains, losses, and credits belong directly to the individual owner, regardless of whether paperwork (like the credit certificate here) happens to reference the business's own name or FEIN rather than the owner's Social Security number. Because Virginia's credit statute allows any qualifying "individual" to claim it -- not just individuals whose credit certificates are personally addressed -- the taxpayer was entitled to claim the credit on his personal return, and the assessment was reversed.

What this means for you

Farmers and other sole proprietors claiming Virginia tax credits

If a credit certificate related to your sole proprietorship is issued under the business's own name or FEIN rather than your personal Social Security number, that mismatch alone doesn't disqualify you from claiming the credit on your individual return -- a single-owner business is treated as inseparable from its owner for federal (and by extension Virginia) income tax purposes.

Accountants preparing returns for sole-proprietor farm or business clients

Watch for this exact fact pattern: a credit or deduction certificate issued in the business's name, where the underlying activity is really a one-owner sole proprietorship reported on the owner's own return (e.g., a Schedule F for a farm). The paperwork mismatch is not a substantive bar to the client claiming the benefit.

Businesses structured as formal pass-through entities (partnerships, LLCs, S corps)

This ruling is specific to true single-owner sole proprietorships. If your business has multiple owners, Virginia's normal pass-through-entity allocation rule (dividing the credit by ownership share) still applies as written.

Common questions

Q: My farm's tax credit certificate is under the farm's EIN, not my Social Security number -- can I still claim it personally?
A: Yes, if your farm is a true sole proprietorship (single owner, no separate legal entity). It's disregarded as separate from you for tax purposes, so the credit belongs to you regardless of what name or ID number is on the certificate.

Q: Does this rule apply to partnerships, LLCs, or corporations too?
A: No. This reasoning is specific to single-owner sole proprietorships that are disregarded entities. Multi-owner pass-through entities still allocate credits among their owners in proportion to ownership share.

Q: What credit was at issue here?
A: Virginia's agricultural best management practices credit -- a refundable credit equal to 25% of the first $100,000 an individual farmer spends on approved conservation practices under a soil conservation plan.

Citations and references

• Va. Code § 58.1-339.3 (agricultural best management practices credit; 25% of the first $100,000 spent, refundable)
• Va. Code § 58.1-339.3 D (pass-through entity owners receive the credit in proportion to their ownership share)
• Va. Code § 58.1-301 (Virginia conforms to IRC terminology/references unless a different meaning is clearly required)
• Treas. Reg. § 301.7701-2(c)(2)(i) (a single-owner business entity is disregarded as separate from its owner for federal tax purposes)

Subject

Federal Adjusted Gross Income (FAGI) : Sole Proprietorship - Disregarded Entity; Credit - Agricultural Best Management Practices (BMP)

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-38

Original ruling text

March 8, 2022

Re: § 58.1-1821 Application: Individual Income Tax

Dear *:

This will reply 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, 2020.

FACTS

The Taxpayer, the owner of a farm, claimed an agricultural best practices management tax credit on his 2020 Virginia individual income tax return. Under review, the Department disallowed the credit and issued an assessment. The Taxpayer appealed, contending that he could claim the credit as the sole proprietor of the farm.

DETERMINATION

Virginia Code § 58.1-339.3 provides:

[A]ny individual who is engaged in agricultural production for market, or has equines that create needs for agricultural best management practices to reduce nonpoint source pollutants, and has in place a soil conservation plan approved by the local Soil And Water Conservation District (SWCD), shall be allowed a refundable credit against . . . [individual income tax] . . . in an amount equaling 25 percent of the first $100,000 expended for agricultural best management practices by the individual.

The credit was disallowed on the 2020 Virginia individual return because it was claimed by the Taxpayer under his social security number while the farm itself had a federal employer ID number (FEIN). The Department found that the credit certificate had been issued to the farm, but was not allocated through a pass-through entity (PTE). The Taxpayer contends that he could claim the credit on his individual Virginia income tax return because the farm was operated as a sole proprietor.

Virginia Code § 58.1-301 provides, with certain exceptions, that the 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. Conformity does not extend to terms, concepts, or principles not specifically provided in the Code of Virginia . For individual income tax purposes, Virginia “conforms” to federal law, in that it starts the computation of Virginia taxable income (VTI) with federal adjusted gross income (FAGI). Income properly 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 Chapter 3 of Title 58.1 of the Code of Virginia .

For purposes of allocating the credit, Virginia Code § 58.1-339.3 D provides that the owners of the PTE, which may include a partnership, limited liability company or S corporation, will receive the credit in proportion to their ownership share. Generally, a sole proprietor is someone who owns an unincorporated business by himself or herself that does not require an FEIN. Treas. Reg . § 301.7701-2(c)(2)(i), however, provides that a business entity that has a single owner is disregarded as an entity separate from its owner. As such, items of income, gain, loss or deduction are considered as belonging to the individual owner of a sole proprietorship. Typically, individuals report income from a sole proprietorship that is a farm on a federal Schedule F.

In addition, Virginia Code § 58.1-339.3 allows any qualifying “individual” to claim the credit. Because single owner PTEs are disregarded as entities separate from their owner for federal income tax purposes, the owner is permitted to claim the credit even if the certificates are issued under the business’ name and FEIN.

Because the farm in this case was disregarded as an entity separate from the Taxpayer and thus a sole proprietorship, the Taxpayer was eligible to claim the credit granted to the farm on his Virginia individual income tax return. Therefore, the case will be returned to the unit that made the adjustment in order to reinstate the credit, abate the assessment, and issue a refund as warranted.

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/3887.B