My S corporation had subpart F/repatriation income under the Tax Cuts and Jobs Act, and it flowed through to my personal return -- can I subtract my share on my Virginia individual income tax return the same way a corporation could?

Plain-English summary

A nonresident individual owned an interest in a Virginia S corporation (referred to as "VASC") that had Virginia taxable income for the 2017 tax year. His 2017 Virginia nonresident return claimed a subtraction for deferred foreign income the Department treated as subpart F income that flowed through to him from VASC in proportion to his ownership share. The Department disallowed the subtraction and assessed additional tax; he appealed.

The specific income involved was tied to the Tax Cuts and Jobs Act's one-time "repatriation" tax: for 2017, the TCJA required domestic corporations and U.S. shareholders to pay a one-time reduced-rate tax on all previously untaxed foreign profits accumulated since 1986. That repatriation amount is technically treated as additional "subpart F income" under IRC § 951, offset by a partial deduction under IRC § 965(c). The net amount -- VASC's untaxed foreign earnings and profits minus the § 965(c) deduction -- flowed into the taxpayer's federal adjusted gross income, and he tried to subtract it back out as subpart F income.

Here's the key wrinkle: Virginia's tax code DOES let corporations subtract subpart F income (Va. Code § 58.1-402(C)(7)) when computing Virginia corporate taxable income. But S corporations like VASC don't pay Virginia corporate income tax at all -- Virginia exempts them, and instead taxes their income to the individual shareholders. When income (or a modification like a subtraction) passes through from an entity like VASC to an individual owner, Virginia law specifies that only the modifications listed in a DIFFERENT statute -- the individual-level subtraction list in Va. Code § 58.1-322.02 -- actually flow through and become available to the individual. That individual-level list simply doesn't include a subpart F income subtraction. So even though the corporate-level subtraction for subpart F income exists on paper, it has no individual-shareholder counterpart that would let this taxpayer subtract the same income on his own personal return. Because the subpart F income remained in his federal adjusted gross income with no available Virginia modification to remove it, the Department upheld the assessment.

What this means for you

Individual shareholders of S corporations (or other pass-through entities) with subpart F or GILTI-type foreign income

Don't assume a subtraction available to CORPORATIONS under Virginia's corporate income tax statute automatically flows through to you as an individual owner. Pass-through modifications only flow through if they're specifically listed in Virginia's individual-level subtraction statute (Va. Code § 58.1-322.02) -- check that list directly rather than reasoning by analogy from the corporate-side rules.

Taxpayers affected by the TCJA's one-time repatriation tax through a pass-through entity

The repatriation inclusion (IRC § 965) is treated as subpart F income for federal purposes, and while it flows through your pass-through entity into your federal adjusted gross income, there's currently no Virginia individual-level subtraction to remove it -- expect it to remain fully includible in Virginia taxable income.

Tax preparers advising pass-through entity owners on Virginia subtractions

Always confirm a claimed subtraction traces to an item genuinely listed in Va. Code § 58.1-322.02 (or another individual-specific provision) -- a subtraction's existence somewhere else in Title 58.1 (like the corporate income tax chapter) doesn't establish that it's available to an individual pass-through owner.

Common questions

Q: My S corporation could subtract subpart F income if it were a C corporation -- can I subtract my share on my personal Virginia return?
A: No. Virginia's corporate subtraction for subpart F income (Va. Code § 58.1-402(C)(7)) applies only at the corporate level. The separate statute governing what flows through to individual pass-through owners (Va. Code § 58.1-322.02) doesn't include subpart F income, so there's no equivalent subtraction available to you as an individual shareholder.

Q: Does the TCJA's one-time repatriation tax income get any special Virginia treatment for individuals?
A: Not as a subtraction. The repatriation inclusion is treated as subpart F income, which remains part of your federal adjusted gross income (and thus Virginia taxable income) with no individual-level Virginia subtraction currently available to remove it.

Q: How do I know if a subtraction my pass-through entity claims actually flows through to me personally?
A: Check whether it's listed in Va. Code § 58.1-322.02 (the individual modification statute) -- pass-through modifications only carry through to an individual owner to the extent they're covered by that specific list, regardless of what other subtractions might exist elsewhere in Virginia's tax code for different types of taxpayers.

Citations and references

• Va. Code § 58.1-301 (Virginia income tax terminology/conformity to the Internal Revenue Code)
• Va. Code § 58.1-402(C)(7) (corporations may subtract amounts included by operation of IRC § 951, i.e., subpart F income)
• Va. Code § 58.1-401 (S corporations are exempt from Virginia corporate income tax; income is taxed to shareholders instead)
• Va. Code § 58.1-391(A) (pass-through entity modifications flow through to an owner in accordance with the owner's federal distributive share)
• Va. Code § 58.1-322.02 (the individual-level Virginia subtraction list; does not include a subpart F income subtraction)
• 26 U.S.C. § 951 (subpart F income); 26 U.S.C. § 965 and § 965(c) (TCJA one-time repatriation tax on post-1986 untaxed foreign earnings and profits, with a partial deduction)
• P.D. 10-274 (12/6/2010) and P.D. 18-76 (5/2/2018) (pass-through entity subtraction modifications are limited to those permitted under Va. Code § 58.1-322.02)

Subject

Subtraction : Subpart F Income - Pass-Through Entity Federal Adjusted Gross Income (FAGI): Tax Cuts and Jobs Act (TCJA) - Untaxed Foreign Profits Pass-Through Entity: Modifications - Subtractions

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 22-97

Original ruling text

May 26, 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, 2017. I apologize for the delay in responding to your request.

FACTS

The Taxpayer was a nonresident of Virginia who had an ownership interest in an S corporation (VASC) that had Virginia taxable income during the 2017 taxable year. He filed his 2017 Virginia nonresident individual income tax return claiming a subtraction for deferred foreign income earned by the VASC. Under review, the Department disallowed the subtraction and issued an assessment. The Taxpayer appeals, contending that he was entitled to claim the subtraction as subpart F income.

DETERMINATION

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 Virginia Code §§ 58.1-322.01 through 58.1-322.04.

Pursuant to Virginia Code § 58.1-402 C 7, corporations are allowed to subtract “[A]ny amount included therein by the operation of § 951 of the Internal Revenue Code (subpart F income).” The Taxpayer contends that VASC had subpart F income that flowed to him in proportion to his ownership interest. As such, he asserts that he could claim a subtraction on his personal income tax return for the subpart F income.

For the 2017 taxable year, the Tax Cuts and Jobs Act (TCJA) requires domestic parent corporations or United States individual shareholders to pay a one-time income tax at reduced rates on all their untaxed foreign profits earned in prior years. This is referred to as “repatriation.” The repatriation amount consists of the gross inclusion of post-1986 accumulated, untaxed earnings and profits under IRC § 965, which is prescribed as additional subpart F income, and the deduction under IRC § 965(c). The difference between VASC’s untaxed earnings and profits and its IRC § 965(c) deduction was reported by the Taxpayer in his FAGI for the 2017 taxable year. He then claimed a subtraction of this amount as subpart F income.

Virginia Code § 58.1-401 exempts “electing small business corporations” from Virginia corporation income tax. As a result, S corporations are not subject to tax in Virginia. Instead, the income of such corporations is taxed to the shareholders. All pass-through entities, including S corporations, are required to file an annual information return with the Department setting forth their income and a list of their owners. Specifically, Virginia Code § 58.1-391 A provides:

In determining Virginia taxable income of an owner, any modification described in § 58.1-322.01, § 58.1-322.02, § 58.1-322.03 and § 58.1-322.04 that relates to an item of pass-through entity income, gain, loss or deduction shall be made in accordance with the owner’s distributive share, for federal income tax purposes, of the item to which the modification relates.

Under these statutes, any subtraction available under Virginia Code § 58.1-322.02 will flow through from a pass-through entity to an individual taxpayer, who in turn can take the subtraction on his or her Virginia individual income tax return. The statute, however, limits the type of subtraction modifications passed through from pass-through entities to those permitted under Virginia Code § 58.1-322.02. See Public Document (P.D.) 10-274 (12/6/2010) and P.D. 18-76 (5/2/2018).

Virginia Code § 58.1-322.02 does not provide a subtraction for subpart F income. Because the subpart F income was included in the Taxpayer’s FAGI and the Code of Virginia does not permit a subtraction for such income, the Department was correct in disallowing the subtraction on the 2017 income tax return. Accordingly, the 2017 assessment is upheld.

An updated bill will be issued shortly. The Taxpayer should remit payment of the balance due within 30 days of the bill date to avoid the accrual of additional interest and possible collections actions.

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/2001.B

Related Documents

10-274

18-76