2011 Legislative Updates

1. 2011 Legislative Updates

2. Agenda • Tips and Tools for Preparers • Administrative Changes • Fixed Date Conformity Advancement • New Tax Credits • Tax Credit Changes • Subtraction • Business Tax Changes • New Taxes Administered by the Department • Questions ?????

3. Tips and Tools for Preparers 2011 Legislative Summary - P. D. 11-103 • The summary is a comprehensive review of law changes for 2011 and beyond. • Download from the Department of Taxation website: www.tax.virginia.gov

4. Tips and Tools for Preparers • Need help fast? –Call our Tax Professionals Hotline (804) 367-9286 Hours: 8:30am – 4:30pm Monday – Friday – Tax Professionals Page www.tax.virginia.gov

5. Tips and Tools for Preparers • Tax Policy Library at www.tax.virginia.gov – Rulings of the Tax Commissioner – Tax Bulletins – Virginia Administrative Code • What’s New section explained in each of the instruction booklets for tax type

6. Tips and Tools for Preparers • Writing In? General Correspondence: Virginia Department of Taxation Post Office Box 1115 Richmond, Virginia 23218-1115 Offers in Compromise and 1821 Appeals: Tax Commissioner Post Office Box 2475 Richmond, Virginia 23218-2475

7. Administrative Changes • Mailing Income Tax Returns – For taxable year 2011, the Department of Taxation is not required to mail its tax returns and instructions unless requested by a taxpayer or his/her representative. – Download forms from the Department’s website – Request forms online and have them mailed – Request forms through Live Chat and have them mailed NOTE: Tax Preparers must file returns electronically if 50 or more returns in the preceding year beginning with the 2011 returns filed in 2012.

8. Administrative Changes cont.•Fillable Forms The Department will make all state tax forms available on its website in fillable, portable document format (PDF) in several phases. – Business tax forms (withholding, sales and use, etc.) available by January 2012 – Income tax forms (individual forms available by 12/31/11), corporation and pass-through entity forms scheduled for 2012 – Forms cannot be filed online, only filled out and printed

9. Administrative Changes cont. • Judicial Notice Tax bulletins, guidelines and other documents, published by the Department will be accorded judicial notice by courts. – The bill also requires that the Department publish tax bulletins and guidelines and includes posting the documents on it’s website as a permitted publication method instead of distribution to national and state tax services – The bill is effective for proceedings commenced on or after July 1, 2011

10. Administrative Changes cont. • Commercial Delivery Services – State and local returns or payments are timely if delivered by a commercial delivery service in an envelope or sealed container – Document must bear a confirmation of shipment date on or before midnight of the day the return or payment is due

11. Administrative Changes cont. • Accrued Interest on Disputed Assessments – The rate at which interest accrues on the outstanding liability of contested assessments is reduced for the period starting nine months after the date of assessment until the Department issues a ruling – Interest will accrue at the federal short-term rate pursuant to IRC § 6621(b), which is between 4½ and 5½ percent less than normal rate prescribed by Va. Code §58.1-15. – If a portion of the contested assessment is correct, interest will resume accruing at the normal rate 30 days after date of action for correction.

12. Virginia Fixed Date Conformity Advances • Advances the date from January 22, 2010 to December 31, 2010 • Net Operating Losses • Virginia will continue to disallow any 5-year carry-back of net operating losses (“NOL”) allowed for NOLs generated in either taxable year 2008 or 2009 • Bonus Depreciation • Virginia will continue to disallow any bonus depreciation allowed for certain assets under Internal Revenue Code (“IRC”) § 168(k) • High Yield Discount Obligations • Virginia will continue to deconform from the suspension of the application of the applicable high yield debt obligation rules for certain debts issued after September 30, 2008, and before January 1, 2010

13. Virginia Fixed Date Conformity Advances cont. Cancellation of Debt Income (CODI) • Virginia will continue to disallow the income tax exclusion for CODI for business indebtedness realized after December 31, 2008, and before January 1, 2011. For taxable year 2009, taxpayers that defer CODI on their federal returns will continue to be able to report the amount of the income in equal installments over three taxable years: 2009, 2010, and 2011 • For taxable year 2010, Virginia will extend the treatment of deferral of CODI to transactions completed on or before the adoption of the Appropriations Acton, which was April 21, 2010. The qualifying transactions may be reported in equal amounts over three taxable years: 2010, 2011, and 2012 • Taxpayers will be required to add back the entire amount of any CODI resulting from transactions after April 21, 2010

14. Virginia Fixed Date Conformity Advances cont. • Domestic Production Deduction • Virginia will continue to partially deconform from the domestic production deduction allowed under IRC § 199, which allows a deduction equal to 9% of qualified production activities income for taxable years 2010 and thereafter • Virginia will allow a deduction equal to 6% of the qualifying income as had been allowed in taxable years 2008 through 2010 • Low Income Tax Credit • Virginia will conform to the temporary increase in the federal earned income tax credit (EITC) for Taxable year 2010 • Virginia law does not presently conform to this change for taxable year 2011, but the General Assembly will consider conforming to the extension during the 2012 session

15. New TAX CREDITS

16. New Tax Credits • Barge and Rail Usage Tax Credit –An individual or business is eligible for the credit to move cargo containers throughout Virginia by barge or rail rather than moving by trucks or other motor vehicles of Virginia highways. –The credit is $25 per 20-foot equivalent unit (TEU) moved by barge or rail – To qualify for the credit, an international trade facility is required to apply to the Department by April 1 using Form BRU – Credit is capped at $1.5 million – Credit expires on January 1, 2015

17. • Barge and Rail Usage Tax Credit cont. – If the cap is exceeded, the Department will allocate credits on a pro rata basis – Any unused credit for the taxable year may be carried forward for 5 years – The credit may be claimed against: individual income tax, corporation income tax, fiduciary taxes, bank franchise tax, the insurance premium tax, and the tax on public service corporations.

18. • Port Volume Increase Tax Credit  Credit is available to individuals and corporations, and  (i) must be engaged in manufacturing of goods or the distribution of manufactured goods; (ii) use Virginia port facilities; and (iii) increase port cargo volume through these facilities  Taxpayer must increase port cargo volume at Virginia port facilities by 5% over its base year port cargo volume  Base year cargo volume must be at least 75 net tons of noncontainerized cargo or 20-foot equivalent unit (TEUs)

19. • Port Volume Increase Tax Credit cont.  Credit amount is $50 per TEU above base year cargo volume; major facilities that transport more than 25,000 TEUs in the first year may receive $50 per TEU transported during the first year  Credit is capped at $3.2 million for each year; $250,000 per taxpayer if full amount is not allocated, taxpayers that received credit in prior year are allowed a pro rata share of remaining credit amount  Taxpayers must submit application for the credit to the Virginia Port Authority by March 1, credit amount will be certified to the Department

20. • International Trade Facility Tax Credit  The credit is allowed for either capital investment in an international trade facility or increasing jobs related to an international trade facility  Credit is equal to $3,000 per new qualified full-time employee that results from increased qualified trade activities by the taxpayer or two percent of the amount of capital investment made by the taxpayer to facilitate the increased eligible trade activity  Any company that creates jobs or makes capital investments in a “tobacco-dependent locality” is permitted to claim a port tax credit equal to $6,000 per job created or four percent of qualified capital investment expenses to the extent that money is available in the Tobacco-Dependent Localities Fund

21. • International Trade Facility Tax Credit cont.  Taxpayermay claim either a capital investment or job tax credit  No more than $250,000 in tax credits can be issued in any fiscal year. The Department will determine the credit amount for the taxable year and provide a written certification to each taxpayer The credit amount will be limited to 50 percent of the taxpayer’s tax liability for the taxable year and any unused credit can be carried forward for ten years  The business must apply by April 1, using Form ITF

22. • Research and Development Tax Credit  A refundable Individual or corporate income tax credit is available for qualified research and development expenses paid or incurred during the taxable year that exceed the Virginia base amount  Credit is equal to (i) 15% of the first $167,000 research and development expenses; or (ii) 20% of first $175,000 if research is conducted in conjunction with a Virginia public college or university, to the extent expenses exceed the Virginia base amount for the taxpayer  Credit is capped at $5 million in any fiscal year, if total amount of approved credits is less than the capped amount, the Department will allocate the remaining amount to taxpayers already approved for the credits for 15% of the second $167,000 in research and development expenses and 20% of the second $175,000 if research is conducted in conjunction with a Virginia public college or university  Application for the credit must be made by April 1, using Form RDC

23. • Telework Expenses Tax Credit • Individual and corporate Income tax credit for employers who incur eligible telework expenses or conduct telework assessments • Employer eligible for a credit of up to $1,200 per telework employee beginning January 1, 2012 but before January 1, 2014 • For 2012 and 2013, the credit amount for telework expenses will be equal to the amount of expenses incurred not to exceed $50,000 per employer, capped at $1 million annually • Business must apply to the Department between September 1 and October 31, prior to the credit year, using Form TEL-1 and must submit Form TEL-2 by April 1 of the year following the credit year

24. • Wineries Tax Credit – An individual and corporate income tax credit for Virginia farm wineries and vineyards – Tax credit is equal to 25% of cost of all qualified capital expenditures made in connection with the establishment of new, or capital improvements to existing Virginia farm wineries and vineyards – Capped at $250,000 per calendar year (allocated pro rata) – Ten-year carryforward provision – Application for credit must be made by April 1 using Form FWV

25. • Motion Picture Production Credit – Qualifying motion picture production companies eligible to receive a series of refundable individual and corporate tax credits beginning January 1, 2011 – Base credit is 15% of all qualifying expenses (including wages), with a bonus 5% if production is filmed in an economically distressed area of Virginia – Production company is allowed an additional 10% to 20% of total aggregate payroll for Virginia residents employed in connection with the motion picture production

26. • Motion Picture Production Credit cont. – Companies that spend at least $250,000 in total production costs in the Virginia, but not more than $1 million, will receive a credit equal 10% of total Virginia resident aggregate payroll – Companies spending over $1 million in production costs, the credit will equal to 20% of the total aggregate resident payroll – An additional credit of 10% of the total aggregate resident payroll is available to companies that hire first-time actors or first-time members of a production crew in connection with a production in Virginia

27. • Motion Picture Production Credit cont. – Motion picture credits issued is capped at $2.5 million for the 2011-2012 biennium and $5 million in each biennium thereafter – To qualify, production companies must submit an initial application to the Virginia Film Office (VFO) 30 days prior to production and, must have a Memorandum of Understanding after the application is approved – After production is completed, production company will submit documentation to VFO which will issue a certification letter for amount of credit

28. Send applications for Credits administered by the Department of Taxation to: Virginia Department of Taxation Tax Credit Unit Post Office Box 715 Richmond, Virginia 23218-0715 An application for a credit can be disqualified if received late. Questions? Call 804-786-2992

29. TAX CREDITS Changes

30. • Agricultural Best Management Practices Tax Credit – Legislation amended the individual income tax credit for agricultural best management practices (BMPs) to allow an individual to receive a refund of 100% of the credit amount that exceeds their Virginia tax liability – Permits a pass-through entity that allocates tax credits among taxpayers to designate a general partner, member-manager, or shareholder as the person that the Department is to contact first for the collection of taxes in the event that the tax credit is disallowed in the future – The credit claimed on the corporate return is nonrefundable

31. • Land Preservation Tax Credit – Legislation increased the maximum credit amount issued in a calendar year by any credit amounts that have been disallowed or invalidated by the Department – If the Department requires a second qualified appraisal within 30 days after an application is filed, that application is not complete until the fair market value of the donation is finally determined by the Tax Commissioner – Credit shall not be reduced by the amount of unused credit that could have been claimed in a prior year by the taxpayer but was unclaimed

32. • Land Preservation Tax Credit cont. (This is not a new credit but an explanation on how the credit will function in 2011.) – The amount of credit that can be claimed by each taxpayer is limited to $50,000 for taxable years 2009, 2010 and 2011, and $100,000 for the 2012 taxable year and thereafter. – Any unused portion of the credit issued to a taxpayer may be carried forward for a maximum of 10 years – Taxpayers affected by the credit reduction for taxable years 2009 – 2011, any unused portion of the credit can be carried forward for a maximum of 13 years

33. • Land Preservation Tax Credit cont. – For taxpayers whom a credit has been transferred, any unused portion may be carried forward for a maximum of 11 years after the credit was originally issued. – For taxpayers affected by the credit reduction for taxable years 2009 - 2011, any portion of a transferred credit may be carried forward for a maximum of 14 years after the credit was originally issued.

34. • Neighborhood Assistance Act Tax Credit – Tax credit expanded to include trusts – If donations of cash, stock, merchandise, real estate or rent/lease of a facility to an approved organization, the credit amount is equal to 40% of the contribution. – For business firms, the credit must be at least $400 for any donation, which means the value of the contribution must be at least $1,000, and the credit cannot exceed $175,000 – For individuals, a donation must be at least $500, which means a credit of $200, and the credit cannot exceed $50,000

35. • Neighborhood Assistance Act Tax Credit cont. –Expanded to include pharmacists donating pharmaceutical services to patients of a nonprofit free clinic as directed by an approved neighborhood organization that received an allocation of tax credits from Department of Social Services – The definition of “impoverished people” has been changed to include individuals with family annual income not in excess of 200 percent of current poverty guidelines – Sunset date extended until July 1, 2014

36. • Coal Employment and Production Incentive Tax Credit – Sunset date extended to July 1, 2016 for redemption or refund by a person with an economic interest in coal credits earned by an electricity generator and allocated to him. – Electricity generator may continue to allocate credits earned after July 1, 2016, but the person with an economic interest in the coal can only claim the credit against his own tax liabilities – The legislation does not affect the redemption of credits earned by the person with an economic interest in coal

37. • Clean Fuel Vehicle and Advance Cellulosic Biofuels Job Creation Tax Credit – Sunset date advanced to December 31, 2014 – Corporation can claim credit equal to $700 for each job created relating to the manufacture and production of clean fuel and advanced cellulosic biofuel vehicles – Credit is allowed in the taxable year in which job is created and in each of the two succeeding years in which the job is continued

38. • Livable Home Tax Credit – A licensed contractor is now eligible for the credit if he builds new residences or retrofits existing residences to provide visitability or improve accessibility – Maximum credit amount increased from $2,000 to $5,000 – Carryover period expanded from five to seven years – Credit is capped at $1 million for credits earned each year

39. • Long-Term Care Insurance Tax Credit – The credit as explained in P. D. 07-211 increases the amount of the credit an individual may claim for long-term care insurance premiums from 15% to 30% of the amount paid for taxable year 2011 – In order for this to become effective, the provisions will have to be reenacted by the General Assembly during the 2012 session – A taxpayer may be able to claim both the Virginia Long-Term Insurance Tax Credit and the Virginia Long-Term Care Premiums Deduction in the same year.

40. • Long-Term Care Insurance Tax Credit cont. Example: An individual purchased a long-term care policy on July 1 and made payments on monthly basis. He would claim a credit in the current taxable year for six months of premiums paid and a credit in the second year for the next six months of premiums paid in order to reach the allowed twelve months. The individual could also claim a deduction in the second year for the six months of premiums that were not used as a basis for the credit provided they were not actually included as a deduction on Federal Schedule A.

41. • Tax Credit for Low Income Individuals The threshold amounts have changed to: Eligible ExemptionsPoverty Guidelines 1 $ 10,890 2 14,710 3 18,530 4 22,350 5 26,170 6 29,990 7 33,810 8 37,630

42. Subtraction • Long-Term Capital Gain Subtraction Beginning January 1, 2011, the subtract is available to an individual or corporation for income taxed for federal income tax purposes as a long-term capital gain or as investment services partnership interest income. The investments must be related to investments in either a “qualified business” as define in Va. Code § 58.1-339.4, orany other technology business approved by the Secretary of Technology that has its principal place of business in Virginia and annual revenues of less than $3 million in the fiscal year prior to the investment. Investment must be made between April 1, 2010, and June 30, 2013 and must be attributable to a qualified business.

43. BUSINESS TAXES

44. PTE Updates • Withholding Exemptions for Nonresident Landlords – Legislation revised the landlord-tenant laws which exempts a nonresident person who is a part of a pass-through entity from the requirement to withhold taxes on shares of taxable income attributable to the property – Must own or lease four or fewer dwelling units – Must disclose the name and federal taxpayer identification number for all owners

45. • Apportionment Factor Changed for Manufacturers • Manufacturing companies may elect to use a single factor apportionment based on sales to determine their Virginia taxable income. • This modification will be phased in as follows: • for taxable years beginning on or after July 1, 2011, but before July 1, 2013, qualifying corporations may elect to use a triple-weighted sales factor; • for taxable years beginning on or after July 1, 2013, but before July 1, 2014, qualifying corporations may elect to use a quadruple-weighted sales factor; and • for taxable years beginning on or after July 1, 2014, and thereafter, qualifying corporations may elect to use the single sales factor method to apportion Virginia taxable income.

46. • Apportionment Factor Changed for Manufacturers cont. There are three conditions to use single sales factor method: • Must certify that wages are at least equal to state or local average; • Must continue to use single-sales factor for three taxable years after the election; • Tax savings subject to recapture if employment levels are not maintained for three taxable years after election.

47. Retail Sales and Use Taxes • Agricultural Produce and Eggs – Agricultural produce and eggs are now exempt when sold at retail in local farmers markets and roadside stands – Exemption only applies if farmer or egg producer’s sales do not exceed $1,000 annually – An exemption from the litter tax is also available for farmers and egg producers who meet these requirements, provided the container the producer provides to hold purchased items has been previously used

48. Retail Sales and Use Taxes cont. • Bank Security System Installers – Businesses primarily engaged in the furnishing and installation of tangible personal property that provides electronic or physical security on real property used by financial institution shall be treated as retailers – Each business is required to collect the tax from the purchaser, rather than paying the tax on its purchase of the material, even if installed on property that is not used by a financial institution – Businesses must give suppliers a resale exemption certificate (Form ST-10) when making purchases of vaults, safe deposit boxes, vault lockers, electronic security systems, digital video systems, card access systems, and similar equipment

49. Retail Sales and Use Taxes cont. Sales Tax Registration through Local Commissioners • Local commissioners of the revenue are now authorized to elect to allow dealers and special use tax contractors to register with the local commissioner, rather than the Tax Commissioner • Local commissioners can assist dealers in directly entering data into the Department’s system using the local commissioner’s computer, and provide the applicant with a Department of Taxation issued certificate of registration • Local commissioners must follow guidelines set forth by the Tax Commissioner

50. New Taxes Administered by the Dept. of Taxation • Wireless E-911 Surcharge – Collection of the Wireless E-911 surcharge will be transferred from the Wireless E-911 Services Board to the Department of Taxation – Wireless service carriers and resellers collect $0.75 per month from post-paid customers, and Retain 3% as dealer compensation Balance deposited to Wireless E-911 Fund – The change is effective July 1, 2011 • Motor Vehicle Rental Tax – Administration and collection of the tax will be transferred from the Department of Motor Vehicles to the Department of Taxation – The change is effective July 1, 2012