Virginia Administrative Code › Title 23 - TAXATION › Agency 10 - DEPARTMENT OF TAXATION › Chapter 110 - INDIVIDUAL INCOME TAX › Section 23VAC10-110-142 - Virginia taxable income; subtractions

Current through Register Vol. 40, No. 24, July 15, 2024
A. To the extent included in FAGI, the items enumerated below shall be subtracted from FAGI in determining Virginia taxable income. If an item was partially excluded or deducted in determining FAGI, it shall be subtracted from FAGI only to the extent included therein. If an item has already been excluded from Virginia taxable income, it shall not be subtracted again pursuant to this section.
1. Interest or dividends on obligations of the United States or Virginia.
a. "Obligation" means a debt obligation or security issued by the United States or any authority, commission, or instrumentality of the United States or by the Commonwealth of Virginia or any of its political subdivisions, which obligation or security is issued in the exercise of the borrowing power of the United States or Virginia and is backed by the full faith and credit of the United States or Virginia.
b. Guarantees by the United States or Virginia of obligations of private individuals or corporations are merely contingent obligations of the United States or Virginia even though the guarantees may be backed by the full faith and credit of the United States or Virginia. The obligation does not become an obligation of the United States or Virginia because of the guarantee and interest and dividends paid on such guaranteed obligations do not qualify for the subtraction unless specifically exempted by statute.
c. Specific statutory exemptions exist for certain securities issued by particular federal or Virginia agencies or political subdivisions. If a federal or Virginia statute exempts from state taxation the interest or dividends on specific securities of a particular agency or political subdivision, then such interest or dividends qualify for the subtraction.
d. Repurchase agreements are usually obligations issued by financial institutions that are secured by U.S. obligations exempt from Virginia income taxation under subdivisions 1 a and c of this section. In such cases, the interest paid by the financial institutions to purchasers of repurchase agreements does not qualify for the subtraction. Repurchase agreements issued following current commercial practice will invariably be regarded as obligations of the issuing financial institution. However, if the purchaser is regarded as the true owner of the underlying exempt obligation, the interest will qualify for the subtraction even though collected by the seller and distributed to the purchaser. Any claim of such ownership must be substantiated by a taxpayer claiming a subtraction.
e. Interest received from regulated investment companies. Interest on exempt obligations received by a regulated investment company and passed through to the stockholders in qualifying distributions, as defined in IRC § 852, will retain its exempt status in the hands of the shareholders. If a shareholder receives a distribution that includes interest from both exempt and non-exempt obligations, all distributions will be deemed taxable unless the shareholder can substantiate the exempt portion of the distributions. Any individual requiring advice as to the taxable status of distributions from any regulated investment company should contact such company. Due to the turnover in investments held by such companies and the commingling of interest from exempt and non-exempt obligations, the Department cannot render such advice.
f. Expenses. The subtraction for interest on exempt obligations must be reduced by any expenses attributable to such interest and by interest or indebtedness incurred or continued to purchase or carry exempt obligations pursuant to IRC § 265.