Virginia Administrative Code › Title 23 - TAXATION › Agency 10 - DEPARTMENT OF TAXATION › Chapter 110 - INDIVIDUAL INCOME TAX › Section 23VAC10-110-225 - Qualified Equity and Subordinated Debt Investments Tax Credit; Definitions

Current through Register Vol. 40, No. 24, July 15, 2024
The following words and terms when used in this regulation
				  shall have the following meanings, unless the context clearly indicates
				  otherwise:
"Affiliated" means a direct or indirect ownership interest of
				  at least 80% in an entity. An indirect ownership interest includes, but is not
				  limited to, direct ownership interests held by a taxpayer's family members or
				  an entity affiliated with such taxpayer or family members, or any combination
				  of these.
"Equity" means common stock or preferred stock, regardless of
				  class or series, of a corporation; a partnership interest in a limited
				  partnership; or a membership interest in a limited liability company, any of
				  which is not required, or subject to an option on the part of the taxpayer, to
				  be redeemed by the issuer within five years from the date of issuance.
"Family member" means, when applied with respect to an
				  individual taxpayer, (i) spouse, (ii) children, (iii) grandchildren, (iv)
				  parents, (v) spouse's parents, and (vi) grandparents.
"Primarily engaged in business in the Commonwealth" means 50%
				  or more of the entity's gross receipts are derived from sources within
				  Virginia.
"Qualified business" means a business which (i) has annual
				  gross revenues of no more than $5 million in its most recently completed
				  taxable year, (ii) is commercially domiciled in the Commonwealth, (iii) is
				  primarily engaged in business or does substantially all of its production in
				  the Commonwealth, and (iv) is not primarily engaged, or is not primarily
				  organized to engage, in any of the following types of businesses:
1. Banks;
2. Savings and loan institutions;
3. Credit or finance;
4. Financial, broker or investment;
5. Businesses organized for the primary
				purpose of rendering professional services as defined in Chapter 7 (§
				13.1-542 et seq.) of Title 13.1 of the Code of Virginia;
6. Accounting;
7. Government, charitable, religious or trade
				institutions or organizations;
8.
				Conventional coal, oil and gas, and mineral exploration;
9. Insurance;
10. Real estate design or
				engineering;
11. Construction or
				construction contracting;
12.
				Business consulting or business brokering;
13. Residential housing, real estate
				brokerage, sale or leasing businesses, or real estate development; or
14. Any business that is in violation of the
				law, and such others as the Department of Taxation may designate.
A business in its first taxable year of operation will be
				  deemed to have annual gross revenues of no more than $5 million and be
				  primarily engaged in business and do substantially all of its production in the
				  Commonwealth if the commercial domicile pursuant to
				  23VAC10-120-140 of such business
				  is within the Commonwealth.
"Qualified investment" means a cash investment in a qualified
				  business in the form of equity or subordinated debt. An investment shall not be
				  qualified, however, if the taxpayer who holds such investment, or any of such
				  taxpayer's family members, or any entity affiliated with such taxpayer,
				  receives or has received compensation, as defined in § 58.1-302 of the
				  Code of Virginia, from the qualified business in exchange for services provided
				  to such business as an employee, officer, director, manager, consultant,
				  independent contractor or otherwise in connection with or within one year
				  before or after the date of such investment. For purposes hereof, reimbursement
				  of reasonable expenses incurred shall not be deemed to be compensation. A
				  qualified investment shall not include existing investments or instruments that
				  have been purchased, transferred, or otherwise obtained without providing new
				  capital to a qualified business.
A subordinated debt instrument that is convertible into
				  equity would qualify if (i) the subordinated debt would otherwise meet the
				  definition under this section, (ii) the equity would otherwise meet the
				  definition under this section, and (iii) the subordinated debt does not include
				  a provision by which the issuer may compel the conversion into equity before
				  the end of the required holding period of the subordinated debt.
An investment which would otherwise qualify for this credit
				  will not be allowed if 50% or more of the proceeds resulting from the
				  investment are used within one year of the cash investment to retire or reduce
				  debt or equity of a qualified business that was incurred prior to the
				  investment.
"Subordinated debt" means indebtedness of a corporation,
				  general or limited partnership, or limited liability company that (i) by its
				  terms requires no repayment of principal for the first three years after
				  issuance; (ii) is not guaranteed by any other person or entity or secured by
				  any assets of the issuer or any other person or entity; and (iii) is
				  subordinated to all indebtedness and obligations of the issuer to national or
				  state-chartered banking or savings and loan institutions. Except as provided
				  for under 23VAC10-110-229, any transaction
				  that results in the extinguishment or reduces outstanding principal of a
				  subordinated debt instrument used to qualify for this credit shall be deemed as
				  a repayment of principal. Such transactions, include, but are not limited
				  to:
1. Reacquisition, retirement, or
				cancellation of a qualified investment;
2. Refunding or refinancing of a qualified
				investment by new issues of debt; or
3. Exchange of a qualified investment for
				common or preferred stock.
"Substantially all of its production in the Commonwealth"
				  means 80% or more of the entity's expenses are incurred within
				  Virginia.