Titles of Regulations: 23VAC10-110. Individual Income Tax (adding 23VAC10-110-145).

23VAC10-120. Corporation Income Tax (adding 23VAC10-120-103).

Statutory Authority: § 58.1-203 of the Code of Virginia.

Public Hearing Information: No public hearings are scheduled.

Public Comment Deadline: October 19, 2018.

Effective Date: November 3, 2018.

Agency Contact: Matthew Huntley, Lead Tax Policy Analyst, Department of Taxation, 600 East Main Street, 15th Floor, Richmond, VA 23219, telephone (804) 786-2010, or email matthew.huntley@tax.virginia.gov.

Basis: Chapter 762 of the 2017 Acts of Assembly requires the Department of Taxation to promulgate regulations regarding the newly established individual and corporate income tax subtraction for income attributable to an investment in a Virginia venture capital account prior to December 31, 2017. To the extent that this regulatory action sets forth the process that an investment fund will use to apply for certification as a Virginia venture capital account, the authority for this regulatory action is mandatory.

Section 58.1-203 of the Code of Virginia provides that the "Tax Commissioner shall have the power to issue regulations relating to the interpretation and enforcement of the laws of this Commonwealth governing taxes administered by the Department." To the extent that this regulatory action will define terms that were left undefined by the legislation, the authority for this regulatory action is discretionary.

Purpose: Chapter 762 of the 2017 Acts of Assembly establishes an individual and corporate income tax subtraction for income attributable to an investment in an investment fund that has been certified by the department as a Virginia venture capital account. This subtraction was codified in § 58.1-322.02 of the Code of Virginia for individual income tax purposes and in § 58.1-402 of the Code of Virginia for corporate income tax purposes.

To be certified as a Virginia venture capital account for purposes of this subtraction, an investment fund must first register with the department prior to December 31, 2023. As part of such registration, the investment fund must (i) indicate that it intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies and (ii) provide documentation that it employs at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience.

Once the investment fund actually invests at least 50% of the capital committed to its fund in qualified portfolio companies, it must notify the department. The department is then required to certify such investment fund as a Virginia venture capital account.

The second enactment clause of Chapter 762 requires the department to promulgate regulations prior to December 31, 2017, establishing procedures regarding (i) registration of an investment fund as a Virginia venture capital account; (ii) provision of documentation regarding an investor's training, education, or experience; and (iii) certification of an investment fund as a Virginia venture capital account by the department.

This regulatory action establishes such procedures regarding the individual and corporate income tax subtraction for income attributable to an investment in a Virginia venture capital account, and, based on §§ 58.1-322.02 and 58.1-402 of the Code of Virginia, provides definitions essential to those procedures. Government must have predictable and adequate revenue to provide for the health, safety, and welfare of citizens. Tax regulations enhance customer service and voluntary compliance. The interpretations, examples, and other guidance in tax regulations ensure uniform application of the tax laws to taxpayers. Business taxpayers in particular find regulations essential in predicting the tax consequences of transactions and avoiding unanticipated tax assessments as the result of audits. Tax regulations also ensure that audits and other compliance activity result in the assessment and collection of the correct amount of tax.

Rationale for Using Fast-Track Rulemaking Process: The fast-track rulemaking process is intended for proposed regulations that are expected to be noncontroversial. As this regulatory action establishes the process that an investment fund will be required to utilize to apply for certification as a Virginia venture capital account and defines certain terms for purposes of providing guidance to taxpayers regarding the subtraction, this action is not expected to be controversial.

Substance: This regulatory action requires that every investment fund desiring to be certified by the department as a Virginia venture capital account for purposes of the subtraction first register with the department by submitting an application indicating that it intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies and employs at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience.

This regulatory action (i), for purposes of the experienced investor requirement, requires an investment fund to include with its registration application documentation of the investor's work experience, training, and education demonstrating that such individual meets the experienced investor requirement; (ii) requires the department to, upon approval of an investment fund's registration application, provide certification to the investment fund stating that such application has been approved, and such certification will only be valid for the calendar year for which it is issued; (iii) provides that, once an investment fund has met the experienced investor requirement actually invests at least 50% of the capital committed to its fund in qualified portfolio companies, it may apply to the department for certification as a Virginia venture capital account; (iv) requires the investment fund to provide documentation demonstrating that it has met the investment requirement; (v) may require the investment fund to provide certain information regarding its investors as determined by the department; (vi) requires the department to, upon approval of an investment fund's application for certification as a Virginia venture capital account, provide certification to the investment fund stating that it is a Virginia venture capital account for purposes of the subtraction, and such certification will only be valid for the calendar year for which it is issued; (vii) requires an investment fund to submit both applications to the department and all necessary attachments no later than January 31 of the calendar year following the calendar year for which the investment fund is applying for certification as a Virginia venture capital account; and (viii) defines terms essential to the clarity of the provisions, some of which are based on definitions in §§ 58.1-322.02 and 58.1-402 of the Code of Virginia.

Issues: This regulatory action establishes procedures regarding the individual and corporate income tax subtraction for income attributable to an investment in a Virginia venture capital account and defines certain terms for purposes of providing guidance to taxpayers regarding the subtraction. Therefore, it will provide advantages to investment funds desiring certification as a Virginia venture capital account and to individual and corporate taxpayers eligible to claim the subtraction. Establishing such procedures will enhance the efficiency of the application process and of the overall administration of the subtraction. This regulatory action will result in no apparent disadvantages to the public or to the Commonwealth.

Department of Planning and Budget's Economic Impact Analysis:

Summary of the Proposed Amendments to Regulation. As required by Chapter 762 of the 2017 Acts of Assembly,¹ the Department of Taxation (Department) proposes to establish procedures regarding how an investment fund may apply for certification as a Virginia venture capital account.

Result of Analysis. Benefits likely outweigh costs for all proposed changes.

Estimated Economic Impact. In 2017, Chapter 762, which allows a subtraction from individual or corporate taxable income for qualifying investments in certified Virginia venture capital accounts, became law. Chapter 762 specifies that investment funds must meet certain criteria in order to qualify for certification as a Virginia venture capital account and further specifies that only investments made in Virginia venture capital accounts that were certified between January 1, 2018, and December 31, 2023, will qualify for the allowed taxable income subtraction.²

The Department now proposes this regulatory action to implement the certification program for Virginia venture capital accounts. The proposed regulatory requirements are substantially identical to those in the authorizing legislation but for two areas. The Department added several definitions that will tend to clarify these requirements and, as the legislation was silent on the mechanics of certification, the Department added a requirement that "every investment fund desiring to be certified…must first register with the Department."³

This proposed regulation, and its underlying statute, allow but do not require certification of certain investments. Because of this, no investment fund is likely to pursue certification unless they judge that the extra benefit that may accrue to their fund on account of the allowable subtraction those investments will generate will outweigh any costs that they may incur to become certified. Those costs would likely include time and other costs associated with the application process as well as time spent keeping required records.

Businesses and Entities Affected. This regulatory action will affect all investment funds who apply for certification as a Virginia venture capital account, individuals and businesses who administer such accounts and individual and corporate taxpayers who invest in qualified accounts.

Localities Particularly Affected. No locality will be particularly affected by this regulatory action.

Projected Impact on Employment. These proposed regulatory changes are unlikely to affect employment in the Commonwealth.

Effects on the Use and Value of Private Property. These proposed regulatory changes are unlikely to affect the use or value of private property in the Commonwealth.

Real Estate Development Costs. These proposed regulatory changes are unlikely to affect real estate development costs in the Commonwealth.

Small Businesses:

Definition. Pursuant to § 2.2-4007.04 of the Code of Virginia, small business is defined as "a business entity, including its affiliates, that (i) is independently owned and operated and (ii) employs fewer than 500 full-time employees or has gross annual sales of less than $6 million."

Costs and Other Effects. No small businesses are likely to incur any additional costs on account of these proposed regulatory changes.

Alternative Method that Minimizes Adverse Impact. No small businesses are likely to incur any additional costs on account of these proposed regulatory changes.

Adverse Impacts:

Businesses. No businesses are likely to incur any additional costs on account of these proposed regulatory changes.

Localities. Localities in the Commonwealth are unlikely to see any adverse impacts on account of these proposed regulatory changes.

Other Entities. No other entities are likely to be adversely affected by these proposed changes.

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¹http://lis.virginia.gov/cgi-bin/legp604.exe?171+ful+CHAP0762.

²Individuals and corporate entities that make qualifying investments will be able to take advantage of the income subtractions allowed for as many years as they hold the qualifying investment so qualifying taxable income subtractions will likely continue past 2023.

³The Department will be using the same certification process that it currently uses for qualified equity tax credits.

Agency's Response to Economic Impact Analysis: The Department of Taxation agrees with the Department of Planning and Budget's economic impact analysis regarding this action.

Summary:

Pursuant to Chapter 762 of the 2017 Acts of Assembly, which establishes individual and corporate income tax subtractions for income attributable to an investment in a Virginia venture capital account, the regulatory action establishes procedures regarding the process an investment fund must use to apply for certification as a Virginia venture capital account and provides definitions of terms essential to understanding the certification process.

23VAC10-110-145. Subtraction for income attributable to an investment in a Virginia venture capital account.

A. To the extent included in federal adjusted gross income, any income, including investment services partnership interest income, attributable to an investment made in a Virginia venture capital account on or after January 1, 2018, but before December 31, 2023, shall be subtracted from federal adjusted gross income in determining Virginia taxable income. If such income was partially excluded or deducted in determining federal adjusted gross income, it shall be subtracted from federal adjusted gross income only to the extent included therein. If such income has already been excluded from Virginia taxable income, it shall not be subtracted again pursuant to this section.

B. The following words and terms when used for purposes of this section 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 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.

"Department" means the Virginia Department of Taxation.

"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.

"Investment services partnership interest income" means income from an investment partnership treated as carried interest income for federal income tax purposes.

"Professional experience" means full-time employment involving venture capital investment.

"Qualified portfolio company" means the same as that term is defined in subdivision 27 of § 58.1-322.02 of the Code of Virginia.

"Substantially equivalent experience" means an undergraduate degree from an accredited college or university in economics, finance, or a similar field of study or a combination of professional experience totaling less than four years, professional training, and undergraduate education from an accredited college or university in economics, finance, or a similar field of study demonstrating competency in venture capital investing.

"Virginia venture capital account" means the same as that term is defined in subdivision 27 of § 58.1-322.02 of the Code of Virginia.

C. The subtraction may not be claimed for an investment in a company that is owned or operated by a family member or an affiliate of the individual. The subtraction may not be claimed for an investment that was used to claim the subtraction for certain long-term capital gains allowed pursuant to subdivision 24 of § 58.1-322.02 of the Code of Virginia, or the qualified equity and subordinated debt investments tax credit allowed pursuant to § 58.1-339.4 of the Code of Virginia.

D. 1. Every investment fund desiring to be certified by the department as a Virginia venture capital account for purposes of this subtraction must first register with the department by submitting an application indicating that it intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies and currently employs at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience.

2. Each investment fund must include with its registration application documentation of the investor's work experience, training, and education adequately demonstrating that such individual meets the professional experience or substantially equivalent experience requirement. Such documentation may include proof of employment, certifications, and transcripts.

3. The registration application required by this subsection must be submitted before or at the time the application required by subsection E of this section is submitted.

4. Once the department determines that an investment fund intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies, has at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience, and has submitted the required attachments, it will provide certification to the investment fund stating that the registration application has been approved. Such certification shall be valid only for the calendar year for which it was issued. An investment fund may reapply for certification each calendar year.

E. 1. An investment fund that has invested at least 50% of the capital committed to its fund in qualified portfolio companies may then submit an application for certification as a Virginia venture capital account.

2. Each investment fund must include with its application documentation that it has invested at least 50% of the capital committed to its fund in qualified portfolio companies.

3. To receive certification for this subtraction, each investment fund may be required to submit certain information regarding its investors as required by the department.

4. Once the department determines that an investment fund has actually invested at least 50% of the capital committed to its fund in qualified portfolio companies and has submitted the required attachments, it will provide certification to the investment fund stating that it is a Virginia venture capital account for purposes of this subtraction. Such certification shall be valid only for the calendar year for which it was issued.

F. The applications in subsections D and E of this section and any necessary attachments must be made on the form prescribed by the department, postmarked no later than January 31 of the calendar year following the calendar year in which the investment fund is applying for certification as a Virginia venture capital account.

FORMS (23VAC10-110)

Virginia Consumers Use Tax Return for Individuals, Form CU-7 (eff. 9/1993).

Virginia Individual Resident Income Tax Return (Booklet - Instructions for Form 760 and 760S), Form 760 and 760S.

Underpayment of Estimated Tax by Individuals, Estates and Trusts, Form 760 C.

Virginia Tentative Tax Return an Application for Extension of Time to File Individual or Fiduciary Income Tax Return, Form 760E (eff. 8/1993).

Virginia Estimated Individual Income Tax Declaration and Forms for Individuals, Estates and Trusts (Booklet - Instructions for Form 760ES), Form 760ES.

Underpayment of Estimated Tax by Farmers and Fishermen, Form 760F.

Virginia Part-Year Resident Individual Income Tax Return (Booklet - Instructions for Form 760PY), Form 760PY.

Short Individual Resident Income Tax Return (Booklet - Instructions for Form 760 and 760S), Form 760S.

Virginia Nonresident Individual Income Tax Return (Booklet - Instructions for Form 763), Form 763.

Virginia Special Nonresident Claim for Individual Income Tax Withheld, Form 763-S.

Credit Computation Schedule, Schedule CR, Form 760.

Schedule for Computing the Age Deduction for Taxpayers 62 and Over, Out-of-State Tax Credit or State of Residence and the Addition to Tax, Penalty and Interest, Schedule NPY, Forms 760PY and 763.

Enterprise Zone Credit, Form 301 (eff. 9/1992).

Computation of ACRS Subtraction, Form 302 (eff. 8/1992).

Application for Designation as a Qualified Business for the Qualified Equity and Subordinated Debt Investments Tax Credit, Form QBA, 2601695, with instructions (eff. 1/2001).

Taxpayer Application for Qualified Equity and Subordinated Debt Investments Tax Credit, Form EDC, 2601154, with instructions (eff. 7/2000).

Instructions for Virginia Venture Capital Account Investment Fund Registration and Certification Forms (rev. 2/2018)

Venture Capital Account Investment Fund Registration Application, Form VEN-1 (rev. 1/2018)

Venture Capital Account Investment Fund Confirmation Application, Form VEN-2 (rev.1/2018)

Venture Capital Account Investment Fund Investor Information Report, Form VEN-3 (rev. 2/2018 )

23VAC10-120-103. Subtraction for income attributable to an investment in a Virginia venture capital account.

A. To the extent included in federal taxable income, any income, including investment services partnership interest income, attributable to an investment made in a Virginia venture capital account on or after January 1, 2018, but before December 31, 2023, shall be subtracted from federal taxable income in determining Virginia taxable income. If such income was partially excluded or deducted in determining federal taxable income, it shall be subtracted from federal taxable income only to the extent included therein. If such income has already been excluded from Virginia taxable income, it shall not be subtracted again pursuant to this section.

B. The following words and terms when used for purposes of this section 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 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.

"Department" means the Virginia Department of Taxation.

"Investment services partnership interest income" means income from an investment partnership treated as carried interest income for federal income tax purposes.

"Professional experience" means full-time employment involving venture capital investment.

"Qualified portfolio company" means the same as that term is defined in subdivision C 25 of § 58.1-402 of the Code of Virginia.

"Substantially equivalent experience" means an undergraduate degree from an accredited college or university in economics, finance, or a similar field of study or a combination of professional experience totaling less than four years, professional training, and undergraduate education from an accredited college or university in economics, finance, or a similar field of study demonstrating competency in venture capital investing.

"Virginia venture capital account" means the same as that term is defined in subdivision C 25 of § 58.1-402 of the Code of Virginia.

C. The subtraction may not be claimed for an investment in a company that is owned or operated by an affiliate of the corporation. The subtraction may not be claimed for an investment that was used to claim the subtraction for certain long-term capital gains allowed pursuant to subdivision C 24 of § 58.1-402 of the Code of Virginia.

D. 1. Every investment fund desiring to be certified by the department as a Virginia venture capital account for purposes of this subtraction must first register with the department by submitting an application indicating that it intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies and currently employs at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience.

2. Each investment fund must include with its registration application documentation of the investor's work experience, training, and education adequately demonstrating that such individual meets the professional experience or substantially equivalent experience requirement. Such documentation may include proof of employment, certifications, and transcripts.

3. The registration application required by this subsection must be submitted before or at the time the application required by subsection E of this section is submitted.

4. Once the department determines that an investment fund intends to invest at least 50% of the capital committed to its fund in qualified portfolio companies, has at least one investor who has at least four years of professional experience in venture capital investment or substantially equivalent experience, and has submitted the required attachments, it will provide certification to the investment fund stating that the registration application has been approved. Such certification shall be valid only for the calendar year for which it was issued. An investment fund may reapply for certification each calendar year.

E. 1. An investment fund that has invested at least 50% of the capital committed to its fund in qualified portfolio companies may then submit an application for certification as a Virginia venture capital account.

2. Each investment fund must include with its application documentation that it has invested at least 50% of the capital committed to its fund in qualified portfolio companies.

3. To receive certification for this subtraction, each investment fund may be required to submit certain information regarding its investors as required by the department.

4. Once the department determines that an investment fund has actually invested at least 50% of the capital committed to its fund in qualified portfolio companies and has submitted the required attachments, it will provide certification to the investment fund stating that it is a Virginia venture capital account for purposes of this subtraction. Such certification shall be valid only for the calendar year for which it was issued.

F. The applications in subsections D and E of this section and any necessary attachments must be made on the form prescribed by the department, postmarked no later than January 31 of the calendar year following the calendar year in which the investment fund is applying for certification as a Virginia venture capital account.

FORMS (23VAC10-120)

Virginia Corporation Income Tax Return (Booklet-Instructions for Form 500), Form 500 (eff. 9/1993).

Schedule A-Multistate Corporation-Allocation and Apportionment of Income.

Underpayment of Virginia Estimated Tax by Corporations, Form 500C.

Application for Extension of Time, Form 500E (eff. 9/1993).

Declaration of Estimated Income Tax for Corporations, Form 500V (eff. 9/1993).

Virginia Corporation Income Tax Extension Payment Voucher, Form 500EV (eff. 9/1993).

Corporation Application for Refund, Form 500-NOLD (eff. 9/1993).

Virginia Small Business Corporation Return of Income, Form 500-S (eff. 9/1993).

Telecommunications Companies Minimum Tax and Credit Schedule (Instructions for Form 500T), Form 500-T (eff. 2/1992).

Corporation Income Tax Voucher.

Amended Virginia Corporation Income Tax Return, Form 500X (eff. 9/1993).

Combined Registration Application, Form R-1 (eff. 10/1989).

Instructions for Completing Combined Registration, Form R-4 (eff. 10/1989).

Instructions for Virginia Venture Capital Account Investment Fund Registration and Certification Forms (rev. 2/2018)

Venture Capital Account Investment Fund Registration Application, Form VEN-1 (rev. 1/2018)

Venture Capital Account Investment Fund Confirmation Application, Form VEN-2 (rev. 1/2018)

Venture Capital Account Investment Fund Investor Information Report, Form VEN-3 (rev. 2/2018)