2022 Instructions for Schedule 500AB
              Schedule of Related Entity Add Backs and Exceptions

Corporations are required to add back certain deductions  received by the related member is subject to a tax based on 
taken on the federal return for interest, royalties, and other  or measured by net income or capital imposed by Virginia, 
expenses related to intangible property such as trademarks  another state, or foreign government that has entered into a 
and patents. A related entity is allowed a subtraction to the  comprehensive tax treaty with the United States government. 
extent that any payments it received have been added back           An intangible expense payment may not be excluded from the 
to the income of another corporation.                               addition unless the receipt of the payment, and its inclusion in 
Corporations should report all payments made and then  the related member’s taxable income or capital, results in a 
identify any exceptions which apply to the payments in the  non-trivial increase in tax liability (or reduction of an operating 
tables provided. The exceptions for interest and royalties differ   loss) after consideration of all of the deductions, credits, 
and need to be reported separately on the form.                     exemptions, and other tax policies and preferences affecting 
                                                                    the tax liability of the related member. The actual return filed 
Intangible Expenses Paid to Related Entities                        with the other state(s) will be examined for the impact or the 
                                                                    payments on the related member’s tax liability. Pro forma 
A corporation that directly or indirectly claims a deduction for    separate returns and tax accruals by the affiliated group are 
payments to a related entity in connection with trademarks,  not acceptable for this purpose. 
patents and similar intangible property must add back the                      If the payor and related member receiving the 
                                                                    Example 1.
deduction on its Virginia income tax return. The addition is        payments are included in a consolidated or combined return 
required for any intangible expenses and costs directly or          in the other jurisdiction, then the payor’s deduction and 
indirectly paid, accrued, or incurred to, or in connection directly corresponding item of income of the related member offset 
or indirectly with one or more direct or indirect transactions      each other in the return filed on behalf of the related member, 
with one or more related members (Va. Code § 58.1-402(B)            and the offsetting amounts do not materially affect the tax 
(8)(a)).                                                            liability of the related member of the affiliated group.
Related entities include a stockholder and a partnership,                      If the related member is subject to a capital 
                                                                    Example 2.
limited liability company, estate, trust, and corporation owned     tax in another jurisdiction that is measured by the number 
by a stockholder when at least 50% of the value of the              of authorized shares, then the receipt of the corresponding 
taxpayer’s outstanding stock is owned, directly or indirectly,      item or income does not materially affect the tax liability of 
or beneficially by the stockholder or family. For further details,  the related member.
see the definitions of “related entity” and “related member” in 
Va. Code § 58.1-302.                                                Example 3. If the related member is subject to a franchise 
                                                                    tax with alternative measures (such as a minimum tax, net 
The statute defines “intangible property” as “patents, pat-         capital, net income, or other measure) and its actual tax 
ent applications, trade names, trademarks, service marks,           liability for the taxable year is based on a measure other than 
copyrights, and similar types of intangible assets.” The statute    net income or capital, then the receipt of the corresponding 
further defines the intangible expenses and costs that must         item of income does not materially affect the tax liability of 
be added back as follows:                                           the related member.
i.  Expenses, losses, and costs for, related to or in connec-
tion directly or indirectly with the direct or indirect acquisi-    Exception 2 
tion, use, maintenance or management, ownership, sale,  The corporation may exclude from the addition an item of 
exchange, lease, transfer, or any other disposition of  intangible expense when the related member derives at least 
intangible property to the extent that such amounts are  one-third of its gross revenues from the licensing of intangible 
allowed as deductions or costs in determining taxable  property to parties who are not related members, and the 
income;                                                             transaction giving rise to the expenses and costs between 
ii.  Losses related to or incurred in connection directly           the corporation and the related member was made at rates 
or indirectly with factoring transactions or discounting            and terms comparable to the rates and terms of agreements 
transactions;                                                       that the related member has entered into with parties who are 
                                                                    not related members for the licensing of intangible property. 
iii. Royalty patent, technical, and copyright fees;
                                                                    For example, Corporation A uses a trademark licensed from 
iv. Licensing fees; and                                             its affiliate to market popular beverages. The trademark was 
v.  Other similar expenses and costs.                               created in connection with the beverage products and is 
                                                                    widely known and associated with beverage products.  The 
Intangible Expenses Add Back Exceptions                             licensing affiliate also licenses the trademark to unrelated 
                                                                    businesses for use on toys, glasses, and incidentals other than 
Exception 1                                                         beverage products. The royalty rates paid by the unrelated 
                                                                    businesses do not qualify for this exception because the use 
The corporation may exclude from the addition an item of 
                                                                    of the trademark by Corporation A is not comparable to the 
intangible expense when the corresponding item of income 
                                                                    use of the trademark by the unrelated businesses.
Va. Dept. of Taxation  6201112  Rev. 09/22
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Exception 3                                                          application of funds among the related entities. The focus of 
                                                                     the inquiry is whether the reason that the corporation found 
The corporation may exclude from the addition an item of  
                                                                     it necessary or expedient to borrow funds from the related 
intangible expense when the corporation can establish to 
                                                                     entity is in any way related to the fact that the corporation is 
the satisfaction of the Tax Commissioner that the intangible 
                                                                     incurring intangible expenses and costs. 
expenses and costs meet both of the following:
                                                                     Although the statute contains several exceptions, the defini-
(i)  the related member during the same taxable year 
                                                                     tion of “interest expenses and costs” in Va. Code § 58.1-302 
directly or indirectly paid, accrued or incurred this 
                                                                     limits the addition to interest paid in connection to trademarks, 
portion to a person who is not a related member and
                                                                     patents and similar intangible property. The restrictive defini-
(ii)  the transaction giving rise to the intangible expenses         tion excludes all of the interest that might qualify for an excep-
and costs between the corporation and the related                    tion. For more information visit the Department’s website at 
member  did  not  have  as  a  principal  purpose  the               www.tax.virginia.gov.
avoidance of any portion of any Virginia income tax 
due.
                                                                                     Completing the Form
The portion of a payment to an unrelated party for which this 
exception is claimed cannot exceed the amount actually paid,         Enter the corporation name, federal employer identification 
accrued, or incurred to the related party. When a transaction  number, Virginia account number, and number of related 
results  in  significant  tax  savings,  it  is  presumed  that  the entities in the space provided. Complete the related entity 
savings were a principal purpose for the transaction even  information for each related entity and indicate the amount of 
though the transaction may also serve other purposes. The  interest, royalties or other intangible expenses paid to each 
taxpayer must show that the other purposes are specific to the       related entity on Lines 1(a)-3(a) and 1(b)-3(b) as appropriate. 
aspects of the transaction that generated the tax savings, and  Complete  the  related  entity  information  for  the  interest 
that the other purposes are so important that the transaction  exception in Part I and exceptions 1-3 in Part II, Royalties 
would have occurred even if there were no tax savings. For           and Other Intangible Property as appropriate.
example, a statement that the purpose of the transaction is 
to consolidate trademark functions is not sufficiently specific                       Line Instructions
when tax savings are generated by transferring the functions 
to a related entity, and moving the functions to another state.      Lines 1(a)-3(a):  Enter  the  amount  of  interest  paid  to  the 
The activities of the corporation and related entity will be  appropriate related entities shown on Lines 1-3. Enclose 
examined to determine if they are consistent with the stated  additional copies of the form or a separate schedule if more 
purposes for the transaction.                                        than 3 related entities.
In the case of factoring transactions, the following items paid or   Lines  1(b)-3(b):  Enter  the  amount  of  royalties  or  other 
incurred by the recipient of the receivables that are the subject  intangible expenses paid to related entities. Enclose additional 
of the factoring transaction may qualify for the exception:          forms or a schedule, if necessary.
(i)  interest paid by the recipient to an unrelated party,           Lines 4(a) and 4(b): Enter the total interest paid to related 
based on the percentage that the receivables and  entities on Line 4(a) and the total royalties or other expenses 
other intangible property transferred by the taxpayer  on Line 4(b).
are of the recipient’s total assets; and                             Line 5: Enter on Line 5 the amount of royalties and other 
(ii)  discounts and losses incurred by the recipient upon  intangible income qualifying for Exception 1 from Part II, 
the subsequent transfer of the same intangible  Exception 1 (Subject to tax).
property to an unrelated party.                                      Line 6: Enter the amount of royalties and other intangible 
                                                                     income qualifying for Exception 2 from Part lI, Exception 2 
Interest Expenses Paid to Related Entities                           (One-Third Revenue).
                                                                     Line 7: Enter the amount of royalties and other intangible 
A corporation that directly or indirectly claims a deduction for 
                                                                     income qualifying for Exception 3 from Part lI, Exception 3 
interest paid to a related entity in connection with trademarks, 
                                                                     (Conduit).
patents, and similar intangible property must add back the 
deduction on its Virginia income tax return. The addition            Line 8: Total exception amount. Add Lines 5, 6, and 7. Enter 
is required for “any interest expenses and costs directly or  here and on Form 500, Question A. 
indirectly paid, accrued, or incurred to, one or more related        Line 9: Compute the net addition amount for royalties and 
members.” See (Va. Code § 58.1-402 (B)(9)(a)).                       other intangibles. Subtract Line 8 from Line 4(b). 
Interest paid to a related entity is presumed to be related to       Line 10: Enter the taxable addition amount of interest and 
intangible property if the corporation has incurred intangible       royalties. Add Lines 4(a) and 9. Enter the total on Schedule 
expenses or costs to the same or any other related entity in         500ADJ, Section A, Line 3.
the same year. It is not necessary to trace the source and 

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