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Instructions for Preparing
2022 FORM 502
Virginia Pass-Through Entity
Return of Income and
Return of Nonresident Withholding Tax
Commonwealth of Virginia
Department of Taxation
Richmond, Virginia
www.tax.virginia.gov
6201028 Rev. 10/22
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| Table of Contents WHAT’S NEW ............................................................................................................................................... 1 GENERAL INFORMATION ........................................................................................................................... 3 Pass-Through Entities Required to File ................................................................................................................... 3 Withholding Tax Payments for Nonresident Owners ................................................................................................ 3 Accounting Method .................................................................................................................................................. 5 Allocation and Apportionment .................................................................................................................................. 5 Pass-Through Entity Elective Entity-Level Tax......................................................................................................... 5 General Filing Requirements ................................................................................................................................... 5 Supplemental Information for Multistate Activity ...................................................................................................... 8 Unified Nonresident Individual Income Tax Return (Composite Return) .................................................................. 8 INSTRUCTIONS FOR PAGE 1 OF FORM 502 ............................................................................................ 9 Taxpayer Information .............................................................................................................................................. 9 Number and Types of Owners ............................................................................................................................... 10 Entities Exempt From Withholding ........................................................................................................................ 10 Distributive or Pro Rata Income and Deductions ................................................................................................... 10 Allocation and Apportionment .................................................................................................................................11 Virginia Modifications to Income (Additions and Subtractions) .............................................................................. 12 Virginia Tax Credits ............................................................................................................................................... 14 INSTRUCTIONS FOR PAGE 2 OF FORM 502 .......................................................................................... 14 Section 1 – Withholding Payment Reconciliation ................................................................................................... 14 Section 2 – Penalty and Interest Charges on Withholding Tax .............................................................................. 14 Section 3 – Penalty for Late Filing of Form 502 ..................................................................................................... 14 Section 4 – Withholding Overpayment ................................................................................................................... 14 Section 5 – Tax, Penalty, and Interest Due ............................................................................................................ 15 Section 6 – Amount Due or Refund ....................................................................................................................... 15 INSTRUCTIONS FOR SCHEDULE 502ADJ .............................................................................................. 15 Sections A and B – Virginia Modifications .............................................................................................................. 15 Section A – Addition Codes .................................................................................................................................... 15 Section B – Subtraction Codes .............................................................................................................................. 16 Section C – Virginia Tax Credits ............................................................................................................................. 19 Section D – Amended Return ................................................................................................................................ 20 INSTRUCTIONS FOR VIRGINIA SCHEDULE VK-1 AND SCHEDULE VK-1 CONSOLIDATED ............. 20 General Instructions ............................................................................................................................................... 20 Additional Owner Information ................................................................................................................................. 21 Line Instructions ..................................................................................................................................................... 21 INSTRUCTIONS FOR SCHEDULE 502A ................................................................................................... 22 Section A – Apportionment Method ........................................................................................................................ 23 Section B – Apportionment Percentage ................................................................................................................. 24 Section C – Allocable and Apportionable Income .................................................................................................. 27 |
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What’s New
Advancement of Virginia’s Fixed Date Conformity with the Internal Revenue Code
Virginia's date of conformity with the Internal Revenue Code (IRC) was advanced from December 31, 2020, to December 31,
2021, subject to certain exceptions. This legislation also allows Virginia to generally conform to the American Rescue Plan
Act of 2021 (“ARPA”) and provides additional benefits to recipients of certain coronavirus disease 2019 (“COVID-19”)
business assistance programs during Taxable Years 2021 and 2019. See Tax Bulletin 22-1, posted on the Department’s
website at www.tax.virginia.gov, for additional information regarding Virginia’s conformity with the IRC and adjustments
that may be required as a result of this legislation
Virginia will continue to deconform from the following: bonus depreciation allowed for certain assets under federal law; the
five-year carryback of certain federal net operating loss (NOL) deductions generated in the 2008 or 2009 taxable years; the
federal income treatment of applicable high yield discount obligations; and the federal income tax treatment of cancellation
of debt income realized in connection with certain business debts. In addition, Virginia will continue to deconform from the
following temporary changes made by the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act: suspension of
certain NOL limitations for Taxable Years 2018, 2019, and 2020 and increasing the business interest limitation for Taxable
Year 2019 and 2020. See Tax Bulletin 21-4 for more information.
At the time these instructions were published, the only required fixed date conformity adjustments were those mentioned
above. However, if legislation is enacted that results in changes to the IRC for the 2022 taxable year, taxpayers may need
to make adjustments to their Virginia returns that are not described in these instructions. Information about any such
adjustments will be posted on the Department’s website at www.tax.virginia.gov.
New Pass-Through Entity Elective Income Tax
For taxable years beginning on and after January 1, 2021, but before January 1, 2026, a qualifying pass-through entity may
make an annual election to pay a 5.75% tax at the entity level for the taxable year. A qualifying PTE is defined as a PTE
100% owned by natural persons or, in the case of a Subchapter S corporation, 100% owned by natural persons or other
persons eligible to be shareholders in an S corporation. A corresponding refundable individual and fiduciary income tax
credit may be claimed for Taxable Years 2021 through 2025 for any amount of income tax paid by a qualifying PTE if the PTE
makes the election and pays the elective income tax imposed at the entity level. Pass-through entities opting to make the
election must electronically submit Form 502PTET instead of Form 502. See the Department's website www.tax.virginia.
gov, for guidelines and additional information, including Form 502PTET and instructions.
Business Interest Deduction Increase
For taxable years beginning on and after January 1, 2022, the Virginia corporate income tax deduction for business interest
has increased to 30% of the business interest disallowed as a deduction under the federal business interest limitation. Under
prior law, the deduction was equal to 20% of disallowed business interest. Enter the deduction amount using Code 56 on the
Schedule 502ADJ and enclose a copy of federal Form 8990. If an addition is required, use Code 22 on Schedule 502ADJ.
Hybrid Sales Factor for Certain Property Information and Analytics Firms
For taxable years beginning on and after January 1, 2022, certain property information and analytics firms which have entered
into a memorandum of understanding with the Virginia Economic Development Partnership (VEDP) may use a hybrid sales
factor when filing Virginia corporate income tax returns. For sales of other than sales of tangible personal property, the
hybrid sales factor uses a market-based sourcing rule for sales of services and the standard cost of performance rule for all
other non-service sales. For more information, see Page 26 of these instructions.
Food Crop Donation Tax Credit Sunset Date Extension
The sunset date for the Food Crop Donation Tax Credit has been extended through Taxable Year 2022.
Major Business Facility Tax Credit Sunset Date Extension
The sunset date for the Major Business Facility Tax Credit has been extended from July 1, 2022, to July 1, 2025.
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What’s New (Continued)
Changes to Worker Training Tax Credit
The sunset date of the portion of the Worker Training Tax Credit for eligible worker training has been extended from July 1,
2022, to July 1, 2025. The sunset date of the portion of the Worker Training Tax Credit for a business primarily engaged in
manufacturing has been extended from January 1, 2022, to January 1, 2025.
For taxable years beginning on and after January 1, 2022, the credit has been expanded by allowing businesses to earn
credits with respect to courses at any Virginia public institution of higher education. This also includes courses at the
New College Institute, the Roanoke Higher Education Authority, the Southern Virginia Higher Education Center, and the
Southwest Virginia Higher Education Center. Under prior law, a business was only allowed credits with respect to courses
at institutions recognized on the Eligible Training Provider List. See Form WTC and Schedule 500CR instructions for more
information.
Expansion of Community of Opportunity Tax Credit
The Community of Opportunity Tax Credit has been expanded by permitting certain landlords with qualified housing units
located in all census tracts in Virginia with poverty rates of less than 10% to qualify for the credit. Under prior law, the
credit was limited to census tracts in the Richmond Metropolitan, Virginia Beach-Norfolk-Newport News Metropolitan, and
Washington-Arlington-Alexandria Metropolitan Statistical Areas.
Assistance
Online Resources:
The Department’s website, www.tax.virginia.gov, contains valuable information to help you.
• Online Services for Businesses – Access online registration, filing, payment, and other electronic services.
• Laws, Rules, & Decisions – Access the Code of Virginia, Tax Regulations, Guidance Documents, Legislative
Summaries, Rulings by the Tax Commissioner, Tax Bulletins, and Attorney General Opinions.
• Email Updates – Sign up and stay informed. By subscribing, you will periodically receive automatic email notifications
regarding legislative changes, filing reminders, and other relevant information.
Contact Us:
Customer Service Inquiries Forms Requests
Department of Taxation Department of Taxation
P.O. Box 1115 P.O. Box 1317
Richmond, Virginia 23218-1115 Richmond, Virginia 23218-1317
Phone: (804) 367-8037 Phone: (804) 367-8037
Fax: (804) 254-6111 or visit www.tax.virginia.gov
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Instructions for Preparing 2022 Form 502
Virginia Pass-Through Entity Return of Income and Return of Nonresident Withholding Tax
GENERAL INFORMATION have income from Virginia sources if it has enough activity
or presence in Virginia to make any apportionment factor
(property, payroll, or sales) positive. Therefore, it may
Pass-Through Entities Required to File
be deemed to have Virginia-source income under the
Every pass-through entity (PTE) doing business in Virginia apportionment formulas even if no specific portion of its
or having income from Virginia sources is required to gross or net income is separately identifiable as being
electronically file a Form 502 for each taxable year. derived directly from Virginia.
Pass-through entities include S corporations, general Single-Member LLC
partnerships, limited partnerships, limited liability
partnerships (LLPs), limited liability companies (LLCs), A single-member LLC that is disregarded as a separate
electing large partnerships, and business trusts. A PTE is entity for federal income tax purposes will be similarly treated
any entity that is recognized as a separate entity for federal for Virginia income tax purposes. Its income, gains, losses,
income tax purposes and the entity’s owners report their and deductions will be included with those of its owner on
distributive or pro rata shares of the entity’s income, gains, the owner’s income tax return. The disregarded entity is not
losses, deductions, and credits on their own income tax required to file Form 502.
returns. Unlike C corporations, a PTE typically does not Investment Pass-Through Entities
pay income tax itself; rather, the entity’s income and related Previous rulings of the Tax Commissioner have held that
items are reported by the owners on their personal returns pass-through entities that are established solely to invest in
and the tax is computed and paid at the owner level. Estates intangible personal property, such as stocks and bonds, and
and trusts that file Virginia Form 770 are not subject to the that have no employees and no real or tangible property, are
Form 502 filing requirements. not considered to be carrying on a trade or business. Thus,
An owner of a PTE may be an individual, a corporation, a the income from the intangible property that is held by an
partnership, or any other type of entity that is treated as a investment PTE is not income from Virginia sources, and
shareholder, partner, or member of a PTE for federal income these types of pass-through entities are not required to file
tax purposes. Form 502.
An owner of a PTE may itself be a PTE and have other Period Covered by the Return
pass-through entities as its owners so that income, gains, A PTE’s taxable year for Virginia purposes is the same as its
losses, and deductions may pass through several levels taxable year for federal income tax purposes.
of ownership before reaching an owner that is taxable. All
pass-through entities that are subject to filing in Virginia are Withholding Tax Payments for Nonresident Owners
required to file their own returns regardless of the ownership Every PTE that does business in the Commonwealth and
hierarchy. There are no “consolidated” or “multilevel” PTE has taxable income derived from Virginia sources must
returns. withhold and pay Virginia income tax on behalf of each of
A PTE has Virginia source income if it has: its nonresident owners, unless the entity or the owner meets
an exception. See the section heading “Exceptions to the
1. Any items of income, gain, loss, or deduction related to
Requirement for Withholding.” If an owner was a nonresident
either:
owner for only a portion of the taxable year, the income
a) the ownership of real or tangible personal property in allocated to such owner must be prorated by the number of
Virginia, or days of residence outside of Virginia in order to determine
b) a business, trade, profession, or occupation carried the amount on which the withholding tax must be paid.
on in Virginia; The tax is equal to 5% of the share of taxable income from
Virginia sources that is allocable to each nonresident owner.
–OR– In determining the amount of tax, the entity may apply any
2. Any income or gain from intangible property to the extent tax credits that pass through to nonresident owners, but the
that such property is used by the entity in a business, tax liability of any nonresident owner may not be reduced
trade, profession, or occupation carried on in Virginia. to less than zero. To avoid penalties, the payment must
If a PTE does not conduct its entire business within Virginia, be equal to the lesser of: 90% of the withholding tax
then it must determine the Virginia-source portion of its liability that was reported for the current taxable year
total income through allocation and apportionment. See or 100% of the withholding tax liability reported for the
Pages 5, 11, and 22 for more information on allocation previous taxable year, provided that the return for the
and apportionment. In general, a non-Virginia entity will previous year covered a 12-month period and reflected
a withholding tax liability.
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Due Date for Payment taxes, or whose credit for taxes paid to other states is
Payment of the withholding tax is due by the original due sufficient to offset all Virginia income tax attributable to
date for filing Form 502 (i.e., April 15 for a calendar year the shares of income distributed by the PTE;
return). The automatic 6-month filing extension for Form 502 (2) individuals included on a composite return (Form 765);
does not apply to the withholding tax payment. If the entity (3) entities other than individuals and corporations that
chooses to use the automatic filing extension for Form 502, are exempt from paying federal income taxes by
the withholding tax payment must be submitted electronically reason of their purpose or activities;
no later than the original due date for filing Form 502.
(4) real estate investment trusts (REITs) that are not
Penalties and Interest Captive REITs; and
If a PTE that is subject to the withholding tax requirement (5) corporations exempt from Virginia income tax.
fails to pay the minimum tax amount described above by
the original due date, penalties may apply. The penalties are The exemption from federal income tax for entities other
computed in the same manner as the extension penalty and than individuals and corporations must apply to the entity’s
late payment penalty for individual income taxes. The late share of the PTE’s income.
filing penalty is computed in the manner prescribed under Examples of such exempt entities include :
Va. Code § 58.1-394.1.
(1) Other PTEs. Generally, a PTE does not need to
If Form 502 is filed within the 6-month extension period, but withhold for a nonresident owner that is also a PTE.
the required minimum withholding tax amount was not paid These nonresident owner PTEs are responsible for
by the original due date, the extension penalty will apply. The filing their own PTE returns of income and must pay the
extension penalty is imposed at the rate of 2% per month withholding tax for their nonresident owners’ shares of
or part of month on the balance of the tax due from the due income from Virginia sources. If a PTE is notified by
date through the date the return is filed, up to a maximum of a nonresident owner PTE that the nonresident owner
12% of the tax due. PTE is not going to file a Virginia PTE return, then the
If Form 502 is filed within the 6-month extension period and PTE is required to withhold on the nonresident owner
full payment is not included with the return, the late payment PTE.
penalty will apply. The late payment penalty is imposed at CAUTION: As a general rule, a PTE should not
the rate of 6% per month from the date of filing of Form 502 withhold tax on behalf of another PTE. If a PTE does
through the date of payment, up to a maximum of 30% of withhold on a nonresident owner PTE, the nonresident
the tax due. If the entity fails to pay the minimum tax amount owner PTE cannot claim credit on its Form 502 for
required as described AND fails to make full payment with such withholding. PTE withholding is not “generation
a return filed within the 6-month extension period, both the skipping” and does not pass through an intermediate
extension penalty and the late payment penalty will apply. PTE to owners that are more than one level of
The extension penalty will be imposed from the original due ownership away. In the event that a PTE erroneously
date through the date that the return is filed, and the late withholds for a nonresident owner PTE, the PTE
payment penalty will begin to accrue on the day after the should file an amended Form 502. See the amended
return is filed. returns section for additional information.
If Form 502 is filed more than 6 months after the due date (2) Entities that are exempt by reason of diplomatic
or more than 30 days after the federal extended due date, immunity or pursuant to treaties between the United
whichever is later, the greater of the late payment penalty, States and other countries. An entity claiming this
imposed at the rate of 30% of the tax due, or a late filing exemption must provide a statement to the PTE
penalty of $1,200 will apply. stating that it has diplomatic immunity from federal
Any balance of unpaid tax is also subject to accrual of income tax.
interest at the rate specified under IRC § 6621, plus 2%, (3) Any nonresident person who is a part of a PTE that
from the due date until the date of payment. For details owns and leases 4 or fewer dwelling units in the
on computing the penalty and interest charges, see the Commonwealth, provided that the PTE discloses the
line-by-line instructions for Page 2 of Form 502. name and federal taxpayer identification number for
Exceptions to the Requirement for Withholding all such owners in its return for the taxable year filed
under Va. Code § 58.1-392. For this purpose, the term
Publicly traded partnerships and disregarded entities are not “person” is defined using the definition of “person” in
subject to the withholding requirement. A PTE with an owner Va. Code § 55-248.4.
that is a disregarded entity does not withhold on behalf of the
disregarded entity. The disregarded entity does not withhold See the Laws, Rules, & Decisions page on the Department’s
on behalf of its individual owner. For all other pass-through website for any additional exceptions that may apply.
entities, no withholding of Virginia income tax is required on If paying the withholding tax imposes an undue hardship
behalf of the following nonresident owners: on the PTE, the PTE may request a waiver of the payment
(1) individuals who are exempt from paying federal requirement. To request a waiver, the PTE must write a
income taxes, who are exempt from Virginia income letter to the Tax Commissioner describing the facts and
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circumstances creating the hardship. The letter must provide Certified Company Apportionment for Business
information to enable the Tax Commissioner to compare Conducted in Certain Disadvantaged Localities
and evaluate the cost of the PTE’s compliance with the Certain companies may decrease the amount of their
withholding requirements and the cost to the Commonwealth income taxed by Virginia when they meet specific eligibility
of collecting income tax from any nonresident owners that requirements and are certified by the Virginia Economic
do not voluntarily file Virginia income tax returns and pay Development Partnership Authority (VEDP). This includes a
the tax. requirement that a specified number of jobs be created and, if
To indicate an exception for the PTE, the entity must enter applicable, investments be made in particular disadvantaged
the appropriate exception code on Form 502, Line d. localities.
To indicate an exception for the entity or for any or all Once the company is certified by VEDP as meeting the
nonresident owners, the entity must enter the appropriate applicable eligibility requirements, it is entitled to decrease
exception code on Line f of the nonresident owner’s Schedule the amount of income taxed by Virginia. For multistate
VK-1, and enclose a list of all of the nonresident owners that certified companies, the decrease in income is accomplished
are claiming an exception to the Form 502. See Page 10 of by allowing such companies to make modifications to their
these instructions for a list of withholding exemption reason apportionment factors (“Certified Company Apportionment”).
codes. For instate certified companies, this is accomplished by
allowing such companies the ability to use apportionment
Accounting Method
and to use Certified Company Apportionment to make
A PTE’s accounting method for its Virginia return of income modifications to their apportionment factors. See Schedule
is the same as its accounting method for federal income tax 500AP Instructions for detailed information.
purposes.
Pass-Through Entity Elective Entity-Level Tax
Allocation and Apportionment
For taxable years beginning on and after January 1, 2021,
If a PTE’s entire business is conducted within Virginia, but before January 1, 2026, a qualifying pass-through entity
then all of its income is Virginia source income; no income may make an annual election to pay a 5.75% tax at the
is allocated to another state, and the entity’s Virginia entity level for the taxable year. A qualifying PTE is defined
apportionment is 100%. as a PTE 100% owned by natural persons or, in the case
If a PTE conducts its business in Virginia and elsewhere in of a Subchapter S corporation, 100% owned by natural
a manner such that its income would be subject to a tax persons or other persons eligible to be shareholders in an
on net income in Virginia and at least one other state, the S corporation. A corresponding refundable individual and
entity must allocate and apportion its income in the same fiduciary income tax credit may be claimed for Taxable Years
manner that is provided in Virginia law for corporations. This 2021 through 2025 for any amount of income tax paid by a
applies to all types of pass-through entities (partnerships, qualifying PTE if the PTE makes the election and pays the
LLPs, LLCs, and S corporations). Dividends received are to elective income tax imposed at the entity level. Pass-through
be allocated to the state of commercial domicile, but all other entities opting to make the election must electronically submit
income must be apportioned. An entity may not apportion Form 502PTET instead of Form 502. See the Department's
its income based on divisional or separate accounting, website www.tax.virginia.gov for guidelines and additional
or any other alternate method unless it has requested information, including Form 502PTET and instructions.
and received permission to do so in advance from the General Filing Requirements
Department.
When to File
The effect of the PTE’s apportionment may vary from one
owner to another, depending on the entity types of the The PTE return must be submitted on or before the 15th day
owners. For instance: of the 4th month after the close of the entity’s taxable year.
• a Virginia resident individual owner is taxable on all How to File
of his or her PTE income regardless of the entity’s The Department requires that all pass-through entities (PTEs)
apportionment; file their withholding tax payments, extension payments,
• a nonresident individual owner uses the entity’s annual tax returns, and final payments electronically. There
Virginia apportioned income in determining his or her are two options available. Returns may be filed through
own Virginia nonresident percentage; and the Federal/State e-File program, or certain Virginia PTEs
may qualify to electronically file a Form 502EZ using the
• a corporate owner may need to include the PTE’s eForms system on the Department’s website. If the PTE is
property, payroll, and sales factors in determining its unable to file and pay electronically by the effective date, the
own apportionment percentage. PTE may request a waiver. Visit the Department’s website
For more information on allocation and apportionment, see at www.tax.virginia.gov to access a waiver form and the
Schedule 502A and the Instructions for Schedule 502A mailing address.
section contained in these instructions.
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e-File (Form 502) To be eligible to file Form 502EZ, the PTE must meet all
The e-File system is supported by numerous commercial of the criteria below:
software programs. e-File software will automatically check • 100% of the PTE’s business is in Virginia
for completeness, correct errors, generate the applicable • 100% of the PTE’s income is from Virginia sources
schedules, and electronically transmit the return and
payment to the e-File processing systems. A list of approved • The PTE’s commercial domicile is in Virginia
commercial software is available on the Department’s • The PTE does not have more than 10 owners
website. If a tax due payment is required, the payment can
• The PTE is not required to file a Virginia Corporation
be made through the e-File system as a direct debit by using
Income Tax Return (Form 500)
eForms or with an ACH credit established through the PTE’s
bank. • The PTE is not filing Schedules 502A and 500AP
In order to successfully e-File, the pass-through entity must: • The PTE is not a noncorporate home service contract
provider who must file a Form 500 and 500HS
• Use an approved commercial e-File software product.
Approved e-File software is listed on the Department’s • The PTE passes no Schedule CR credits to its owners
website. for the year
• You must be able to create a readable PDF file for any • The PTE has no fixed date conformity modifications or
document or schedule that is required for backup to adjustments to pass to its owners
the return. You must either have a scanner that allows • The total taxable income of the PTE must be greater
you to scan documents into a PDF file or software that than or equal to $0 and does not exceed $40,000 for
allows you to save a file as a PDF document. This the taxable year of the return
feature will allow you to e-File your state return if the
Internal Revenue Service (IRS) does not support the • The total additions to and subtractions from income
federal return and/or schedules through the federal are less than $1,000
e-File system by attaching the federal return as a PDF • The return is not being amended as a result of a
file to the state return’s electronic transmission. partnership-level federal adjustment
• The Virginia e-File program has been designed to • The PTE is not electing to pay income tax at the entity
accept transmission of the federal and state return level (Form 502PTET filers).
together or separately (often referred to as a state-
only transmission). The state-only transmission option The 502EZ is free, secure, available 24/7, and does not
can be used when the federal return being filed is not require registration or login credentials. For more information,
supported by the federal e-File system. This allows go to www.tax.virginia.gov/eforms.
the state return to be filed electronically by itself. Waiver Request
Most software vendors support both the electronic If the requirement to file and pay electronically creates an
transmission of the federal and state together (linked) undue hardship for a taxpayer, the PTE may request a
or separately (unlinked). waiver. All requests for waivers must be submitted to the
• Large pass-through entities must decide whether Department in writing using the PTEs Tax Electronic Filing
to use an Electronic Return Originator (ERO) to Waiver Request form on the Department’s website at www.
electronically file the return or prepare and e-File tax.virginia.gov.
the return themselves. Please note, if a partnership
Extension of Time to File
chooses to prepare and e-File the return themselves,
they may have to register and apply with the IRS to An automatic extension of time to file is granted to the date
obtain an Electronic Filing Identification Number 6 months after the due date for filing Form 502 or 30 days
(EFIN) and possibly an Electronic Transmitter after the extended due date for filing the federal income tax
Identification Number (ETIN) depending upon the return, whichever is later. The automatic extension of time
e-File option chosen. Please see the Department’s to file does not extend the payment due date for withholding
website for detailed information. tax. The withholding tax payment is due on the due date of
• Small pass-through entities may use an online the PTE’s return regardless of whether the extension to file
provider to avoid having to register with the IRS for an Form 502 is used. Use Form 502W to make the withholding
Electronic Filing Identification Number (EFIN). tax payment by the due date.
eForms (Forms 502EZ, 502W, and 502V) Penalties
An online return, Form 502EZ, is available through the If Form 502 is not filed within the automatic extension period
eForms application on the Department’s website. This return or more than 30 days after the extended federal due date,
is a shorter version of the existing Form 502, and is designed the extension will be invalid and the greater of the late
to simplify the filing process. In addition, you can submit payment penalty or the late filing penalty will apply. The late
pass-through entity withholding payments (Form 502W) and payment penalty is equal to 6% of the tax due per month,
return payments (Form 502V) using eForms. Using eForms with a maximum penalty of 30% of the tax due. The late filing
is a fast and free way to file and pay state taxes.
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penalty is $1,200 when filed after the automatic extension ORDER OF DOCUMENTS
period of 6 months.
• Form 502
If the failure to file continues for more than 6 months, the
• Schedule 502ADJ, if applicable
Department may assess the PTE with a late filing penalty
equal to 6% of the Virginia taxable income that the owners • Schedule 502ADJS, if applicable
derive from the entity. The Department may estimate this • Schedule 502A, if applicable
taxable income using any method it deems reasonable and • Schedule(s) VK-1 or VK-1 Consolidated
with any information in its possession. The 6% penalty will • Schedule(s) SVK-1, if applicable
be reduced by any monthly penalty that has already been
• Schedule 500AB, if applicable
assessed pursuant to Va. Code § 58.1-394.1(A), or the 6%
penalty may be assessed instead of the monthly penalty. • Schedule 500AP, if applicable
The 6% penalty will also be reduced to the extent that any • Form 500HS, if applicable
owner has paid Virginia income tax on his or her share of the • Form 502FED-1, if applicable
entity’s income for the same taxable year. • A copy of your federal return
Penalty for Returned Check or EFT Nonpayment
Report of Change in Federal Return
If the PTE’s bank does not honor a payment to the
Department, the Department may impose a penalty of $35, If the amount of any item of distributive or pro rata income, or
as authorized by Va. Code § 2.2-614.1. This penalty will be deduction on the PTE’s federal return of income is changed
assessed in addition to other penalties due. or corrected by the IRS or any other competent authority, or
through renegotiation of a contract with the United States,
Signature the entity must notify the Department and issue an amended
The return must be signed by an officer of the S corporation, Schedule VK-1 to each owner within 1 year of the federal
a general partner, or an authorized LLC member, as final determination date. If a PTE amends its federal return
appropriate for the type of entity. An owner’s signature on of income in any manner that would affect its Virginia return
the return will be prima facie evidence that the owner is or the Virginia returns or tax liabilities of its owners, the entity
authorized to sign on behalf of the PTE. If the return was must file an amended Virginia return and issue an amended
prepared wholly or in substantial part by a person other than Schedule VK-1 and Schedule SVK-1, if applicable, to each
an owner or an employee of the entity, that person must also owner with full disclosure of the federal amendment.
sign the return. Report of Partnership-Level Federal Adjustments
Virginia Schedules and Enclosures Partnerships are required to report partnership-level
In addition to Form 502, the return must include Schedule(s) federal adjustments no later than 90 days after the final
VK-1 or VK-1 Consolidated, and Schedule(s) SVK-1, if determination date by submitting Form 502FED-1, Virginia
applicable, indicating the owner’s share of income and Partnership-Level Federal Adjustments Report, to the
Virginia modifications and credits for each owner. Also, Department. The partnership can either elect to pay any
Schedule 502ADJ and Schedule 502A, are usually required. resulting Virginia income tax due on behalf of its partners or
To claim certain tax credits, specific documentation must instead file amended Forms 502 and/or 765, issue updated
be enclosed with the return. See the Schedule 502ADJ, Schedules VK-1, and send a copy of completed Form
Section C – Virginia Tax Credits section of these instructions 502FED-1 to each direct partner within 90 days of the final
for more information. If an entry is made on Section C, Part I, determination date. See the Form 502FED-1 instructions for
Line 1 of Schedule 502ADJ for state income tax paid, a more information.
supporting schedule must be enclosed. If the PTE and the If the partnership elects to pay on the entity-level, it
qualifying nonresident owners elect, a composite return, must submit Form 502FED-2 within 90 days of the final
Form 765, Virginia Unified Nonresident Individual Income determination date. The entity-level tax payment is due within
Tax Return (Composite Return), may also be filed. This is a 1 year of the final determination date. See Form 502FED-2
separate return and should not be included with Form 502. Instructions for more information.
A copy of the PTE’s federal return of income, as filed with Amended Returns
the IRS, is required to be enclosed with the Virginia return.
The required enclosure includes the federal Form 1120-S, A PTE may amend its Form 502 through PTE e-File. The
Form 1065, or Form 1065-B, with Schedule K. Do not “amended return” indicator must be marked on the return
include federal Schedule K-1 because it is not required. Do within the software package. If the original return was filed
not submit Schedules K-2 and K-3 with the Virginia return, through eForms using 502EZ, the PTE may use the eForms
however, they must be made available upon request. If application to amend the return. Enter the corrected figures
the federal return is so voluminous that it is impractical to for Form 502 and supporting schedules. An explanation of
include a complete copy with the Virginia return, enclose the any changes made must be documented with the e-File
Form 1120-S, Form 1065, or Form 1065-B along with the submission, including any supporting forms or schedules. In
Schedule K, and a statement that the complete return will be addition, the PTE must issue an amended Virginia Schedule
made available upon request. VK-1 to each owner. To amend a return that was originally
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filed through eForms using Form 502EZ, the PTE must Unified Nonresident Individual Income Tax Return
submit Form 502. (Composite Return)
If the amended return includes an adjustment to the When a PTE is required to file a Virginia return of income,
total withholding due for nonresident owners, complete the owners of the entity are typically required to file a Virginia
Schedule 502ADJ, Section D – Amended Return, to compute income tax return to report their respective shares of income.
any additional tax due or refund resulting from the amended To simplify the filing requirement for qualified individual
return. nonresident owners, the PTE may file a composite Virginia
If a PTE files Form 502 and later finds it did not include income tax return on their behalf using Form 765, Unified
all Schedule(s) VK-1, Schedule(s) VK-1 Consolidated, or Nonresident Individual Income Tax Return (Composite
Schedule(s) SVK-1, if applicable, with the return but no Return), provided that certain conditions described in the
other changes to the return are necessary, the entity should Form 502 instructions are met. The PTE is not required to
not file an amended Form 502. Instead, it should submit the pay the withholding tax on behalf of the individual nonresident
additional schedule(s) to the Department with a cover letter owners for whom it files Form 765, and should not withhold
that includes the notation “Additional Schedule(s) VK-1, for those owners. Accordingly, there is no provision on
Schedule(s) VK-1 Consolidated, or Schedule(s) SVK-1 Form 765 for claiming credit for such withholding. A PTE
Enclosed with Previously Filed Return.” may file a composite return for only a portion of its qualified
In the event the PTE that filed the Form 502 erroneously nonresident owners, provided that the PTE pays the PTE
withheld for an owner, such as a nonresident owner PTE, withholding tax for any qualified nonresident owners who are
and no other changes to the original Form 502 are necessary, not included in the composite return.
the PTE should file an amended Form 502, completing The Form 765 is an individual income tax return that is
all lines and schedules, reflecting a reduced withholding completed separately and filed in addition to the PTE’s
amount on Line c, Form 502, and in Section 1, Form 502. return. Accordingly, Form 765 may not be filed unless the
Also, the PTE should complete Section D of Schedule entity has also filed its Form 502 or, if the entity is a trust or
502ADJ to determine the amount of withholding overpaid estate, its Form 770. Do not submit Form 765 with Form 502
with the original return and now due to the PTE as a refund. or Form 770, or include Form 765 as an enclosure with those
Enclose revised Schedules VK-1, marked amended, only for returns.
the owners for which withholding was erroneously reported
Form 765 may be downloaded from the Department’s
indicating that no withholding was required.
website, www.tax.virginia.gov, or requested by calling the
Be sure to issue a corrected Schedule VK-1 and Department at (804) 367-8037.
Schedule and SVK-1, if applicable, to every owner
affected by the changes to the return, with a notice Qualified Nonresident Owner
alerting the owners to the potential need to amend their A qualified nonresident owner is generally defined as an
own Virginia returns. Upon receipt of the amended return, individual who is a nonresident of Virginia for income tax
the Department will review the amended return and, as purposes and who is a direct owner of the entity. A qualified
applicable, refund to the PTE the amount the PTE withheld owner may derive Virginia source income from more than one
in error on the nonresident owner PTE. PTE (and thereby be included in multiple composite returns),
A partnership with partnership-level federal adjustments or from other sources. If the qualified owner also receives
that files an amended Virginia return instead of making an income from sources other than pass-through entities, or
election to pay any resulting VA income tax due on behalf of from entities that do not file composite returns, the owner
its partners, must file Form 502FED-1 along with amended must also file an individual income tax return on Form 763 to
returns 502 and 765 (if applicable) and all associated account for any Virginia source income that is not reported
schedules within 90 days of the federal final determination in a composite return. Corporations, regardless of where
date. Do not send a copy of the Form 502FED-1 to partners domiciled, Virginia resident individuals, and individuals
if you are electing to calculate and pay any tax due at the who are not direct owners of the entity, regardless of their
entity level on behalf of the partners. See the Form 502FED-1 residency status, are not qualified nonresident owners and
instructions for more information. may not be included in a composite return.
Supplemental Information for Multistate Activity Multiple pass-through entities under common ownership
that wish to file a consolidated Form 765 must request
If the entity files composite returns in other states, or is taxed
permission from the Department to do so. Address requests
as a corporation in other states, it must provide a statement
to the Tax Commissioner, Virginia Department of Taxation,
to each of its owners. The statement must confirm the
P.O. Box 2475, Richmond, VA 23218-2475.
owner’s election to participate in the composite filing in the
other state and provide the owner’s share of gross income, Conditions for Filing a Composite Return
taxable income, and tax paid. This statement will be used The PTE must obtain the consent of each qualified
to determine the credit amount on the Virginia individual nonresident owner, as defined above, to be included in the
income tax return. A sample reporting format is available on return. Such consent must indicate that the nonresident
the Department’s website at www.tax.virginia.gov under owner agrees to be taxed under the following conditions:
the topic of Credit for Taxes Paid to Another State.
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1. The PTE must provide a schedule containing the INSTRUCTIONS FOR PAGE 1 OF FORM 502
total income of the entity and the amount that is
attributable to Virginia under either the applicable state Taxpayer Information
apportionment formula, as provided in Va. Code §§ Fiscal year or short period filers: Enter the beginning
58.1-408 through 58.1-420, or by using an alternative and ending dates for the PTE’s fiscal or short year. Enter as
method of apportionment that is approved by the Tax MM/DD/YYYY.
Commissioner as provided in Va. Code § 58.1-421.
Check boxes at top of page: Mark the appropriate box for
2. The return will include each qualified nonresident any condition that applies:
owner’s name, address, and social security number,
and the Virginia taxable income attributable to each • Schedules VK-1 filed by Web Upload;
qualified nonresident owner. • The Department is authorized to discuss this return
3. The amount of tax is computed on the Virginia taxable with the undersigned preparer;
income by applying the highest rate for individual • The return is the initial return filed by the entity;
income tax specified in Va. Code § 58.1-320 or by
• The return is an amendment of a previously filed return
reference to the tax tables that are published by
(see amended return reason codes below);
the Department, without regard to the number of
participants. The tax is computed on the entity’s • The return is the final return that the entity will have to
income that is attributable to the qualified nonresident file with Virginia (i.e., the entity has been dissolved or
owners without the benefit of itemized deductions, no longer operates in Virginia);
standard deductions, personal exemptions, credit for • The name or address shown represents a change that
income taxes paid to states of residence, or credit for should be reflected in the Department’s records;
Virginia income tax withheld on behalf of the owners.
• The entity’s fiscal year has changed;
4. An owner, officer, or employee of the PTE who is
authorized to act on behalf of the PTE in tax matters • A Virginia Unified Nonresident Individual Income Tax
(authorized representative) must sign the composite Return (Composite Return), Form 765, will be filed for
return. By signing the return, the signer is declaring that the same taxable year;
he or she is the authorized representative of the PTE • The entity is an electing large partnership;
and that each participant has signed a consent form • The entity is subject to bank franchise tax. If this
authorizing the PTE to act on the participant’s behalf box is checked, the S corporation will provide the
in the matter of composite returns, and acknowledging shareholders with the pertinent information concerning
the participant’s understanding and acceptance of their allocable share of the income or gain, losses, or
all of the terms and conditions of participation in a deductions or the value of any distributions paid or
composite return. The consent form must continue distributed to the shareholder by the S corporation.
in force indefinitely until it is revoked in writing by the
participant, and permit the PTE to file amendments or • The company is certified by the VEDP and is electing
take other actions concerning the composite return to use a modified apportionment method according to
without additional authorization from the participant. the provisions of Va. Code § 58.1-405.1.
The consent forms must be maintained by the PTE Amended Return Reason Codes
and provided to the Department for inspection upon
If amending a return, mark the amended return check box and
demand. Participation in the composite return will
enter the reason code in the space provided. Use the reason
indicate the consent of the nonresident owner to be
code that best describes why the return is being amended
taxed by the Commonwealth of Virginia.
and enclose the appropriate documentation.
5. Estimated income tax payments made on behalf of
owners included in a composite return must be made Code Amended Return Reason
on a composite basis, using the name and account 02 Partnership-Level Federal Adjustment –
number or FEIN of the PTE. Enclose Form 502FED-1
Automatic extensions of time to file Form 502 or Form 770 03 Federal Return Adjusted or Amended –
and Form 765 are separate and independent of each other. Enclose copy of IRS final determination
A payment may be required for an extension for Form 765
if 90% of the liability has not been paid by the original due 04 Virginia Return Changes to Subtractions, Deductions,
date. Additions, and Credits
05 Pass-Through Entity Elective Income Tax Amended
Return (Form 502PTET Filers)
10 Allocation and Apportionment Changes
11 Schedule 500AB Changes
30 Other – Enclose Explanation
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Federal Employer ID Number: Enter the PTE’s FEIN. • files a composite return on behalf of all nonresident
Name and Address: Enter the entity’s name and address in owners
the space provided. • the PTE owns and leases 4 or fewer dwelling units
Date of Formation, Date Operations Began in Virginia, Because only individuals may be included on a composite
and State or Country Where Incorporated: Enter the return, PTEs that have both individual and corporate and/
entity’s date of formation, the date operations began in or other entity members may be exempt from paying the
Virginia, and the state or country where it is incorporated or withholding tax for the individual members, but will still be
organized in the space provided. required to pay the withholding tax on behalf of the corporate
Entity Type: (A proper entry in this field is required.) Enter and/or other entity members. In that case, the PTE should
the code from the following table that corresponds to the not indicate that it is exempt from paying the withholding
type of entity filing this return. tax. Instead, it will indicate on the individual members’
Schedules VK-1 that it is not required to pay the withholding
Entity Type Code tax for them because they are included on a composite
S Corporation SC return.
General Partnership PG Withholding Exemption Reason Code
Limited Partnership PL Entity files a composite nonresident income
03
Limited Liability Company LL tax return for ALL nonresident owners.
Limited Liability Partnership LP Publicly traded partnership 04
Nonprofit Organization NZ Undue hardship waiver granted 06
Other OB PTE’s income is from rents with 4 or fewer
07
dwelling units
NAICS Code: Enter the 6-digit NAICS code. A list of these
Undue Hardship
codes can be accessed from the Businesses section on the
Department’s website, www.tax.virginia.gov. If a PTE believes that the withholding requirement
causes an undue hardship, the PTE may apply to the Tax
Description of Business Activity: Enter a 1 to 2 word
Commissioner requesting an exemption. In addition to any
description of the primary activity in which the business is
other information that is pertinent to the PTE’s petition for
engaged.
relief, the letter must provide information that will enable
Number and Types of Owners the Tax Commissioner to compare and evaluate the cost to
a. Enter the total number of owners. The total number the PTE of complying with the withholding tax requirements
of owners should be the same as the number of and the cost to the Commonwealth of collecting income
shareholders who were shareholders during any part tax from any nonresident owners who do not voluntarily file
of the taxable year (see federal Form 1120-S, Page 1, Virginia income tax returns and pay the tax. For purposes
Line I) or the number of Schedules K-1 filed with of requesting an undue hardship exemption, the withholding
the PTE’s federal return (see federal Forms 1065 or tax liability itself is not considered to be part of the cost of
1065-B, Page 1, Line I). compliance, nor is a PTE’s inability to pay the tax a basis for
exemption.
b. Enter the total number of owners that are not residents
of Virginia. If the residency status is not known, enter Distributive or Pro Rata Income and Deductions
the number of owners whose address of record is not Line 1. Total of taxable income amounts.
in Virginia.
Enter the total of all the various categories of taxable income
c. Enter the total amount withheld for all nonresident shown in the “Income” section of Schedule K of the PTE’s
owners from Line e of each Schedule VK-1 filed with federal Form 1065 or Form 1120-S. It may be helpful to use
this return. the worksheet below to summarize the income, but note that
d. If the entity claims an exemption from paying the the worksheet lines may not correspond exactly to every item
withholding tax, enter the exemption code from the on the Schedule K. If you are an “electing large partnership,”
Withholding Exemption Reason list below in the space see the paragraph labeled “Electing large partnerships”
provided. following the Line 3 instructions below.
Entities Exempt From Withholding
The PTE will not be required to pay the withholding tax if it:
• is a publicly traded partnership
• is a disregarded entity
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amount of tax-exempt interest income from Schedule K on
1. Ordinary income (loss) from trade
Line 3. The electing large partnership rules were repealed
or business ..................................
for partnership tax years beginning after 2017.
2. Net income (loss) from rental real
estate .......................................... Allocation and Apportionment
3. Net income (loss) from other Lines 4-7 (All pass-through entities required to file a
rental activity ............................... Virginia return must complete this section).
4. Interest income ........................... If the PTE conducted its business entirely within Virginia,
5. Dividend income ......................... and no income is allocated or apportioned elsewhere, then
leave Lines 4 and 5 blank, repeat the amount from Line 1 on
6. Royalty income ...........................
Line 6, and enter “100%” on Line 7. If the PTE conducted
7. Other portfolio income ................. its business in Virginia and elsewhere, complete Schedule
8. Net short-term capital gain (loss) ... 502A first to determine the entries for Lines 4-7 as described
below. See Schedule 502A and its instructions for more
9. Net long-term capital gain (loss) .... information on who is eligible to allocate and apportion
10. Net IRC § 1231 gain (loss) .......... income. If the PTE is electing the alternative method of
11. Other taxable income (loss) ........ apportionment for manufacturers, mark the box to the right
of the allocation and apportionment heading.
12. Total of taxable income amounts
(This is a Virginia calculation; Virginia law provides that dividends that are received are to
there is not a total on Schedule K be allocated to the state of commercial domicile, and that
of federal Form 1065 or all other income must be apportioned as directed in Va.
Form 1120-S.) ............................. Code §§ 58.1-408 through 58.1-420, 58.1-422, 58.1-422.1,
58.1-422.2, or 58.1-422.3. Virginia law does not allow for
Caution subtractions from apportionable income based on separate
The Schedule K of federal Forms 1065 and 1120-S does or divisional accounting, or for the exclusion of non-Virginia
not include a total taxable income amount, and the correct investment income. Except as provided below, an alternative
amount to enter on Form 502 is not necessarily the sum of method of allocation and apportionment may not be used
all entries in the “Income” section of Schedule K. Schedule K without prior written approval from the Department.
may have entries that overlap for a particular category of Some entities may be entitled to an alternative method of
income (for instance, a yearly amount and the amount through allocation and apportionment if they can demonstrate that
a certain date because of a midyear federal law change). the application of Virginia’s apportionment law to their
For each category of income, include only the yearly total in particular facts for the taxable year would be contrary to the
the Virginia computation; do not omit, duplicate, or count any principles set forth in Allied-Signal, Inc. v. Director, Div. of
amounts twice. Taxation, 504 U.S. 768 (1992).
Line 2. Total deductions. In Allied-Signal, the Court reaffirmed the continued validity
Enter the total of the various categories of deductions shown of apportionment of any income received directly by the
in the “Deductions” section of Schedule K of the PTE’s taxpayer, including investment income such as capital gains,
federal Form 1065 or 1120-S. This may include charitable unless the capital transaction serves an investment function
contributions, the IRC § 179 expense deduction and “other” that is completely unrelated to any of its operational activities
deductions. carried on in the state. The Court also reinforced the principle
that investment income may be included in apportionable
Line 3. Tax-exempt interest income. income if there is a unitary relationship between the taxpayer
Enter the total tax-exempt interest income shown in the and the entity in which the taxpayer has invested. However,
“Other” section of the PTE’s federal Schedule K. the Court made it clear that the absence of a unitary
relationship does not necessarily preclude apportionment.
Electing large partnerships. An electing large partnership,
which files federal Form 1065-B, combines items of income, Such an adjustment for unrelated investment function
gain, loss, and deduction before reporting to the partners, income is only available to a multistate entity that is entitled
rather than reporting such items separately to partners as to allocate and apportion its income, and that proves by clear
do other partnerships. The Schedule K for Form 1065-B is, and cogent evidence that the assets producing the income
therefore, significantly different from Schedule K for Forms serve an investment function unrelated to operational
1065 and 1120-S. From the Schedule K (Form 1065-B), functions. If investment function income is excluded from
combine total taxable income (loss) from passive loss apportionable income, the denominator of the relevant
limitation activities (without regard to general or limited apportionment factors must also be adjusted to exclude
partner allocation), taxable income (loss) from other activities, items related to the investment assets.
qualified dividends from other activities, and any net capital Any entity that qualifies for an alternative method of allocation
gain or other taxable income from Schedule K that is not and apportionment for this type of income is required to
included in the above amounts. Enter the result on Line 1, add back any loss included in federal taxable income that
Total taxable income amounts. Leave Line 2 blank. Enter the is attributable to the acquisition, ownership, management,
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stewardship, sale, or exchange of investment assets that Line 5.
are unrelated to the taxpayer’s operational function. If the Enter the amount from Schedule 502A, Section C, Line 3(e).
entity previously claimed a subtraction for nonapportionable
investment function income with respect to any investment Line 6.
assets, an addition is required for any subsequent losses Enter the amount from Schedule 502A, Section C, Line 4. If
generated by such assets. the PTE conducted its business entirely within Virginia and
Burden of Proof: As a prerequisite to claiming an adjustment no income was allocated or apportioned elsewhere, enter
on Lines 3b and 3d in Section C of Schedule 502A (which the amount from Form 502, Line 1.
effectively allocates income other than dividends) the entity Line 7.
must be able to demonstrate that the application of Virginia
Enter the apportionment percentage from Schedule 502A,
law to its particular facts will be unconstitutional. The burden
Section B, Line 1 or Line 2(f). If the PTE conducted its
is on the entity to prove by clear and cogent evidence that
business entirely within Virginia and no income was allocated
the capital investment was completely separate from its
or apportioned elsewhere, enter 100% on Line 7.
operations, and that the taxpayer’s investment function was
located outside of Virginia. The entity must also demonstrate Virginia Modifications to Income (Additions and
that the classification of the capital asset and its income for Subtractions)
Virginia purposes is consistent with the manner in which
Virginia modifications (additions and subtractions) should
the income has been allocated and apportioned with other
be allocated among owners in proportion to each owner’s
state tax authorities. The entity will be under a particularly
percentage of ownership or participation in the PTE, or
heavy burden of proof in cases where the asset was clearly
as provided in the partnership agreement or other entity
operational at any time. Objective evidence is required; an
document. However, each owner may only claim the
unsubstantiated statement as to the entity’s intent, purpose
modifications that are allowed on the owner’s Virginia
or state of mind will be insufficient to meet the burden. An
income tax return. Therefore, an individual owner reports
entity claiming this exclusion for nonapportionable income
only modifications applicable to individual income tax and a
must enclose a statement with the return stating the nature
corporate owner reports only those modifications applicable
of the adjustment and the basis for the position that the relief
to Virginia corporate income tax.
is in accordance with Allied-Signal. The entity must include
with the return all evidence necessary to support its position. Fixed Date Conformity Update for 2022
For additional information, see Virginia Tax Bulletin 93-4 Virginia's fixed date of conformity with the Internal Revenue
(also designated Public Document (“PD”) 93-93B). Code (IRC) was advanced from December 31, 2020, to
Other alternative methods of allocation or December 31, 2021, subject to certain exceptions.
apportionment: If any PTE believes that the method of Virginia will continue to deconform from the following: bonus
allocation or apportionment specified by the Department depreciation allowed for certain assets under federal law;
will subject it or its owners to taxation on a greater portion the five-year carryback of certain federal net operating loss
of the entity’s net income than is reasonably attributable to (NOL) deductions generated in the 2008 or 2009 taxable
business or sources within Virginia, it is entitled to file with years; the federal income treatment of applicable high yield
the Department a statement of its objections and of the discount obligations; and the federal income tax treatment
alternative method of allocation or apportionment that it of cancellation of debt income realized in connection with
believes to be proper under the circumstances, with such certain business debts. In addition, Virginia will continue
detail and proof and within such time as the Department may to deconform from the following temporary changes made
reasonably prescribe. If the Department concludes that the by the Coronavirus Aid, Relief, and Economic Security
method of allocation or apportionment employed is, in fact, (“CARES”) Act: suspension of certain NOL limitations for
inapplicable or inequitable, it will redetermine the allocation Taxable Years 2018, 2019, and 2020 and increasing the
or apportionment by such other method as it deems best business interest limitation for Taxable Year 2019 and 2020.
calculated to assign to the state for taxation the portion of See Tax Bulletin 21-4 for more information.
the income reasonably attributable to business and sources
within the state, not exceeding, however, the amount which Virginia Additions
would be arrived at by the application of the statutory rules Use the following line instructions for reporting Virginia
for allocation or apportionment. additions to income.
The policy of the Department is that the statutory method Line 8. Fixed Date Conformity Addition – Depreciation.
is the most equitable method of determining the portion of Enter the amount that should be added to federal taxable
income that is attributable to business activity in Virginia. income based upon the recomputation of allowable
Permission to use an alternative method of allocation depreciation. If depreciation was included in the computation
or apportionment will be granted only in extraordinary of your federal taxable income and one or more of the
circumstances. depreciable assets received the special bonus depreciation
deduction for federal purposes in any taxable year from
Line 4.
2001 through 2022, then depreciation must be recomputed
Enter the amount from Schedule 502A, Section C, Line 2. for Virginia purposes as if such assets did not receive the
special bonus depreciation deduction for federal purposes in
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any taxable year from 2001 through 2022. If the total 2022 Subtractions should be allocated among owners in
Virginia depreciation is less than 2022 federal depreciation, proportion to each owner’s percentage of ownership or
then the difference must be recognized as an addition. For participation in the PTE, or as provided in the partnership
further instructions, see Virginia’s annual conformity Tax agreement or other entity document. However, each owner
Bulletins, which are available on the Department’s website may only claim the subtractions allowed on the owner’s
at www.tax.virginia.gov , or call (804) 367-8037. Virginia income tax return. Therefore, an individual owner
may only claim subtractions applicable to individual
Line 9. Fixed Date Conformity Addition — Other.
income tax, while a corporate owner may claim only those
(1) Disposed Asset. If an asset was disposed in 2022 and subtractions applicable to Virginia corporate income tax.
such asset received the special bonus depreciation
deduction for federal purposes in any taxable year from Line 14. Fixed Date Conformity Subtraction –
2001 through 2022, and a gain or loss was recognized Depreciation.
for federal purposes, then the gain or loss must be Enter the amount that should be subtracted from federal
recomputed as if such asset did not receive the special taxable income based upon the recomputation of allowable
bonus depreciation deduction for federal purposes in any depreciation. If depreciation was included in the computation
taxable year from 2001 through 2022. The adjustment of your federal taxable income and one or more of the
will be the difference in the federal and Virginia basis depreciable assets received the special bonus depreciation
of the asset when sold. If the federal basis of the asset deduction for federal purposes in any taxable year from
is greater than the Virginia basis (resulting in a lower 2001 through 2022, then depreciation must be recomputed
gain reported for federal purposes), then the difference for Virginia purposes as if such assets did not receive the
between the bases is an addition on the Virginia return. special bonus depreciation deduction for federal purposes
For further instructions, see Virginia’s annual conformity in any taxable year from 2001 through 2022. If the total 2022
Tax Bulletins, which are available on the Department’s Virginia depreciation is more than 2022 federal depreciation,
website at www.tax.virginia.gov , or call (804) 367- then the difference must be recognized as a subtraction.
8037. For further instructions, see Virginia’s annual conformity Tax
(2) Other Fixed Date Conformity Additions. If you Bulletins, which are available on the Department’s website
are required to make any other fixed date conformity at www.tax.virginia.gov , or call (804) 367-8037.
additions listed in the Fixed Date Conformity Update for Line 15. Fixed Date Conformity Subtraction – Other.
2022 above, enter the total amount of such additions. If an asset was disposed of in 2022
(1) Disposed Asset.
Also, enclose a schedule and explanation of such and such asset received the special bonus depreciation
additions. deduction for federal purposes in any taxable year
Line 10. Net Income Tax. Enter the amount of any net from 2001 through 2022, and a gain or loss was
income taxes and other taxes, including franchise and excise recognized for federal purposes, then the gain or loss
taxes, which are based on, measured by, or computed must be recomputed as if such asset did not receive
with reference to net income, imposed by this state or any the special bonus depreciation deduction for federal
other taxing jurisdiction, to the extent they are deducted in purposes in any taxable year from 2001 through 2022.
determining federal taxable income. Income tax of any sort The adjustment will be the difference in the federal and
and by any name is not an allowable deduction in determining Virginia basis of the asset when sold. If the federal basis
Virginia taxable income. Note that this item may be related to of the asset is lower than the Virginia basis (resulting in
the income tax paid on Schedule 502ADJ, Section C, Part I, a greater gain for federal purposes), then the difference
Line 1, but is defined differently and is not necessarily the between the two bases is a subtraction on the Virginia
same amount. return. For further instructions, see Virginia’s annual
conformity Tax Bulletins, which are available on the
Line 11. Interest on Obligations Other Than Virginia.
Enter interest income received, less related expenses to the Department’s website at www.tax.virginia.gov , or call
extent they are not deducted in determining federal taxable (804) 367-8037.
income, on obligations of any state other than Virginia, or (2) Other Fixed Date Conformity Subtractions. If you
of a political subdivision or agency of any such other state are required to make any other fixed date conformity
unless it was created by compact or agreement to which subtractions listed in the Fixed Date Conformity
Virginia is a party. Update for 2022 above, enter the total amount of such
Line 12. Total Additions From Schedule 502ADJ. First subtractions on this line. Also, enclose a schedule and
complete Schedule 502ADJ, Section A. See the Schedule explanation of such subtractions.
502ADJ instructions on Page 15. Enter the total additions Line 16. Interest on Obligations of the United States.
from Schedule 502ADJ, Section A, Line 5. Enter the amount of income (interest, dividends and
gain) derived from obligations or the sale or exchange
Virginia Subtractions
of obligations of the United States, and on obligations or
Use the following line instructions for reporting Virginia securities of any authority, commission or instrumentality of
subtractions from income. the United States to the extent they are included in federal
taxable income but exempt from state income taxes under
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the laws of the United States. This includes, but is not limited of the required withholding tax by the original due date for
to, stocks, bonds, treasury bills, and treasury notes. It does filing Form 502 (or 100% of the previous year’s liability),
not include interest on refunds of federal taxes, equipment provided that the return for the previous year covered a
purchase contracts or normal business transactions. 12-month period and reflected a tax liability, an extension
Line 17. Total Subtractions from Schedule 502ADJ. First penalty will apply to the balance of tax due after subtracting
complete Schedule 502ADJ, Section B. See the Schedule the payments on Line 2 from the tax liability on Line 1. The
502ADJ instructions later in this book. Enter the total penalty is assessed at the rate of 2% per month or part of a
subtractions from Schedule 502ADJ, Section B, Line 5. month from the original due date for filing Form 502 through
the date that the Form 502 is filed. The maximum extension
Line 18. Total Subtractions. Add Lines 14 through 17. penalty is 12%. The extension penalty applies only if the
Virginia Tax Credits Form 502 is filed within the extension period.
Line 19. Enter the total nonrefundable credits from Schedule Extension Penalty Worksheet
502ADJ, Section C, Part II, Line 1.
Line 20. Enter the total refundable credits from Schedule A. Tax due after timely payments as
502ADJ, Section C, Part IV, Line 1. reported on Line 2. ......................
B. Date the Form 502 was filed .......
INSTRUCTIONS FOR PAGE 2 OF FORM 502
C. Number of months from the due
date through the date filed (count
Section 1 – Withholding Payment Reconciliation
in 30-day increments and round
Line 1. Total withholding tax due for nonresident up to the next full month). ...........
owners. Enter the total tax required to be withheld on behalf
of the nonresident owners. The total withholding tax due is D. Extension penalty percentage.
generally 5% of each nonresident owner’s share of income Multiply Line C by 2% (.02).
from Virginia sources (including additions and subtractions). Do not exceed 12%.. ................... %
The amount of withholding tax may be reduced by any tax
credits that were earned by the PTE that pass through to E. Extension penalty.
nonresident owners provided the credits are applicable to Multiply Line A by Line D. ............
the owners’ income tax return. Reminder: the PTE is not
required to pay the withholding tax on behalf of the individual Line 6. Late payment penalty on withholding tax due.
nonresident owners for whom it files Form 765 and should The late filing penalty will apply if there is a balance due on
not withhold for those owners. Line 4 and Form 502 is being filed more than 6 months after
the original due date or more than 30 days after the federal
Line 2. Total withholding tax paid. Enter the amount of
extended due date, whichever is later. If Form 502 is being
withholding tax paid by the PTE that is named on Form 502
filed after the specified dates, compute a late filing penalty
and submitted directly to the Department prior to the return
of 30% of the tax due on Line 4. The extension penalty does
filing. Do not enter any amount that was withheld by another
not apply in cases where the return is subject to the late filing
PTE in which this PTE is a nonresident owner and was issued
penalty.
a Schedule VK-1 reflecting an amount that was withheld by
the other PTE. Only amounts paid directly to the Department Line 7. Interest. Interest may apply if there is a balance due
by the PTE filing Form 502 should be recorded on Line 2. on Line 4. If Line 4 reflects a balance of tax due and Form 502
If another PTE has withheld erroneously on the PTE filing is being filed after the original due date, interest must also
Form 502, then the PTE should contact the other PTE and be accrued on the balance of tax due. Interest is accrued
request reimbursement of the amount withheld in error. at the underpayment rate established by IRC § 6621, plus
2%, from the due date of the return through the date the
Line 3. Overpayment. If Line 2 is greater than Line 1, enter
tax is paid. For current interest rates, visit the Department’s
the difference here.
website at www.tax.virginia.gov.
Line 4. Balance of withholding tax due. If Line 2 is less
Line 8. Total penalty and interest due. Add Line 5, or
than Line 1, enter the difference here.
Line 6, (whichever applies) to Line 7.
Section 2 – Penalty and Interest Charges on
Section 3 – Penalty for Late Filing of Form 502
Withholding Tax
Line 9. Penalty for Late Filing of Form 502. If Form 502 is
Line 5. Extension penalty. The extension penalty may being filed more than 6 months after the original due date,
apply if the balance due on Line 4 is more than 10% of or more than 30 days after the federal extended due date,
Line 1. Virginia law provides for an automatic extension of enter $1,200.
time for filing Form 502 for a period of 6 months after the
original due date, or 30 days after the extended federal due Section 4 – Withholding Overpayment
date, whichever is later. This extension does not apply to the Any overpayment reported on Line 3 of Section 1 must be
payment of the income tax withheld on behalf of the entity’s offset against any penalty and interest charges computed in
nonresident owners. If the entity does not pay at least 90% Sections 2 and 3.
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Line 10. Net overpayment. INSTRUCTIONS FOR SCHEDULE 502ADJ
• If Line 8 or Line 9 exceeds Line 3, go to Line 13 below
to compute the total payment due. Sections A and B – Virginia Modifications
• Compare Line 6 and Line 9. If Line 6 is greater than To report Virginia modifications (additions and subtractions)
Line 9, subtract Line 8 from Line 3. enter the 2-digit code and amount for the type of modification
in Sections A and B below. Use Section A to report additions
• If Line 9 is greater than Line 6, subtract the sum of and Section B to report subtractions from the list of codes
Line 7 and Line 9 from Line 3. below.
• Otherwise, enter overpayment from Line 3.
Section A – Addition Codes
Line 11. Amount of withholding overpayment to be Use the codes below to report amounts for Virginia Additions
credited to 2023. Enter the amount of the net overpayment in Section A. If you have more than 4 additions to report
from Line 10 that you want to apply as credit to income tax
in Section A, Lines 1-4, use the supplemental Schedule
withheld for nonresident owners for Taxable Year 2023.
502ADJS to provide information for additions in excess of
Line 12. Amount of withholding overpayment to be 4. Include the total of additions from the Schedule 502ADJS
refunded. Enter the amount of the net overpayment from in the total additions reported on Schedule 502ADJ, Line 5.
Line 10 to be refunded to the entity. Subtract Line 11 from
Line 10. The total of Lines 11 and 12 cannot exceed the Addition Codes for Use on Schedule 502ADJ
amount on Line 10. Code Description
Section 5 – Tax, Penalty, and Interest Due 10 Interest on federally exempt U.S. obligations –
Line 13. Balance of tax due plus extension penalty, if Enter the amount of interest or dividends that are
applicable. If there is an amount due on Line 4, enter the exempt from federal income tax, but taxable in
amount from Line 4, plus the extension penalty on Line 5, if Virginia, less related expenses. (Va. Code §§ 58.1-
applicable. If there is an overpayment on Line 3 and Line 8 322.01 1; 58.1-402 B.2.)
or Line 9 is greater than Line 3, enter Line 5 minus Line 3. 13 Deduction for bad debts – The deduction for bad
Line 14. Interest charges on withholding tax. Enter the debts allowed in computing federal taxable income
amount of interest due from Line 7. for a state or federal savings and loan association.
(Va. Code § 58.1-403 1.)
Line 15. Late filing penalty. Enter the greater of Line 6 or
Line 9. 14 Unrelated business taxable income – The amount
of unrelated business taxable income as defined by
Line 16. Total payment due. Add Line 13, Line 14, and Line IRC § 512. (Va. Code § 58.1-402 B.5.)
15.
15 Royalty addback for intangible expenses – See
Section 6 – Amount Due or Refund the instructions for Schedule 500AB for additional
Line 17. Motion Picture Production Tax Credit to be information. Enclose Schedule 500AB with Form
refunded directly to PTE. If the PTE elects to have this 502. (Va. Code § 58.1-402 B.8.a.)
credit refunded at the entity level, enter the amount of 16 Interest addback for intangible expenses – See
credit authorized by the Virginia Film Office within the the instructions for Schedule 500AB for additional
Virginia Tourism Authority in their certification letter. For information. Enclose Schedule 500AB with Form
more information about this credit, see Motion Picture 502. (Va. Code § 58.1-402 B.9.a.)
Production Tax Credit in the Schedule 500CR instructions 18 Income from Dealer Disposition of Property –
or contact: Virginia Film Office within the Virginia Enter the amount that would be reported under
Tourism Authority, 901 E. Cary St. Suite 900, Richmond, the installment method from certain dispositions
VA 23219, or call (804) 545-5530. of property. If, in a prior year, the taxpayer was
Line 18. Research and Development Expenses Tax allowed a subtraction for certain income from
Credit to be refunded directly to PTE. If the PTE elects to dealer dispositions of property made on or after
claim this credit at the entity level, enter the amount of credit January 1, 2009, in the years following the year of
available. disposition, the taxpayer is required to add back
the amount that would have been reported under
Line 19. Total Amount of Tax Credit Refund. Add Line 17
the installment method. Each disposition must be
and Line 18.
tracked separately for purposes of this adjustment.
Line 20. Amount Due. If there is an amount due on Line 16 (Va. Code § 58.1-402 F.)
and the amount exceeds the amount on Line 19, subtract 21 Food Crop Donation Tax Credit – To the extent
Line 19 from Line 16. a credit is allowed for growing food crops in the
Line 21. Amount of Refund. If there is an amount due on Commonwealth and donating such crops to a
Line 16 and the amount is less than the amount on Line nonprofit food bank, an addition is required for
19, subtract Line 16 from Line 19. If there is an amount on any amount claimed by the taxpayer as a federal
Line 12, add Line 12 and Line 19. income tax deduction for such donation.
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Addition Codes for Use on Schedule 502ADJ Subtraction Codes for Use on Schedule 502ADJ
Code Description Code Description
22 Addition Related to the Business Interest 10 Any amounts included under the provisions of IRC
Deduction – For taxable years beginning on and § 78. (Va. Code § 58.1-402 C.5.)
after January 1, 2022, an income tax deduction is 11 The amount of any refund or credit for overpayment
allowed in an amount equal to 30% of the business of income taxes imposed by this state or any other
interest that is disallowed for federal income tax taxing jurisdiction. (Va. Code § 58.1-402 C.4.)
purposes. If (i) you claimed a Virginia Business
Interest Deduction on prior year Virginia return(s) 12 Any amount included therein by the operation of
and (ii) you are able to fully utilize your federal IRC § 951 (subpart F income) and/or, for taxable
carryover of business interest from those prior years beginning on and after January 1, 2018, IRC
year(s) on your current year federal return, you § 951A (Global Intangible Low-Taxed Income). (Va.
must report an addition on your current year Virginia Code § 58.1-402 C.7.)
return equal to the amount of the Virginia Business 13 Any amount included in federal taxable income that
Interest Deduction claimed on the prior year Virginia is foreign source income and defined as follows:
return(s). However, if you are able to only partially 1) Interest other than interest derived from
utilize your federal carryover of business interest sources within the United States;
from the prior year(s) on your current year federal
return, the Business Interest Addition will be applied 2) Dividends other than dividends derived from
in the same proportion as the amount of federal sources within the United States;
carryover that is utilized. If reporting this addition, 3) Rents, royalties, license, and technical fees
enclose a copy of federal Form 8990. from property located or services performed
Under prior law, the amount of the deduction was without the United States or from any interest in
limited to 20% of business interest disallowed. such property including rents, royalties, or fees
for the use of or the privilege of using without
23 Partnership-Level Federal Adjustments Income the United States any patents, copyrights,
Addition – Income related to certain partnership secret processes and formulas, goodwill,
adjustments that result from federal tax changes trademarks, trade brands, franchises, and
and other changes to federal taxable income must other like properties; and
be added to the income tax return if the income was
not previously reported on the Virginia return. The 4) Gains, profits, or other income from the sale of
amount of the addition is equal to the income that intangible or real property located without the
was not included in Virginia taxable income on the United States.
original Virginia income tax return. When reporting In determining the source of income for purposes
this addition, enclose the partnership’s completed of items 1 through 4 above, the provisions of
Form 502FED-1. IRC §§ 861, 862, and 863 will be applied. (Va.
99 Other (Enclose Explanation) – Enter the amount Code § 58.1-402 C.8.)
of any other income not included in federal taxable 14 The amount of any dividends received from
income which is taxable in Virginia. If you are filing corporations in which the taxpaying corporation
electronically, provide a detailed explanation in the owns 50% more of the voting stock, to the extent
space provided by the software program. If you included in federal taxable income and to the extent
are filing by paper, enclose an explanation and not otherwise subtracted from federal taxable
supporting documentation, if applicable. income. (Va. Code § 58.1-402 C.10.)
This must include the amount of losses or 16 The amount that could have been deducted by a
deductions of an S corporation that is subject gas supplier, pipeline distribution company, or gas
to the bank franchise tax, or the amount of any utility company, as a net operating loss carryover
distributions from such an S corporation. This or net capital loss in arriving at taxable income
addition will be claimed as a negative deduction except that such loss or portion thereof had been
(Code 112) on Line 8a of the shareholder’s carried back for federal purposes to a taxable year
Schedule ADJ. See the worksheet in the individual before it became subject to Virginia income tax.
income tax instruction booklet. To the extent that the recomputed loss is carried
back more than 2 years, it may be subject to the
Section B – Subtraction Codes modification for deconformity. (Va. Code § 58.1-
Use the following codes to report amounts for Virginia 403 9.)
Subtractions in Section B. If you have more than 4
subtractions to report in Section B, Lines 1-4, use the
supplemental Schedule 502ADJS to provide information for
additions in excess of 4.
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Subtraction Codes for Use on Schedule 502ADJ Subtraction Codes for Use on Schedule 502ADJ
Code Description Code Description
17 A gas supplier, pipeline distribution company, gas 48 The amount of payments received in the preceding
utility company, or electric supplier (except an year in accordance with the Tobacco Quota Buyout
electric cooperative) that was subject to the state Program of the American Jobs Creation Act of
license tax on gross receipts in 2000, and became 2004 to the extent they are included in federal
subject to Virginia income tax in 2001, may taxable income. For example, on the 2022 return
amortize its Virginia tax basis using the straight- the taxpayer may subtract the portion of payments
line method over a period of 30 years, beginning received in 2021 that is included in the taxpayer’s
on the adjustment date. The Virginia tax basis is 2021 federal taxable income; while payments
the aggregate adjusted book basis less aggregate received in 2022 may generate a subtraction on
adjusted tax basis of assets placed in service prior the 2023 Virginia return. If the taxpayer chooses
to the first day of the taxable year that the company to accept payment in installments, the gain from
became subject to Virginia income tax. (Va. Code the installment received in the preceding year may
§ 58.1-440.1.) be subtracted. If, however, the taxpayer opted
20 The amount of income derived from Virginia to receive a single payment, 10% of the gain
obligations or the sale or exchange of Virginia recognized for federal purposes in the year that
obligations that are included in federal adjusted the payment was received may be subtracted in
gross income. (Va. Code §§ 58.1-322.02 2; 58.1- the following year and in each of the 9 succeeding
402 C.2.) taxable years. (Va. Code §§ 58.1-322.03 11;
58.1-402 D.) Note: This deduction will be claimed
21 The amount of wages and salaries eligible for the
as a deduction (Code 108) on the owner’s individual
Federal Work Opportunity Tax Credit that are not
income tax return.
deducted for federal tax purposes. (Va. Code §§
58.1-322.02 6; 58.1-402 C.6.) 49 Income from Dealer Disposition of Property –
An adjustment is allowed for certain income from
22 The amount of intangible expenses and costs or
dealer dispositions of property made on or after
interest expenses and costs added to the federal
January 1, 2009. In the year of disposition the
taxable income of a corporation must be subtracted
adjustment will be a subtraction for gain attributable
from the federal taxable income of the related
to installment payments that are to be made in
member if the related member is subject to Virginia
future taxable years provided that (i) the gain arises
income tax on the same amount. See the Form
from an installment sale for which federal law does
500 instructions for additional information. Enclose
not permit the dealer to elect installment reporting
Schedule 500AB with Form 502 (Va. Code § 58.1-
of income, and (ii) the dealer elects installment
402 C.21.)
treatment of the income for Virginia purposes on
43 The amount contributed to the Virginia Public or before the due date prescribed by law for filing
School Construction Grants Program and Fund the taxpayer’s income tax return. In subsequent
that has not been claimed as a deduction on the taxable years, the adjustment will be an addition
taxpayer’s federal income tax return. (Va. Code for gain attributable to any payments made during
§§ 58.1-322.03 8; 58.1-402 C.15.) Note: This the taxable year with respect to the disposition.
deduction will be claimed as a deduction (Code Each disposition must be tracked separately for
107) on the owner’s individual income tax return. purposes of this adjustment. (Va. Code §§ 58.1-
322.04 4; 58.1-402 F.)
50 Gains from Land Preservation – Enter the
amount of federal gain or income recognized as a
result of the sale of Land Preservation Tax Credits.
A subtraction is allowed for any gain or income
recognized by a taxpayer on the application of
Land Preservation Tax Credits against Virginia
income tax liability to the extent the gain is included
in and not otherwise subtracted from federal
taxable income. The transfer of the credit and its
application against a tax liability must not create
gain or loss for the transferor or the transferee.
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Subtraction Codes for Use on Schedule 502ADJ Subtraction Codes for Use on Schedule 502ADJ
Code Description Code Description
51 Certain Long-Term Capital Gain – Provided 54 Virginia Real Estate Investment Trust – For
the long-term capital gain or investment taxable years beginning on and after January 1,
services partnership income is attributable to an 2019, taxpayers may claim a subtraction for income
investment in a “qualified business” as defined in attributable to an investment in a Virginia real estate
Va. Code § 58.1-339.4 or any other technology investment trust made on or after January 1, 2019,
business approved by the Secretary of Technology but before December 31, 2024.
or the Secretary of Commerce and Trade, it may In order for the subtraction to be claimed on the
be allowed as a subtraction. The business must investors’ income tax returns, the real estate
have its principal facility in Virginia and less than investment trust in which they invest must be
$3 million in annual revenues for the fiscal year certified by the Department as a Virginia real estate
preceding the investment. The investment must investment trust for the taxable year during which
be made between the dates of April 1, 2010, and the investment was made. If the fund is approved,
June 30, 2020. Taxpayers claiming the Qualified a 9-digit certification number will be provided. Enter
Equity and Subordinated Debt Investments this number in the “Certification Number” space
Credit, the subtraction for income attributable to a provided by the subtraction code.
Virginia venture capital account, or the subtraction
for income attributable to a Virginia real estate No subtraction is allowed to an individual taxpayer:
investment trust cannot claim this subtraction for an investment in a company that is owned
relating to investments in the same business. or operated by a family member or affiliate of
In addition, no investment is “qualified” for this the taxpayer; who claimed the subtraction for
subtraction if the business performs research in certain long-term capital gains or Venture Capital
Virginia on human embryonic stem cells. Investments for the same investment; or who
claimed the Qualified Equity and Subordinated Debt
52 Gain from Historic Rehabilitation – To the extent
Investments Tax Credit for the same investment. For
that it is included in federal taxable income, any
more information, see the Form REIT instructions.
amount of gain or income recognized by a taxpayer
in connection with the Historic Rehabilitation Tax 56 Business Interest Deduction – For taxable years
Credit is allowed as a subtraction on the Virginia beginning on and after January 1, 2022, taxpayers
return. may claim a deduction of 30% of business interest
disallowed as a deduction pursuant to § 163(j) of
53 Venture Capital Account Investment – Taxpayers
the Internal Revenue Code, to the extent included
may claim a subtraction for income attributable to
in and not otherwise subtracted from federal taxable
an investment in a Virginia venture capital account
income. If claiming this deduction, enclose a copy
made on or after January 1, 2018, but before
of federal Form 8990. Note: This subtraction will be
December 31, 2023. For the purposes of this
claimed as a deduction (Code 116) on the owner’s
subtraction, income includes, but is not limited to
individual income tax return.
investment services partnership interest income,
otherwise known as investment partnership carried Under prior law, the deduction was limited to 20%
interest income. No subtraction will be allowed of business interest disallowed.
for an investment in a company that is owned 57 Gain from Eminent Domain – For taxable years
or operated by a family member or an affiliate of beginning on or after January 1, 2019, taxpayers
the taxpayer. No subtraction will be allowed for may claim a subtraction for any gain recognized
a taxpayer that has claimed the Qualified Equity from the taking of real property by condemnation
and Subordinated Debt Investment Tax Credit, proceedings.
a subtraction real estate investment trust for the
58 Partnership-Level Federal Adjustments Income
same investment, or a subtraction for certain long- Income related to certain partnership
Subtraction –
term capital gains for the same investment. adjustments that result from federal tax changes
In order for the subtraction to be claimed on the and other changes to federal taxable income may
investors’ income tax returns, the fund in which be subtracted from Virginia taxable income if the
they invest must be certified by the Department as income was previously reported on the Virginia
a Virginia venture capital account for the taxable return but should not have been reported. The
year during which the investment was made. If the amount of the subtraction is equal to the federal
fund is approved, a 9-digit certification number will taxable income that was included in the Virginia
be provided. Enter this number in the “Certification original income tax return. When claiming this
Number” space provided by the subtraction code subtraction, include a copy of the partnership’s
Form 502FED-1.
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this election, the full amount of the credit(s) will be refunded
Subtraction Codes for Use on Schedule 502ADJ
to the PTE reduced by any outstanding tax assessments.
Code Description State Income Tax Paid: Many states follow the federal tax
99 Other – Enter the amount of any other subtraction treatment of pass-through entities and apply income tax to
not included in federal taxable income, which is not the entity’s income only at the owner level. Some states,
taxable in Virginia. If you are filing electronically, however, may not recognize the federal S corporation
provide a detailed explanation in the space election or may otherwise impose an income tax directly on
provided by the software program. If you are filing a PTE. If the PTE properly paid a direct state income tax,
by paper, enclose an explanation and supporting owners who are individuals may qualify to claim the “credit
documentation, if applicable. for tax paid to another state” on their Virginia individual
This must include the amount of income or gain of income tax returns, based on their proportional shares of the
an S corporation that is subject to Bank Franchise tax paid by the PTE.
Tax. This deduction (Code 112) will be claimed The credit for tax paid to another state is based only on
on the shareholder’s income tax return. See the an income tax on earned or business income, or gain on
worksheet in the individual income tax instructions. the sale of an asset. Other taxes do not qualify, including
any franchise, license, excise, unincorporated business or
Section C – Virginia Tax Credits occupation tax, or any tax characterized as such by the
Tax credits based on a PTE’s activities are passed through taxing jurisdiction, even if the tax is based on earned or
to the owners, generally in proportion to each owner’s business income. A tax that would be illegal or unauthorized
percentage of ownership or participation in the entity in the taxing jurisdiction if it were characterized as an income
(although the legislation for a particular credit may allow for tax or a commuter tax does not qualify.
other allocation). When the credit is subject to a limitation, If the PTE paid a direct state income tax for which an
the limitation applies to the total credit of the PTE (the individual owner could claim the credit for tax paid to another
aggregate of the owners’ shares), not to each owner’s share state based on his or her proportional share, enter the total
separately. amount of tax paid by the entity, and a schedule identifying
Pass-through entities do not use or compute credit carryovers. each taxing jurisdiction with a description of the tax and the
A PTE passes through to each owner the owner’s share of amount paid.
each credit earned by the PTE for that year. Each owner Do not include any taxes paid by the entity that reflect another
must then determine the manner in which, with respect to state’s income tax withholding requirement on behalf of
its own circumstances, the credits can be used (including specific owners, or that were paid in connection with another
carryovers). state’s equivalent to Form 765 on behalf of specific owners.
For most credits, specific documentation must be These amounts may be shown with appropriate descriptions
enclosed with the return of the PTE and the return of the on the Schedule VK-1 of each specific owner that is affected,
owner. See the instructions for Schedule CR, instructions but should not be included in the amount on Section C,
for Schedule 500CR, or visit the Department’s website, Part I, Line 1, of Form 502ADJ, which will be distributed to
www.tax.virginia.gov, for more information about each all owners based on each owner’s participation percentage.
credit and its required documentation. Without proper Credit Allocation
documentation, the credit will not be allowed.
The following credits must be allocated among owners in
Many credits may not be reported on your return and allocated proportion to each owner’s percentage of ownership or
to owners until after you have submitted an application and participation in the PTE:
have been notified in writing that the credit is allowed. If your
• State Income Tax Paid (See above)
return is due and you have not yet been notified, you have
the option to either: • Neighborhood Assistance Act Tax Credit
• Pay at least 90% of your withholding tax liability by the • Biodiesel and Green Diesel Fuels Tax Credit
return due date and file your return on extension after • Recyclable Materials Processing Equipment Tax
receiving such notification, or Credit
• File your return by the due date without reporting and • Major Business Facility Job Tax Credit
without allocating the credit, and file an amended • Agricultural Best Management Practices Tax Credit
return after you have received such notification
• Waste Motor Oil Burning Equipment Tax Credit
For information on specific credits, see either the
• Riparian Forest Buffer Protection for Waterways Tax
Schedule CR instructions (individuals) or the Schedule
Credit
500CR Instructions (corporations).
• Communities of Opportunity Tax Credit
Exception: There are currently 2 refundable credits that the
PTE may elect to have refunded at the entity level. They are • Green Jobs Creation Tax Credit
the Motion Picture Production Tax Credits and the Research • Farm Wineries and Vineyards Tax Credit
and Development Expenses Tax Credit. If the PTE makes • International Trade Facility Tax Credit
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• Port Volume Increase Tax Credit Section D – Amended Return
• Barge and Rail Usage Tax Credit If the PTE is filing an amended return, complete Form 502
• Livable Home Tax Credit using the corrected figures, as if it were the original return.
• Education Improvement Scholarships Tax Credit Do not make any adjustments to the amended return to
show that the PTE received a refund or paid a balance due
• Food Crop Donation Tax Credit as the result of the original return. Then complete Schedule
• Worker Training Tax Credit 502ADJ, Section D, Lines 1-6 to determine if the PTE is
• Motion Picture Production Tax Credit due a refund or any additional tax is due with the amended
• Conservation Tillage and Precision Agriculture return. When completing Line 1, enter tax paid prior to filing
Equipment Tax Credit the return, tax paid with the return, and additional tax paid
after the return was filed.
These credits may be allocated among owners in proportion
to each owner’s percentage of ownership or participation in INSTRUCTIONS FOR VIRGINIA SCHEDULE
the PTE, or as the owners may mutually agree, or as provided
VK-1 AND SCHEDULE VK-1 CONSOLIDATED
in the partnership agreement or other entity document.
• Vehicle Emissions Testing Equipment Tax Credit General Instructions
• Historic Rehabilitation Tax Credit Schedule VK-1 or Schedule VK-1 Consolidated and
• Land Preservation Tax Credit Schedule SVK-1 (if applicable) is prepared by the PTE to
show each owner’s distributive or pro rata share of the entity’s
• Qualified Equity and Subordinated Debt Investments
income, Virginia modifications and Virginia credits, and other
Tax Credit
information necessary for an owner to be able to include the
• Research and Development Expenses Tax Credit effect of participation in the entity in the owner’s income tax
• Major Research and Development Expenses Tax return. Schedule VK-1 does not replace federal Schedule
Credit K-1; it is a supplement to the federal schedule for those state
• Virginia Housing Opportunity Tax Credit tax issues that require additional information. The PTE will
prepare a Schedule VK-1 and SVK-1 (if applicable) for each
Form PTE – Virginia Pass-Through Credit Allocation owner; a copy should be given to each owner, and a copy
Form PTE must be filed with the Tax Credit Unit to allocate should be included with the entity’s Form 502 submission
certain tax credits to owners before they can be claimed by to the Department. Use the Web Upload application on the
the owners on their Virginia Income Tax Returns. See Form Department’s website, www.tax.virginia.gov, to submit
PTE for a list of those credit types. Form PTE must be filed Schedules VK-1 and SVK-1 electronically.
with the Tax Credit Unit by the pass-through entity within
Schedule VK-1 Consolidated
30 days of certification of the credit but at least 90 days prior
to the participants filing their income tax returns. Use this template only if the PTE has been granted a
waiver from the electronic filing mandate. Schedule VK-1
For more information, write to: Virginia Department of
Consolidated allows taxpayers to report multiple owners
Taxation, Tax Credit Unit, P.O. Box 715, Richmond, VA
on one Excel summary sheet. The PTE will continue to
23218-0715, or call (804) 786-2992.
send a copy of the Schedule VK-1 to each owner for filing
Part II – Total Nonrefundable Credits. Add Part I, Lines purposes, but will not need to send a copy of each owner’s
1-8 and 12-27. Schedule VK-1 to the Department. In its place, a summary
Part III – Refundable Credits. These credits provide for of each owner’s share will be reported on the Schedule VK-1
refunds of amounts that exceed the tax due. Consolidated and sent to the Department for processing.
Use the Form 502 instructions with the Schedule VK-1
• Agricultural Best Management Practices Tax Credit
Consolidated form layout for field computations, additions,
• Conservation Tillage and Precision Agriculture subtractions, tax tables, and mailing addresses. To avoid
Equipment Tax Credit the disclosure of confidential taxpayer information, the PTE
• Coalfield Employment Enhancement Tax Credit must not send the summary to its owners.
• Motion Picture Production Tax Credit If filing by paper, PTEs reporting 10 or more owners must use
• Research and Development Expenses Tax Credit the Schedule VK-1 Consolidated to report the owner’s share
of income, modifications, allocations, and the total additions,
Part IV – Total Refundable Credits. Add Part III, Lines 1, 5, subtractions, and credits reported on the Schedule VK-1.
and 7-9.
A Schedule VK-1 Consolidated template is available for
All pass-through entities distributing credits to owner(s), download from the Corporation and Pass-Through Entity
shareholders, partners, or members must give each a Forms section of the Department’s website. Users may
Schedule VK-1, Owner’s Share of Income and Virginia create their own forms using the form layout; however,
Modifications and Credits. Also, a Schedule VK-1 they must adhere to the form layout requirements and
Consolidated must be included with the return. If the specifications in the Schedule VK-1 Consolidated Summary
Schedule VK-1 Consolidated is completed, do not enclose to ensure accurate processing of the Schedule VK-1
each owner's Schedule VK-1. Consolidated. The Schedule VK-1 Consolidated Summary is
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available on the Department’s website at www.tax.virginia. Line e: Amount Withheld by PTE for Owner. Enter the
gov. The Summary’s Appendix contains detailed steps for amount withheld by the PTE for the nonresident owner.
using Excel, including screen shots. If the entity does not have
Line f: Withholding Exemption.
Additional Owner Information to pay the withholding tax or if it is not required to include the
income of an owner in its withholding tax calculations, enter
Line a: Date Owner Acquired Interest in the PTE. Enter in
the exemption code in the space provided.
MM/DD/YYYY format.
Line b: Owner’s Entity Type. Enter the code that Withholding Exemption Reason Code
corresponds to the owner’s entity type: Exempt from federal or Virginia income tax 01
(individuals)
Entity Type Code Entities other than individuals and 02
Individual who was a Virginia resident RES corporations that are exempt from federal
Individual who was not a Virginia resident NON income taxes
General Partnership PG Individual owner is included in a composite 03
Limited Partnership PL return
Limited Liability Company LL PTE is a publicly traded partnership 04
Limited Liability Partnership LP Corporations exempt from Virginia income 05
tax; or noncaptive REITs
S Corporation SC
Undue hardship (PTE) 06
C Corporation CC
PTE’s income is from rents with 4 or fewer 07
Trust or Estate TE dwelling units
Nonprofit Organization NZ
Other OB Line Instructions
Line c: Owner’s Participation Type. Enter the code These items on Schedule VK-1 correspond to related items
that corresponds to the owner’s type of membership or with the same line numbers on Lines 1-11 of Form 502 and
participation in the PTE: to certain lines of Sections A, B, and C of Schedule 502ADJ.
In general, Form 502 and Schedule 502ADJ show the
Participant Type Code PTE’s total amount for the item, while each Schedule VK-1
General Partner GPT shows one owner’s share of the item. The owner’s share of
an item is usually determined by the owner’s participation
Limited Partner LPT percentage (see above), but some partnership agreements
LLC / LLP Member LLM may provide for special allocations. The entries on each
S Corporation Shareholder SHR line of the Schedules VK-1 for all owners of the PTE should
equal the corresponding entry on Form 502 and Schedule
Other OTR
502ADJ, except for Line 7. The entry on Line 7 will be the
Line d: Owner’s Participation Percentage. For an same for all owners of the entity and the same as Line 7 of
S corporation shareholder, enter the owner’s percentage Form 502 (the PTE’s Virginia apportionment percentage).
of stock ownership for the taxable year, as shown on the
Additions, subtractions, and credits should be allocated
owner’s federal Schedule K-1 (Form 1120-S), Line G. For
among owners in proportion to each owner’s percentage of
a partner or other recipient of federal Schedule K-1 (Form
ownership or participation in the PTE, or as provided in the
1065), enter the ending percentage for the partner’s profit
partnership agreement or other entity document. However,
share as shown on the Schedule K-1, under Line J.
each owner may only claim the additions, subtractions, or
For a partner in an electing large partnership, the federal credits allowed on the owner’s Virginia income tax return.
Schedule K-1 (Form 1065-B) does not indicate a participation Therefore, an individual owner may only claim additions,
percentage, but the partnership must determine such a subtractions or credits applicable to individual income tax,
percentage in order to distribute Virginia modifications while a corporate owner may claim only those additions,
and credits among the owners. The percentage should be subtractions, or credits applicable to the Virginia corporate
determined in a manner substantially similar to the profit income tax.
sharing percentage at the end of the year provided for a
The Virginia Public School Construction Grants Program,
regular partnership, unless there is compelling reason to use
Fund (Code 43), the Tobacco Quota Buyout Program (Code
another method.
48), and the business interest (Code 56) deductions must
The participation percentages as shown on Schedules VK-1 be claimed as deductions on the shareholder’s individual
for all owners of the PTE should equal 100%. income tax return. The deduction for an S corporation subject
The participation percentage should be entered as a percent to bank franchise tax is reported as an “other” addition or
with 2 decimal places. For instance, the participation subtraction on Schedule VK-1 and as a positive or negative
percentage for an S corporation shareholder who holds
one-third ownership is entered as “33.33%.”
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deduction on the owner’s individual income tax return. The state or another. Apportionment is the division of income
addition related to the business interest deduction (Code 22) among states according to the ratio of activities in one place
is reported as negative deduction on the owner’s individual to activities everywhere.
income tax return.
Who Must Use Schedule 502A
Report the following on the VK-1 Consolidated: Schedule 502A is used to show the amount of allocated
• Page 1, Lines a-f. income and to determine the apportionment percentage.
• Page 1, Lines 1-7. If the PTE’s income is all from Virginia, then the entity does
• Page 1, total additions and subtractions from Lines 13 not allocate and apportion income; the Virginia apportionment
and 18. percentage is 100%, and Schedule 502A is not required. In
all other cases, the PTE must prepare a Schedule 502A and
• Page 2, total nonrefundable credits from Part IV, enclose it with Form 502. The owners may also need a copy
Line 1. of Schedule 502A from the PTE in order to prepare their own
returns properly (see the next section).
INSTRUCTIONS FOR SCHEDULE 502A
Effect of Schedule 502A on Owners of the PTE
General Information A PTE does not calculate a net taxable income amount for
each owner. Rather, it determines each owner’s distributive
A PTE must determine the extent to which its income is from
share of various types of income, gains, losses, deductions,
Virginia sources. This determination is made in the same
and credits. Each owner then uses that information as
manner as provided by law for corporations (Va. Code §§
applicable, plus the PTE’s allocation and apportionment
58.1-405 through 58.1-422.4), with such accommodation
information from Schedule 502A, in determining its Virginia
as may be necessary considering the differences between
taxable income. How each owner uses the PTE’s information
regular taxpaying corporations and pass-through entities.
will vary, however, depending on the owner’s entity type.
When All Income Is from Virginia Sources
Allocable and Apportionable Income
If a PTE conducts its entire business within Virginia, Virginia law provides that dividends received are to be
then all of its income is Virginia source income. A PTE is allocated to the state of commercial domicile, and that all
presumed to be doing business entirely within Virginia other income must be apportioned as directed in Va . Code
unless it is subject to (or would be subject to if it were a §§ 58.1-408 - 58.1-420, 58.1-422, 58.1-422.1, 58.1-422.2,
regular taxpaying corporation) one of the following taxes in 58.1-422.3, or 58.1-422.4. Virginia law does not allow for
another state: 1) a tax imposed on net income; 2) a franchise subtractions from apportionable income based on separate
or other tax measured by net income; or 3) a franchise tax or divisional accounting, or for the exclusion of non-Virginia
for the privilege of doing business. An entity is “subject to” investment income.
such a tax if it carries on sufficient activity within a state
that the state has jurisdiction to impose the tax, whether or Certified Company Apportionment for Business
not the state actually imposes the tax. The activities must Conducted in Certain Disadvantaged Localities
be considered in the light of Public Law (“P.L.”) 86-272 (15 For taxable years beginning on or after January 1, 2018,
U.S.C. §§ 381-384). If federal law would prohibit the state certain companies may decrease the amount of their
from imposing the tax because the entity’s activities in the income taxed by Virginia when they meet specific eligibility
state were not of a certain type or did not exceed a certain requirements and are certified by the Virginia Economic
threshold, then the state does not have jurisdiction, and Development Partnership Authority (“VEDP”). This includes a
the entity is not subject to the state’s tax for purposes of requirement that a specified number of jobs be created and, if
allowing the entity to allocate and apportion income away applicable, investments be made in particular disadvantaged
from Virginia. In addition, an entity is not subject to a tax in a localities.
state if it voluntarily pays the tax but is not required to do so
Once the company is certified by VEDP as meeting the
by the laws of that state, or if it pays a fee for qualification,
applicable eligibility requirements, it is entitled to decrease
organization, or the privilege of doing business in the state
the amount of income taxed by Virginia. For multistate
but either: 1) does not actually engage in business in the
certified companies, the decrease in income is accomplished
state; or 2) engages in some business in the state, not
by allowing such companies to make modifications to their
sufficient for nexus, and the tax or fee bears no relation to
apportionment factors (“Certified Company Apportionment”).
the entity’s activities in the state.
For instate certified companies, this is accomplished by
When Income Is from Virginia and Other States allowing such companies the ability to use apportionment
If a PTE’s income is not all Virginia source income, as and to use Certified Company Apportionment to make
defined above, and the entity conducts its business in modifications to their apportionment factors. See Schedule
Virginia and in one or more other states, then the portion 500AP Instructions for detailed information
of total income that is Virginia source income is determined Schedule 500AP
through allocation and apportionment. Allocation is the
Schedule 500AP must be used by companies certified by
assignment of income, or a piece of income, wholly to one
VEDP as eligible to use Certified Company Apportionment
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that elect to use a modified apportionment method to A retail company is required to apportion its income using a
determine the amount of Virginia income that is subject single sales factor method of apportionment.
to apportionment. Eligible companies must complete the
Line 6 – Debt Buyers Apportionment
Schedule 500AP prior to completing the Schedule 502A to
determine the value that will be used on the appropriate line Check this box if the corporation is a debt buyer with a taxable
of Schedule 502A, Section B, Column B. year beginning on or after January 1, 2019. A debt buyer is
required to apportion its income using a single sales factor
Line Instructions method of apportionment. See the instructions for Section B,
Enter the company’s name and FEIN. Line 1 for more information. (Va. Code § 58.1-422.3.)
Checkboxes Line 7. Manufacturer’s modified apportionment method:
Check this box if a manufacturer is electing the modified
If filing a Unified Nonresident Individual Income Tax
apportionment method under Va. Code § 58.1-422. See the
Return, Form 765, check the box as indicated. The “Unified
Rulings & Decisions section on the Department’s website
nonresident return filed” check box must also be marked on
Form 502, Page 1. Please enclose a completed Schedule www.tax.virginia.gov to download the guidelines for this
at
apportionment method.
502A with Form 765 if a composite return is filed by the
business owners. Which Manufacturers Qualify: An electing manufacturer
If the pass-through entity is certified by VEDP as eligible to must certify to the Department that the average weekly
use Certified Company Apportionment, check the box and wage of its full-time employees was greater than the lower
enclose the Schedule 500AP. Use the modified Virginia of the state or local average weekly wage for the taxpayer’s
apportionment factor that was computed on Schedule industry. (Va. Code § 58.1-422.)
500AP, Column C to complete the Schedule 502A. See the In addition, the PTE must maintain 90% of the base year
Schedule 500AP Instructions for additional information. level of employment in Virginia for the first 3 taxable
If the pass-through entity is a property information and years after making the election. If a PTE fails to meet this
analytics firm that has entered into a memorandum of requirement, it will be required to reapportion income based
understanding with VEDP and meets the criteria outlined in on the standard apportionment and provide the owners with
Va. Code § 58.1-422.4, check the appropriate box. corrected income amounts. The owners will be required
to pay the difference between taxes calculated under the
Section A – Apportionment Method standard method of apportionment and taxes calculated
All income of the PTE except the class of income allocable under the election, as well as interest and a 10% penalty.
as specified in the instructions for Section C, Line 3 is (Va. Code § 58.1-422.)
apportioned to this state in accordance with the items below. Manufacturing pass-through entities may elect to use the
(Va. Code § 58.1-408.) modified apportionment method. Once a manufacturing
Line 1. Motor carriers. If a taxpayer is a motor carrier and PTE makes this election, it generally may neither revoke
an exception applies, check the proper box for Exception 1 such election for 3 taxable years nor amend the return on
or Exception 2. See the instructions for Section B, Line 1 for which such election was made to change its method of
more information. apportionment. The manufacturing company will be required
to use the apportionment factor that is effective at the time
Line 2. Financial companies. Check this box if the PTE
that the modified apportionment method election is made,
is a financial company. Financial companies must apportion
and any apportionment factor that becomes effective in the
income based on cost of performance in Virginia versus
first 3 taxable years after the election.
cost of performance everywhere. See the instructions for
Section B, Line 1 for more information. Line 7(a). Enter the beginning date (MM/DD/YY) of the
Line 3. Construction companies. Check this box if the PTE election year.
is a construction company that has elected to report income Line 7(b). A taxpayer making this election must certify that
on the completed contract basis. Construction companies the average weekly wage of its full-time employees is greater
that have made this election must apportion income as than the lower of the state or local average weekly wages
provided in the instructions for Section B, Line 1. for its industry and that the average annual number of full-
Line 4. Railway companies. Check this box if the PTE is a time employees of the manufacturing company is at least
railway company. Railway companies must determine their 90% of the base year employment.Check the box certifying
net apportionable income by using revenue car miles. See that the company meets the requirements. The wage and
the instructions for Section B, Line 1 for more information. employment certification box should be checked for each
year that the manufacturer’s election is claimed.
Line 5. Retail Company Apportionment. Check this box if
the company is a retail company. Manufacturer does not maintain employment levels for
modified apportionment method election. A manufacturer
For purposes of this requirement, a retail company is defined will be subject to additional tax (recapture) and interest if the
as a domestic or foreign company primarily engaged in average weekly wage of its full-time employees is lower than
activities that, in accordance with the NAICS, United States the state or local weekly wage for its industry or its number of
Manual, United States Office of Management and Budget, full-time employees do not equal or exceed 90% of its base
1997 Edition, would be included in Sectors 44-45.
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year employment level. The amount of the recapture is equal Motor carriers: Motor carriers of property or passengers
to the difference between the tax that would have been due using highways of this state must, unless they meet one
under the standard apportionment method and the amount of the two exceptions set forth below, apportion their net
of tax that was due using the modified apportionment method apportionable income to Virginia using the ratio of vehicle
for each of the first 3 years in which the average weekly miles in this state to total vehicle miles everywhere. “Vehicle
wage of its full-time employees was lower than the state or miles” means miles traveled by vehicles, owned or operated
local weekly wage for its industry or its number of full-time by the taxpayer, hauling property, or carrying passengers for
employees did not equal or exceed 90% of its base year a charge or fare.
employment level. The Department will generally assess A carrier meeting either of the exceptions set forth below is
the manufacturer with the amount required to be recaptured not required to apportion income to Virginia. In such cases,
and any interest due. However, a manufacturer that fails, or a return must be filed, but it is necessary only to enter the
anticipates that it will fail, to meet the wage and employment name and address on appropriate lines, enter zero on Line 7,
requirements may file returns for the taxable years for Form 502, check the appropriate box(es) on Schedule
which recapture would be required, using the statutory 502A, Section A, Line 1 and complete Section B, Line 1 of
apportionment method, and pay any taxes and interest due Schedule 502A. (Va. Code § 58.1-417.)
on such returns in lieu of waiting to receive an assessment
of such amounts due from the Department. Such company Exception 1: A carrier which neither owns nor rents real
must submit a written explanation with its return detailing or tangible personal property inside this state except
why it is changing to the statutory apportionment method. vehicles, makes no pickups or deliveries inside this state,
and travels no more than 50,000 “vehicle miles” inside this
If you file an amended return and voluntarily change your state; provided that the Virginia “vehicle miles” are less
apportionment method because you anticipate that you than 5% of total vehicle miles.
will fail to meet the wage and employment requirements,
file an amended return by completing a new return for Exception 2: A carrier which neither owns nor rents real or
the year of adjustment using the corrected figures, as if it tangible personal property inside this state except vehicles,
were the original return. Do not make any adjustments to and which makes no more than 12 round trips into this state
the amended return to show that the you received a refund during the taxable year, either hauling property or carrying
or paid a balance due as the result of the original return. passengers; provided that the Virginia “vehicle miles” are
Check the amended return box on Form 502, complete a less than 5% of total vehicle miles traveled during the
revised Schedule 502A, and the Amended Return section on taxable year.
Schedule 502ADJ, Page 2. Financial companies: A financial company is a company
Line 8. Enterprise Data Center Operation: A taxpayer that is not exempted from the imposition of tax under the
with an enterprise data center operation that enters into a provisions of Va. Code § 58.1-401, which derives more
memorandum of understanding with the Virginia Economic than 70% of its gross income from the classes of income
Development Partnership (VEDP) to make a new capital enumerated in items 1 through 4 below, without reference
investment of at least $150 million in an enterprise data to the state where the income is earned, including, but not
center in Virginia is required to apportion Virginia taxable limited to, small loan companies, sales finance companies,
income using a single sales factor method of apportionment. brokerage companies, and investment companies:
Line 9. Multi-Factor Formula with Double-Weighted 1. Fees, commissions, other compensation for financial
Sales Factor: Check if using the multi-factor apportionment services rendered;
formula with a double-weighted sales factor. 2. Gross profits from trading in stocks, bonds, or other
securities;
Section B – Apportionment Percentage
3. Interest; and
Line 1. Single Factor Computations: Motor Carriers,
Financial Companies, Construction Companies, Railway 4. Dividends that are included in Virginia taxable income.
Companies, Retail Companies, Debt Buyers, Manufacturers In computing the amounts referred to in items 1 through
who elected the Modified Apportionment Method in Section A, 4 above, any amount received by a member of an
and Certain Enterprise Data Center Operations. affiliated group (determined under IRC § 1504(a), but
without reference to whether any such company is an
For taxpayers using the single-factor computation, check includible company under IRC § 1504(b)) from another
the appropriate box for the PTE’s entity type (motor carrier, member of such group, will be included only to the
financial corporation, construction corporation, railway extent that the amount exceeds the related expenses
company, retail company, qualified manufacturer’s modified of the recipient.
apportionment, enterprise data center operation) on
Lines 1 through 8 of Section A. Based on the appropriate The Virginia taxable income of a financial company, as
computation method for your entity type or election, enter defined in Va. Code § 58.1-418, excluding income allocable
the total, Virginia, and percentage on Line 1, Section B. For under Va. Code § 58.1-407, must be apportioned within and
example: railway companies are to use the ratio of revenue without this state in the ratio that the business within Virginia
car miles in Virginia to total revenue miles of the corporation is to total business of the corporation. Business within this
everywhere. state must be based on cost of performance in Virginia over
cost of performance everywhere. (Va. Code § 58.1-418.)
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Cost of Performance Factor Debt Buyers
(a) The cost of performance is the cost of all activities directly For taxable years beginning on or after January 1, 2019, a
performed by the taxpayer for the ultimate purpose of debt buyer is required to apportion their income to Virginia
obtaining gains or profit, except activities directly performed using a single factor method of apportionment based on
by the taxpayer for the ultimate purpose of obtaining sales and market-based sourcing methods to source certain
dividends allocable under the provisions of Va. Code sales that consist of money recoverable on debt.
§ 58.1-407. For purposes of Debt Buyer Apportionment, a "debt
(i) Such activities do not include those performed on buyer" is an entity and its affiliated entities that purchase
behalf of a taxpayer, such as those performed by nonperforming loans from unaffiliated commercial entities
an independent contractor. that (i) are in default for at least 120 days or (ii) are in
(ii) The cost of performance does not include the bankruptcy proceedings. "Debt buyer" does not include an
cost of funds (interest, etc.), but does include the entity that provides debt collection services for unaffiliated
cost of activities required to procure loans or other entities.
financing. For debt buyers, sales, other than the sales of tangible
(b) Activities constituting the cost of performance are deemed personal property, are in Virginia if they consist of money
performed at the situs of real and tangible personal recovered on a debt that a debt buyer collected from a
property or the place at which or from which activities are person who is a resident of Virginia or an entity that has its
performed by employees of a taxpayer. commercial domicile in Virginia, regardless of the location
(c) Cost of performance of a financial institution within and of the debt buyer's business (Va. Code 58.1-416 B). If
without Virginia must be determined without regard to necessary information is not available to the taxpayer to
the location of borrowers, location of property in which determine whether a sale other than the sale of tangible
the financial company has only a security interest, or the personal property is in Virginia, the taxpayer may estimate
cost to the financial company of the funds which it lends. the dollar value or portion of the sale in Virginia, provided
(23 Virginia Administrative Code (VAC) 10-120-250.) that the taxpayer can demonstrate that:
Construction companies: Construction companies which 1. the estimate has been undertaken in good faith;
have elected to report income on the completed contract 2. the estimate is a reasonable approximation of the dollar
basis for federal income tax purposes must apportion value or portion of the sale in the Commonwealth; and
income within and without this state in the ratio that the
3. in using an estimate the taxpayer did not have as a
business within this state is to total business of the company.
principal purpose the avoidance of any tax due.
The business within and without this state is based upon
“sales” as defined by Va. Code § 58.1-302, to the extent Manufacturers Modified Apportionment Method: Use
that it is included in taxable income, and is determined the single sales factor apportionment if the PTE elected
as provided by Va. Code §§ 58.1-414 through 58.1-419. the Manufacturer’s Modified Apportionment Method in
All other construction companies must determine Virginia Section A. Enter the Total,Virginia , and Percentage on
taxable income by reference to Va. Code §§ 58.1-406 Section B, Line 1.
through 58.1-416. Enterprise Data Center Operation: A taxpayer with
Railway companies: Railway companies must determine an enterprise data center operation that enters into a
their net apportionable income to this state by multiplying memorandum of understanding with the Virginia Economic
Virginia taxable income of such company, excluding the Development Partnership (VEDP) to make a new capital
income allocable under Va. Code § 58.1-407, by the use of investment of at least $150 million in an enterprise data center
the ratio of revenue car miles in this state to total revenue in Virginia is required to apportion Virginia taxable income
car miles of the company everywhere. using a single sales factor method of apportionment.
“Revenue car mile” in the case of railway carriers of property Line 2. Multi-Factor Computation: Three-Factor Formula
or passengers means the movement of a unit of loaded – Multistate companies are generally required to use
car equipment a distance of one mile. The loaded car a three-factor formula of property, payroll and double-
miles must be determined in accordance with the Uniform weighted sales. The sum of the property factor, payroll factor
System of Accounts for Railroad Companies of the Interstate and twice the sales factor is divided by 4 to arrive at the
Commerce Commission. (Va. Code § 58.1-420.) final apportionment factor. Retail companies are required to
apportion their income using a single sales factor method of
Retail Companies: A retail corporation is required to
apportionment. See the specific instructions that follow.
apportion its income using a single sales factor method of
apportionment. For purposes of this requirement, a retail Line 2(a). Property factor: The property factor is a
company is defined as a domestic or foreign corporation fraction, the numerator of which is the average value of the
that is primarily engaged in activities that, in accordance with company’s real and tangible personal property that is owned
the North American Industry Classification System (NAICS), and used or rented and used in this state during the taxable
United States Manual, United States Office of Management year, and the denominator of which is the average value
and Budget, 1997 Edition, would be included in Sectors 44-45 of all the company’s real and tangible property owned and
(Va. Code § 58.1-422.1). used or rented and used during the taxable year and located
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everywhere; to the extent that such property is used to of the sale or other disposition of intangible property, only
produce Virginia taxable income and is effectively connected the net gain is included. Net gain is determined on a per
with the conduct of a trade or business within the United transaction basis. (Va. Code § 58.1-302.)
States and income derived therefrom is includible in federal Sales of tangible personal property are in this state if the
taxable income. (Va. Code § 58.1-409.) property is received in this state by the purchaser. In the
Property owned by the company is valued at its original case of delivery by common carrier or other means of
cost plus the cost of additions and improvements. Property transportation, the place at which such property is ultimately
rented by the company is valued at 8 times the property’s received after all transportation has been completed is
annual rental rate. (Va. Code § 58.1-410.) considered the place at which such property is received by
The average value of property is determined by averaging the purchaser. Direct delivery in this state, other than for
the value at the beginning and ending of the tax period, but purposes of transportation, to a person or firm designated
the Department may require the averaging of monthly values by a purchaser, constitutes delivery to the purchaser in
during the tax period if it is reasonably required to reflect this state, and such direct delivery outside of this state to
properly the average value of the corporation’s property. a person or firm designated by the purchaser does not
(Va. Code § 58.1-411.) constitute delivery to the purchaser in this state, regardless
of where title passes, or other conditions of sale. (Va. Code
Line 2(b). Payroll factor: The payroll factor is a fraction, the § 58.1-415.)
numerator of which is the total amount paid or accrued in this
state during the tax period by the company for compensation, Sales, other than sales of tangible personal property, are in
and the denominator of which is the total compensation paid Virginia if: (a) the income-producing activity is performed in
or accrued everywhere during the tax period; to the extent Virginia; or (b) the income-producing activity is performed
that such payroll is used to produce Virginia taxable income in and outside of Virginia and a greater proportion of this
and is effectively connected with the conduct of a trade or activity is performed in Virginia than in any other state, based
business within the United States, and the income derived is on costs of performance. (Va. Code § 58.1-416.)
includible in federal taxable income. (Va. Code § 58.1-412.) Hybrid Sales Factor for Certain Property Information and
“Compensation” means wages, salaries, commissions, and Analytics Firms
any other form of remuneration that is paid or accrued to Qualified property and analytics firms may source sales of
employees for personal services. (Va. Code § 58.1-302.) services using market-based sourcing but must otherwise
Compensation is paid or accrued in this state if: follow the standard three-factor apportionment formula with
sales weighted twice. Under market-based sourcing, sales
(a) the employee’s service is performed entirely within of services are in the Commonwealth if they are derived
the state; or from transactions with a customer or client who receives
(b) the employee’s service is performed both within the benefit of the services in the Commonwealth. This rule
and without the state, but the service performed will apply regardless of the location of the firm’s business
without the state is incidental to the employee’s operations. All other sales continue to be sourced based on
service within the state; or cost-of-performance. Be sure the box at the top of the form is
checked to indicate the company qualifies to use the hybrid
(c) some of the service is performed in the state and:
sales factor to calculate apportionable sales.
(i) the base of operations or, if there is no base of
Prior to using the hybrid sales factor on the return, companies
operations, the place from which the service is
must enter into a Memorandum of Understanding with the
directed or controlled is in the state; or
Virginia Economic Development Partnership. A qualified
(ii) the base of operations or the place from which the property information and analytics firm is an entity and its
service is directed or controlled is not in any state affiliated entities that as of January 1, 2022, is primarily a
in which some part of the service is performed, commercial real estate information and analytics firm with a
but the employee’s residence is in this state. (Va. location in an eligible city and that between January 1, 2022,
Code § 58.1-413.) and January 1, 2029, is expected to:
Line 2(c): Sales factor. The sales factor is a double- (i) make or cause to be made a capital investment in an
weighted in the three-factor formula which consists of sales, eligible city of at least $414.45 million and
property and payroll factors. The sales factor is a fraction,
(ii) create at least 1,785 new jobs with average annual
the numerator of which is the total sales of the company in
wages of at least $85,000 per job.
this state during the tax period, and the denominator of which
is the total sales of the company everywhere during the tax See Va. Code § 58.1-422.4.
period, to the extent that such sales are used to produce Line 2(d). Standard Apportionment Sales Factor. Multiply
Virginia taxable income and are effectively connected with Line 2c by 2 and enter the result. The sales factor is a
the conduct of a trade or business within the United States double-weighted.
and income derived is includible in federal taxable income
(Va. Code § 58.1-414). “Sales” means all gross receipts of Line 2(e). Sum of Percentages. Add Lines 2(a), 2(b), and
the company other than dividends, except that, in the case 2(d).
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Line 2(f). Multi-Factor Percentage. Line 2(e) divided by the Line 4. Apportionable Income. If domiciled in Virginia,
number 4 (double-weighted sales) reduced by the number of subtract Line 2 from Line 1. If not domiciled in Virginia,
factors, if any, having no denominator. subtract Line 3e from Line 1.
Standard apportionable income is apportioned by multiplying Alternative Method of Allocation or Apportionment
the income by a fraction, the numerator of which is the If any company believes that the method of allocation or
property factor plus the payroll factor, plus 2 times the sales apportionment administered by the Department will subject
factor, and the denominator of which is 4. However, if the it to taxation on a greater portion of its net income than is
sales factor does not exist, the denominator of the fraction reasonably attributable to business or sources within this
must be the number of existing factors. If the sales factor state, it is entitled to file with the Department a statement of
exists, but the payroll factor or the property factor does not its objections and of such alternative method of allocation
exist, the denominator of the fraction must be the number of or apportionment as it believes to be proper under the
existing factors. circumstances with such detail and proof and within such
Section C – Allocable and Apportionable Income time as the Department may reasonably prescribe. If
the Department concludes that the method of allocation
Line 1. Total of Taxable Income Amounts. Enter Total of
or apportionment employed is, in fact, inapplicable or
Taxable Income Amounts from Form 502, Line 1.
inequitable, it must redetermine the taxable income by such
Line 2. Dividends. If the commercial domicile is in Virginia, other method of allocation or apportionment as seems best
enter the dividends received. Also, enter this amount on calculated to assign to Virginia for taxation the portion of
Form 502, Line 4. the income reasonably attributable to business and sources
Line 3(a). Dividends-Commercial Domicile Is Not within the Virginia, not exceeding, however, the amount
Virginia. If the PTE’s commercial domicile is not in Virginia, which would be arrived at by application of the statutory
enter the dividends received. rules for allocation or apportionment. (Va. Code § 58.1-421.)
Line 3(b). Nonapportionable Investment Function A company requesting permission to use an alternative
Income. Enter the nonapportionable investment function method of allocation or apportionment of income must
income from assets producing income serving an investment comply with Virginia Corporation Income Tax Regulation
function unrelated to the operational functions of the 23 VAC 10-120-130. The policy of the Department is that
business. the statutory method is the most equitable method of
determining the portion of a multistate company’s income
Line 3(c). Subtotal. Add Lines 3a and 3b. that is attributable to business activity in Virginia. Permission
Line 3(d). Nonapportionable Investment Function Loss. to use an alternative method of allocation and apportionment
Enter the nonapportionable investment function loss from will be granted only in extraordinary circumstances.
assets that are producing losses from an investment function
unrelated to the operational functions of the business.
Line 3(e). Allocable Income. Subtract Line 3d from Line 3c.
Enter the amount on Form 502, Line 5.
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