What’s new in Virginia for taxable year 2003!

1. What’s new in Virginia for taxable year 2003!

2. Agenda • Filing Statistics - perspective • Legislative & Form Changes • Withholding • Corporate • Individual • E-file Information • Filing Tips • Legislative Proposals Under Consideration

3. Virginia Individual Income Tax Filing Statistics Breakdown by Form Type • The 2002 760CG (paper CG + E-file) 71.62% • The 2002 760 Handprint (booklets & flats) 20.95% • In-house Electronic (Ifile & Telefile) 7.43% Note – Telefile is being discontinued after taxable year 2003 (filing season 2004) due to low participation - more taxpayers are now using either e-file or ifile. The 2003 Telefile instruction booklet will be mailed only to taxpayers who used Telefile for taxable year 2002, and it includes a notification to these participating taxpayers that the program is being discontinued.

4. TY2002 Filing Statistics - as of July 9, 2003

5. Legislative & Form ChangesTaxable Year 2003

6. Legislative Changes for TY2003Withholding Payroll Service Providers & Bulk Filers • Effective July 1, 2004 • All persons who act on behalf of 100 or more taxpayers to remit withholding payments are required to submit all withholding payments using ACH Credit • ACH Credit record format specifications adhere to CCD+TXP, NACHA standard • EFT Guide with details can be downloaded from our web site – go to www.tax.state.va.us • Tax Alert sent to PSPs for whom we have email addresses and to the National Payroll Reporting Consortium for posting on their web site. Copy can be downloaded from our web site.

7. Legislative Changes for TY2003Corporate & Individual Fixed Date Conformity • 2003 Virginia General Assembly rolled date of conformity forward to 12/31/02 with 2 exceptions • Special Bonus Depreciation – must adjust Virginia return • Net Operating Loss – 2 years for Virginia • Impact of 2003 Federal Jobs and Growth Tax Relief Reconciliation Act • Prior to JGTRRA, the annual limitation for the §179 deduction for 2003 was $25,000 and the phase-out threshold began at $200,000. • For 2003, JGTRRA increased the annual limitation to $100,000 and increased the phase-out threshold to $400,000. • Therefore, each taxpayer claiming a §179 expense deduction in which (1) the deduction was in excess of $25,000 and/or (2) property placed in service for the taxable year was in excess of $200,000, must make an adjustment on his or her Virginia return.

8. Legislative Changes for TY2003 Corporate Returns • Enterprise Zone ProgramCredit - new classification for businesses that are high in investment and limited in job creation • qualified zone investments of $50 million+ • creation of fewer than 50 permanent full-time positions • “Small qualified businesses” limited to a tax credit of 80% of tax due first year and 60% for years 2 - 10 (subject to cap of $16 million)) • “Large qualified businesses” limited to amounts negotiated with Commonwealth not to exceed limits established for small qualified businesses (subject to limit based on new state taxes that will be generated within 5 year period by creation of new positions…) • This credit is administered by the Virginia Department of Housing and Community Development • Enterprise Zones - if a state-mandated enterprise zone is scheduled to expire before the expiration of a federal-mandated enterprise zone, the state designation expiration date shall be extended to conform to the expiration date of the federal designation. Code clarified to match current interpretation - no impact

9. Legislative Changes for TY2003 Corporate Returns • Nonprofit Corporations - Filing date changed to 15th day of the 6th month following the close of the organization’s taxable year • Returns of Affiliated Corporations: Permits a group of affiliated corporations that have filed Virginia income tax returns on the same basis for at least the preceding 20 years to be granted permission by the Tax Commissioner to change the basis of the type of return filed from consolidated to separate or from separate or combined to consolidated if: • The tax computed under the affiliated group’s requested return basis would be equal or greater than the tax for the full taxable year immediately preceding the taxable year for which the requested return basis would be applicable; and • The affiliated group agrees to compute its tax liability under both the requested return basis and the elected return basis and pay the greater of the two amounts for the taxable year in which the requested return basis is effective and the immediately succeeding taxable year.

10. Legislative Changes for TY2003 Corporate Returns • Criminal Penalties - any officer of a corporation who makes a fraudulent return or statement with intent to evade the payment of taxes shall be guilty of a Class 6 felony (increased from Class 1 misdemeanor). • Credit for Employers of the Disabled - Credit expired at end of taxable year 2002. No new credits will be authorized. However, taxpayers have up to 2 years left to claim eligible carryover amounts. • Credit for Coal Cogeneration – Credit expired at end of taxable year 2001. No new credits will be authorized. However, taxpayers still have 4 years left to claim eligible carryover amounts.

11. Form Changes for TY2003 Corporate Returns • Form 500 • Nonprofit checkbox on page 1 (extended due date indicator) • Principle Business Activity Code (PBA) – now defined as a 6 digit NAIC • Most returns include a 6 digit NAIC even though Virginia has used SIC in past • Use same code as used for federal return • Instructional text - added text below line 7 regarding Line 8 and when to use • Fixed Date Conformity Line items stay the same but instructions have been updated • Form 500CR • Line 35a deleted (roll forward of fixed date conformity) • Credit for Employers of Disabled Individuals and for Coal Cogeneration – credits have expired however carryover credits may still be claimed. Form adjusted to allow for only carryover credit amounts.

12. Form Changes for TY2003 Corporate Returns • Form 500S • Amended Checkbox added to form on page 1 • PBA – see Form 500 • Fixed Date Conformity line items updated • Clean Fuel Vehicle Deduction “addition line” deleted • Section 179 adjustment “addition line” added • S-Corporation “subtraction line” deleted • Credits To Tax section lists each credit (had been free-form for 2002) • Form 500X • Capital Loss carryback checkbox added to form • For NOL, use 500NOLD • For Capital Loss carrybacks, amend using 500X • Line 2- expanded for fixed date conformity modifications • Line 8 – Payment Credit line items expanded to breakout tax paid on original return and refundable credits claimed on original return • Page 2, Part II Explanation of Changes to Income and Modifications – checkbox added to indicate if federal approval received and instructional text informing taxpayer to attach IRS Statement of Adjustment

13. Form Changes for TY2003 Corporate Returns • Form 500-NOLD • Removed Capital Loss carryback checkbox • Line 2 – Federal NOL for Year of Loss • Added Net Fixed Date Conformity Modifications (line 2b) • Added line 2c = Federal NOL minus Fixed date Conformity Modifications • Line 5 – Federal Taxable Income • Added Net Fixed Date Conformity Modifications (line 5b) • Added Line 5c = Federal Taxable Income less line 5b • Line 19 Tax Credits • broken out by nonrefundable tax credits and refundable tax credits (19a and 19b) • Subtotal line added to form (19c = 19a + 19b)

14. Legislative Changes for TY2003 Individual Returns • Subtraction for Foreign Source Income – Repealed for individual income tax. Subtraction Code 26 is no longer valid. • New Contributions: • Home Energy Assistance Fund (Refunds & Tax Dues) • 8 new School Foundations (Refunds & Tax Dues) • War Memorial and D-Day Memorial Foundation (Refunds & Tax Dues) • Historic Resources Fund - Contribution was scheduled to expire but sunset date was extended. Remains in effect as valid “refund only” contribution.

15. Legislative Changes for TY2003 Individual Returns • New Subtractions: • Peanut Quota Buyout Program - payments received in accordance with the Farm Security and Rural Investment Act of 2002 • Retroactive to TY2002 • Code = 47 • Avian Influenza - indemnification payments received by qualified poultry growers and table egg producers as a result of depopulation of poultry flocks because of avian influenza in 2002. Indemnification payments made to owners of poultry who contract with poultry growers do not qualify for the subtraction. • Retroactive to TY2002 • Code = 45 • Military Death Gratuity - payments made to survivors after September 11, 2001, to the extent included in Federal Adjusted Gross Income • Retroactive to TY2001 • Code = 46

16. Legislative Changes for TY2003 Individual Returns • Neighborhood Assistance Program Credit -eligible health care professions expanded to include professional counselors, clinical social workers, clinical psychologists, marriage and family therapists, and physical therapists. Preapproval required. • Credit for Employers of the Disabled - Credit expired at end of taxable year 2002. No new credits will be authorized. However, taxpayers have up to 2 years left to claim eligible carryover amounts. • Criminal Penalties - any individual who makes a fraudulent return or statement with intent to evade the payment of taxes shall be guilty of a Class 6 felony (increased from Class 1 misdemeanor).

17. Legislative Changes for TY2003 Individual Returns • Refund Interest - Changes start date for calculating interest due on refunds. For returns filed electronically, interest will be paid if refund not issued by 30th day following day of receipt and, for paper returns, if refund not issued by 60th day following day of receipt. Applies to current year individual income tax returns only. For prior year returns (late) filed in 2004, interest will be paid beginning on the 60th day following filing date. • For filing season 2003, VA TAX issued: • 99% of electronically filed refunds in 12 days or less • 87% of paper filed refunds in 12 days or less File electronically for the fastest refunds!!!

18. Form Changes for Taxable Year 2003The 760CG The Big Change A New Schedule - the Schedule OSC • To be used for reporting Multiple Credits for Taxes Paid to Another State • Schedule will allow for detail for credits to be claimed for 4 states on one page • 2 Additional line items for each credit - filing status claimed on other state return and indicator for taxpayer claiming credit when filing status different (e.g. joint in VA but married filing separately in other state) • Taxpayers with one credit will use ADJ - taxpayers with multiple credits will use Schedule OSC

19. Form Changes for Taxable Year 2003The 760CG Reasons for New Schedule OSC • Inconsistency among software developers when reporting detail for multiple credits as there has been no standard methodology established by Virginia • With no standard reporting method, unable to capture data efficiently either manually or using automated processing technology • At present and continuing with TY2003, VA TAX will not capture credit for taxes paid to another state – program will continue to be manually audited • Beginning with taxable year 2004, VA TAX will capture credit detail and begin implementing automated audit and review programs

20. Form Changes for Taxable Year 2003The 760CG Other Changes • Page 1 - Line 10 Deductions. Order has been changed in response to requests from Tax Professionals - will now flow as 10a Federal Itemized, 10b State/Local Income Tax, and then 10 Deductions • Page 1 - Line 23 Other Credits - New Political Contribution Credit Indicator • Page 2 - Telephone numbers moved to above Schedule ADJ/CG Part 1 for technical reasons

21. Form Changes for Taxable Year 2003The 760CG • Schedule ADJ - one code box for School Foundation Contributions eliminated (25e) • Schedule FED - Full name and address added to schedule and indicators to reflect if information in lines 1 - 10 is from the Federal Schedule C or the Federal Schedule F. • Schedule INC - added VA Account Number (not a mandatory field as is the FEIN) and a taxpayer indicator • Schedule INC - added to 2D barcode with space allotted for 10 wage statements

22. Form Changes for Taxable Year 2003The 760CG • Schedule CR, Page 4 - Credit for Employers of Disabled Individuals has expired - form will reflect that no new credits may be claimed and allow only for carryover credits to be claimed for TY2003 • Schedule CR, Page 4 - Line items for Land Preservation Credit (LPC) expanded and text changed to allow for easy reconciliation of transferred credit amounts • Credits that originated on or after January 1, 2002, may be transferred • To avoid delays when submitting returns claiming the LPC, TAX recommends that all taxpayers notify us of all new or transferred Land Preservation Credits within 60 days of donation or transfer but no later than 30 days before return submission • Use Form LPC to notify TAX of a donation or transfer – form can be downloaded from our web site at www.tax.state.va.us (go to individual or business credits section using the forms download menu) • Schedule CR, Page 2 - Line item reference errors for Foreign Source Pension Income corrected - please check your software…..

23. Form Changes for Taxable Year 2003 The TY2003 760 Handprint Changes • Whole Dollar amounts only - change also impacts 760PY, 763, 770, and 760E • Note: with Virginia requiring whole dollar rounding on its 2003 returns, 26 out of 42 states that have individual income taxes will now be requiring whole dollar rounding. • For taxable year 1998, only 13 states required whole dollar rounding – the number has doubled in 5 years. • Minor Adjustments to Schedule ADJ, contribution area • New Schedule OSC • Schedule CR wording for expired credit • Schedule CR line items updated for Land Preservation Credit

24. Form Changes for Taxable Year 2003 The 760CG Return Package and Vendor Form Specifications can be viewed at: www.tax.state.va.us Just click onto the tax professional page, then click on “Vendor Form Specifications”. You’ll be asked for a password. It’s “VA_Tax”. For line item business rules for each 760CG form or schedule, view the vendor specifications document – Appendix A. And, while you are visiting our web site, sign up to receive Tax Bulletins and Alerts via email! Just click on the Tax Professional section, and then click on “General Information”.

25. e-file!

26. Why E-file?It’s fast, accurate, and secure! • E-file is a joint federal and state program that allows you to submit both federal and state returns to the IRS electronically using commercial tax preparation software (also referred to as ELF or JELF). • VA TAX receives the returns by accessing a secure IRS site and downloading the Virginia returns daily • For each e-filed return, you will receive an acknowledgement – so you’ll know within 2 to 3 days if Virginia has accepted or rejected the return! (And, if we reject the return, we’ll provide you with a reason code so you can fix it and resubmit!) • E-filed returns have a 4.7% error rate compared to a 10.41% error rate for paper returns. And, the errors for e-filed returns are usually simple errors that can be quickly resolved without any taxpayer contact! • Refunds are issued fast – no mail delays, no manual processing at TAX to capture the return information – the return is transferred right from your computer into ours ours!

27. Individual Income TaxWhat can you file using e-file? • 760 Returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another State • Exception: may file using e-file if only credit claimed from the Schedule CR is the Political Contribution Credit • 760PY returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another State • 763 returns w/o credits from the Schedule CR or the Credit for Taxes Paid to Another State You can even file “state only” returns – check with your software developer

28. Individual Income TaxWhat cannot be filed using e-file • Amended Returns • Prior Year Returns – use iFile • Fiduciary Returns • Extension Requests – use iFile • Estimated Payments – use iFile. • Returns with certain other subtractions that require documentation • Returns with Federal Forms 4852, Substitute W2s • Returns for deceased taxpayers – including joint returns with one deceased taxpayer • Fiscal Year Returns • Returns with Schedule CR credits claimed (except for 760s when the only Schedule CR credit claimed is the Political Contribution Credit) • Returns with Credit for Taxes Paid for Another State

29. Individual Income TaxFuture E-file Enhancements • Now under consideration for e-file is the 760E. TAX cannot, however, expand e-file to include the 760E for about 2 more years because of internal restrictions and issues. • Until then, use iFile to submit individual extension requests. iFile is a TAX application that is available via our web site. iFile uses a “shared secret” method to allow access: • The taxpayer logs onto our web site and clicks on “individual” and then clicks on “File an extension”. • The taxpayer uses his or her SSN, last year’s refund or tax due amount, and zip code to “authenticate” identity. • After authentication, the taxpayer can file an extension and pay his or her tentative tax online at our web site. • Payments can be warehoused – that is, the taxpayer can select the date, up-to the due date, upon which TAX will debit the taxpayer’s bank account • Estimated payments can also be filed using iFile! Visit us at www.tax.state.va.us

30. Filing Tips • Always ensure you are using the latest version of your software • Send us original returns, single sided – not copies (of course, we prefer you e-file!) • If using software with 2D Barcode capability, do not change information on the return after you print – ALWAYS make the changes in your software and reprint • Report problems with your software to your software company – if you cannot resolve the issues with your software developer, let us know – contact Lee Mikelson at Lmikelson@tax.state.va.us • Other questions or issues, use the Tax Preparer hotline 1-804-367-9286 or send us a secure email via www.tax.state.va.us

31. Working together, we can make filing season 2004 the best ever!