FISCAL NOTE

Date Requested: February 28, 2019
Time Requested: 02:49 PM
Agency: Tax & Revenue Department, WV State
CBD Number: Version: Bill Number: Resolution Number:
2732 Comm. Sub. HB2807
CBD Subject: Taxation


FUND(S):

General Revenue Fund

Sources of Revenue:

General Fund

Legislation creates:

Decreases Existing Revenue, Increases Existing Expenses



Fiscal Note Summary


Effect this measure will have on costs and revenues of state government.


The purpose of this bill is to provide a reducing modification to the West Virginia adjusted gross income of a shareholder of a Subchapter S corporation or a limited liability company engaged in banking business in this state and making the modification retroactive with respect to tax years beginning on or after January 1, 2018. According to our understanding, the provisions of this bill attempt to address a recent administrative policy change made by the State Tax Department affecting the Personal Income Tax liability of shareholders of S corporations in the banking business. Passage of this bill seeks to codify the Department’s previous policies. The proposed bill would provide a retroactive codified additional modification reducing the West Virginia adjusted gross income for shareholders of S corporations or limited liability companies in the banking business for tax years beginning on or after January 1, 2018. The shareholders proportional share of all items of income, loss, deduction or credit of the S corporation can be further reduced in the calculation of their West Virginia adjusted gross income by the percentage of the S corporations’ assets that are the following: • Obligations or securities of the United States, West Virginia and any political subdivision or authority of West Virginia • Investments or loans primarily secured by mortgages, or deeds of trust, on residential property located in West Virginia • Loans primarily secured by a lien or security agreement on residential property in the form of a mobile home, modular home or double-wide located in West Virginia. The tax loss value of the proposed modification would be roughly $400,000 in FY2020 and each fiscal year thereafter. The provisions of this bill are similar to existing provisions for financial organizations subject to the Corporation Net Income Tax. However, taxpayers subject to the Personal Income Tax are able to directly reduce their taxable income through a subtraction of any income due to tax-exempt federal obligations and State obligations interest. C-corporations calculate their deduction for tax-exempt interest only by way of the asset allocation formulas as generally outlined in the bill. The provisions of this bill would provide qualifying shareholders of financial organizations organized as an S-corporation with a double tax modification for tax-exempt interest. Additional administrative costs incurred by the State Tax Department would be $45,000 in FY2020 and $20,000 in each fiscal year thereafter.



Fiscal Note Detail


Effect of Proposal Fiscal Year
2019
Increase/Decrease
(use"-")
2020
Increase/Decrease
(use"-")
Fiscal Year
(Upon Full
Implementation)
1. Estmated Total Cost 0 45,000 20,000
Personal Services 0 20,000 20,000
Current Expenses 0 0 0
Repairs and Alterations 0 0 0
Assets 0 0 0
Other 0 25,000 0
2. Estimated Total Revenues 0 -400,000 -400,000


Explanation of above estimates (including long-range effect):


According to our understanding, the provisions of this bill attempt to address a recent administrative policy change made by the State Tax Department affecting the Personal Income Tax liability of shareholders of S corporations in the banking business. Passage of this bill seeks to codify the Department’s previous policies. The proposed bill would provide a retroactive codified additional modification reducing the West Virginia adjusted gross income for shareholders of S corporations or limited liability companies in the banking business for tax years beginning on or after January 1, 2018. The shareholders proportional share of all items of income, loss, deduction or credit of the S corporation can be further reduced in the calculation of their West Virginia adjusted gross income by the percentage of the S corporations’ assets that are the following: • Obligations or securities of the United States, West Virginia and any political subdivision or authority of West Virginia • Investments or loans primarily secured by mortgages, or deeds of trust, on residential property located in West Virginia • Loans primarily secured by a lien or security agreement on residential property in the form of a mobile home, modular home or double-wide located in West Virginia. The tax loss value of the proposed modification would be roughly $400,000 in FY2020 and fiscal years thereafter. The provisions of this bill are similar to existing provisions for financial organizations subject to the Corporation Net Income Tax. However, taxpayers subject to the Personal Income Tax are able to directly reduce their taxable income through a subtraction of any income due to tax-exempt federal obligations and State obligations interest. C-corporations calculate their deduction for tax-exempt interest only by way of the asset allocation formulas as generally outlined in the bill. The provisions of this bill would provide qualifying shareholders of financial organizations organized as an S-corporation with a double tax modification for tax-exempt interest. Additional administrative costs incurred by the State Tax Department would be $45,000 in FY2020 and $20,000 in each of the fiscal years thereafter.



Memorandum


The purpose of this bill is to provide a reducing modification to the West Virginia adjusted gross income of a shareholder of a Subchapter S corporation or a limited liability company engaged in banking business in this state and making the modification retroactive with respect to tax years beginning on or after January 1, 2018. The bill states that the fraction is being multiplied against the shareholder’s “West Virginia adjusted gross income;” however, in §11-21-17a, it states that the modification must be used to determine the taxpayer’s West Virginia adjusted gross income. Also, it appears to state that the shareholder’s West Virginia adjusted gross income will be reflected on the K-1 received by the shareholder, but the West Virginia adjusted gross income is determined after modification to the federal adjusted gross income. Also, the focus on the shareholder of the S Corporation or member of the LLC may add some confusion, as it is unclear how a shareholder would produce the necessary documentation to support taking this modification, such as residential loan information. It would appear that this modification may need to be stated on the Pass-Through Entity Return to document what the shareholders are entitled to take. There is also a reference in line 33 to W. Va. Code §11-21-37c(f). That Code section does not appear to exist, this may be a typographical error. The Com Sub also added reference to W. Va. Code §11-24-6, which seems redundant when the whole equation from that Code section is in subsection (a) of the bill. Also, the Com Sub does not clarify to which adjustment under W. Va. Code §11-24-6 it refers. The Com Sub probably means W. Va. Code §11-24-6(f), but this could cause problems, as there are many adjustments listed under that section. The Com Sub refers to W. Va. Code §11-14-6 while discussing the special apportionment rules for financial organizations, so W. Va. Code §11-24-7b may be the proper reference. The bill title does not indicate the internal effective date of January 1, 2018. The bill is retroactive and that needs to be stated in the bill title.



    Person submitting Fiscal Note: Mark Muchow
    Email Address: kerri.r.petry@wv.gov