WEST virginia legislature

2019 regular session

Committee Substitute

for

House Bill 2807

By Delegates J. Kelly, Nelson, Worrell, D. Kelly, Azinger, Criss, Caputo, Angelucci, Longstreth, N. Brown and Espinosa

[Originating in the Committee on Finance, February 19, 2019.]

A BILL to amend the Code of West Virginia, 1931, as amended, by adding thereto a new section, designated §11-21-12j; and to amend and reenact §11-21-17a of said code, all relating to creating an additional modification to the West Virginia adjusted gross income of shareholders of S corporations or members of a limited liability company engaged in business as a financial organization in this state, similar to the modification that presently exists in the code for financial organizations organized as C corporations.

Be it enacted by the Legislature of West Virginia:

ARTICLE 21. PERSONAL INCOME TAX.

§11-21-12j. Additional modification reducing federal adjusted gross income for shareholders of S corporations and members of limited liability companies engaged in banking business.

(a) For taxable years beginning on and after January 1, 2018, the West Virginia adjusted gross income of a taxpayer who is a shareholder of an S corporation or a member of a limited liability company engaged in business as a financial organization as defined in §11-24-3a(a)(14) of this code, as adjusted pursuant to §11-21-12 of this code, shall be further adjusted by multiplying that portion of the taxpayer’s West Virginia adjusted gross income attributable to the taxpayer’s proportional share of all items of income, loss, deduction or credit of the S corporation or limited liability company, as shown on the K-1 received by the taxpayer for the tax year, by a fraction equal to one minus a fraction:

(1) The numerator of which is the sum of the average of the monthly beginning and ending account balances of the S corporation or limited liability company during the taxable year (account balances to be determined at cost in the same manner that obligation’s, investments and loans are reported on Schedule L of Federal Form 1120S of the following:

(A) Obligations or securities of the United States, or of any agency, authority, commission or instrumentality of the United States and any other corporation or entity created under the authority of the United States Congress for the purpose of implementing or furthering an objective of national policy;

(B) Obligations or securities of this state and any political subdivision or authority of the state;

(C) Investments or loans primarily secured by mortgages, or deeds of trust, on residential property located in this state and occupied by nontransients; and

(D) 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 this state and occupied by nontransients.

(2) The denominator of which is the average of the monthly beginning and ending account balances of the total assets of the S corporation or limited liability company which are shown on Schedule L of Federal Form 1120S, which are filed by the S corporation or limited liability company with the Internal Revenue Service: Provided, That the adjustment allowed herein shall not be made to the extent that the adjustments provided for in this section are otherwise allowed by §11-21-12 of this code and shall not be made to adjusted gross income of a taxpayer who is a shareholder of an S corporation or a member of a limited liability company engaged in banking business if the income of the S corporation or limited liability company of which the taxpayer is a shareholder or member has been adjusted at the S corporation or limited liability company level by the adjustment authorized under §11-24-6 of this code or §11-21-37c(f) of this code for the tax year.

(b) Apportionment rules for organizations engaged in business both within and without this state. -- For taxable years beginning on and after January 1, 2018, an S corporation or a limited liability company engaged in business as a financial organization as defined in §11-24-3a(a)(14) of this code, which regularly engages in business both within and without this state shall apportion the business income component of its federal taxable income, after adjustment as provided in §11-24-6 of this code, by multiplying the amount thereof by the special gross receipts factor determined as provided in subsection (c) of this section. The adjustment provided in §11-24-6 of this code shall be made notwithstanding the fact that the entity is an S corporation or limited liability company, and not a C corporation.

(c) Special gross receipts factor. -- The gross receipts factor is a fraction, the numerator of which is the total gross receipts of the S corporation or limited liability company engaged in business as a financial organization as defined in §11-24-3a(a)(14) from sources within this state during the taxable year and the denominator of which is the total gross receipts of the S corporation or limited liability company engaged in business as a financial organization as defined in §11-24-3a(a)(14) wherever earned during the taxable year: Provided, That neither the numerator nor the denominator of the gross receipts factor shall include receipts from obligations described in §11-24-6(f)(1)(A), (B), (C) and (D) of this code.

(d) Effective date.—The provisions of this section are retroactive with respect to tax years beginning on or after January 1, 2018, the law in effect for each of those years is fully preserved as to those years, except as provided in this section.

§11-21-17a. Resident shareholders of S corporations.

(a) S corporation shareholder's modifications. -- In determining West Virginia adjusted gross income and West Virginia taxable income of a resident S corporation shareholder, any modification described in §11-21-12b. §11-21-12c, or §11-21-12d, or §11-21-12j of this code, which relates to an item of income, gain, loss or deduction shall be made in accordance with the S corporation shareholder's pro rata share, for federal income tax purposes, of the items to which the modifications relate. Where a shareholder's pro rata share of any such item is not required to be taken into account separately for federal income tax purposes, the shareholder's pro rata share of such item shall be his or her pro rata share for federal income tax purposes of S corporation taxable income or loss generally.

(b) Character of items. -- Each item of S corporation income, gain, loss or deduction shall have the same character for a shareholder under this article as for federal income tax purposes. Where an item is not characterized for federal income tax purposes, it shall have the same character for a shareholder as if realized directly from the source from which realized by the S corporation, or incurred in the same manner as incurred by the S corporation.