By Terry Barrett, CPA, Tax Senior Manager | State and Local Tax Team
Unitary Business Reporting Requirement: Details, Deadlines, and Penalties
As a result of Virginia General Assembly action, corporations that are members of a unitary business are required to file a report on certain unitary tax information by July 1, 2021. Failure to file these pro forma reports will subject the corporate taxpayer to substantial penalties.
Unitary Business Information Reporting Requirements in Virginia
The recent budget approved by Governor Northam and the General Assembly for Fiscal Year 2020-2022 included a reporting requirement for certain corporations filing tax returns in Virginia. Failure to timely comply with the requirements by qualifying corporations may be costly – up to a $10,000 penalty — thus focus on this matter is highly recommended.
Over the past few years, legislation requiring mandatory unitary combined reporting for corporations has been introduced in the General Assembly. This year, the legislative body determined further study is required and as part of that further study has mandated certain informational reporting requirements. Specifically, corporations that are members of a unitary business must file an informational report, in a format prescribed by the Tax Commissioner, which contains the unitary combined net income of the group based on taxable year 2019 computations. The report must include, at a minimum, the difference in tax owed as a result of filing a unitary combined report, computed according to methods prescribed by the Tax Commissioner, compared to the tax owed under the current filing requirements. Read more details regarding the requirement on the Virginia Department of Taxation’s website.
What is a Unitary Business?
A “unitary business” is defined for purposes of the reporting requirement as “a single economic enterprise comprised either of separate parts of a single business entity or a commonly controlled group of business entities that are sufficiently interdependent, integrated, and interrelated through their activities so as to provide a synergy and mutual benefit that produces a sharing or exchange of value among them and a significant flow of value to the separate parts.” It also includes “that part of the business that meets the above definition and is conducted by a taxpayer through the taxpayer’s interest in a partnership, whether the interest in that partnership is held directly or indirectly through a series of partnerships or other pass-through-entities.”
What businesses are excluded from the reporting requirement?
Excluded from a “unitary business” and the informational returns are entities subject to the insurance premiums license tax or the bank franchise tax, as well as a foreign corporation if it has 80% or more of its average property, payroll, and sales factors outside the United states. Foreign corporation income subject to the provisions of a federal income tax treaty is also excluded.
Due Dates and Penalties
As noted above, the information reports are due on or before July 1, 2021, in a format prescribed by the Tax Commissioner. A penalty of $10,000 will be imposed for failure to timely file (no extensions allowed) or for materials omissions or misstatements. The Tax Commissioner does have the authority to waive the penalty upon a determination that the requirement would cause an undue hardship. The Tax Commissioner is to report back to the General Assembly by December 1, 2021, information gathered through this reporting process. Learn more regarding due dates and penalties.
Unitary Combined Reporting in Other States
The current trend is for states to require unitary combined reporting with 28 states having such requirement. Virginia is in the minority of states with its option for corporations to file on a separate, combined, or consolidated basis. Of its neighboring states/taxing jurisdictions, the District of Columbia, Kentucky, and West Virginia require unitary combined reporting; Delaware, North Carolina, and Tennessee generally require separate reporting; and Maryland currently is considering legislation to change from separate to mandatory combined reporting. Based upon the information gathered by the Tax Commissioner and results of the study on mandatory combined reporting, Virginia may be joining the majority of states – time will tell.
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.