500AB: Schedule of Related Entity Add Backs and Exceptions (2024)
Virginia · Virginia Tax · Used for tax years 2024
Virginia Schedule 500AB reports interest, royalties, and other intangible expense payments made to related entities. It calculates exceptions for qualifying intangible expense payments and the net addition to report on Schedule 500ADJ. Enclose it with your Virginia Corporation Re
Who files this form
Schedule 500AB is used to report a taxpayer’s interest, royalty, and other intangible expense payments to related entities, along with qualifying exceptions for intangible expense payments.
The 2024 schedule directs taxpayers to enclose it with their Virginia Corporation Return, Form 500.
What you'll need
Have the following information ready:
- Your name as shown on the Virginia return, FEIN, and number of related entities.
- Each related entity’s name, FEIN, jurisdiction where organized, and jurisdiction of commercial domicile.
- Interest, royalty, and other intangible expense payments made to each related entity.
For exceptions claimed in Part II, you also need:
- Exception 1, Subject to tax: The related entity’s gross revenues, jurisdictions where it paid tax measured by net income or capital, tax types, and amounts attributable to royalties and other intangible income. Enclose copies of the tax returns filed. Schedules and supplemental forms may be omitted.
- Exception 2, One-Third Revenue: The related entity’s gross revenues, the three unrelated parties paying it the most royalties, amounts paid by those parties and all other unrelated parties, and your qualifying royalty payments made at comparable rates and terms.
- Exception 3, Conduit: The unrelated party’s name, royalties the related entity paid to that party for the same intangible property, and a description of the licensing transactions’ purpose.
Enclose a separate sheet if you need more space for an exception.
How to file
Enclose Schedule 500AB with your Virginia Corporation Return, Form 500. The supplied form does not provide a mailing address or e-file instructions.
To complete the schedule:
- List related entities and payments in Part I, then total interest and intangible expense payments on Lines 4a and 4b.
- Complete any applicable exceptions in Part II. Transfer the totals for Exceptions 1, 2, and 3 to Part I, Lines 5, 6, and 7.
- Add Lines 5, 6, and 7. Enter the total on Line 8 and Form 500, Question A.
- Subtract Line 8 from Line 4b to get the net addition for royalties and other intangibles on Line 9.
- Add Lines 4a and 9. Enter the total on Line 10 and Schedule 500ADJ, Section A, Line 3.
Common mistakes
- Leaving out the schedule: The form reminds you to enclose Schedule 500AB with Form 500.
- Omitting tax return copies for Exception 1: Enclose copies of the related entity’s tax returns filed in the listed jurisdictions. Schedules and supplemental forms may be omitted.
- Treating offset income as taxed under Exception 1: If the related entity filed a consolidated or combined return with the taxpayer in the other state or foreign country, the recipient’s income and taxpayer’s deduction offset each other, and no tax is deemed paid.
- Leaving the transaction purpose unexplained for Exception 3: Describe the licensing transactions to demonstrate that avoiding tax was not their principal purpose.
Questions people ask
Which exceptions does Part II list?
Part II lists three exceptions applicable to royalties: Subject to tax, One-Third Revenue, and Conduit.
Can I omit schedules when attaching tax returns for Exception 1?
Yes. The form requires copies of the tax returns filed but says schedules and supplemental forms may be omitted.
What payments do I enter for Exception 2?
Enter the royalties you paid to the related entity at rates and terms comparable to its agreements with unrelated parties. Identify the three unrelated parties paying the highest royalty amounts and report amounts paid by them and all other unrelated parties. The form also sets a one-third-of-gross-revenues condition for this exception.
What must I show for the Conduit exception?
Identify the unrelated party that received royalties from the related entity for the same intangible property licensed to you. Enter the royalties the related entity paid to that party and explain the licensing transactions’ purpose to demonstrate that tax avoidance was not the principal purpose.
What if I need more room to explain an exception?
Enclose a separate sheet. The form permits this for each of the three exceptions.