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- When Does the Virginia PTE Tax Election Become Effective?
- What is the PTE Tax Election?
- When Can You Make the Virginia PTE Election?
- Don’t Claim the Credit Just Yet…
- Tax Credit for Individual 2021 Tax Returns
Key Details: Governor Youngkin signed S.B. 692 into law on April 11, 2022. S.B. 692 allows qualifying pass-through entities (PTE) to make an annual election for taxable years 2021 through 2025 to pay, at the entity level, a Virginia state income tax rate of 5.75%.
This PTE Tax Election legislation is intended to be used as a workaround for the $10,000 federal limitation for individuals to deduct state and local taxes (SALT), making Virgnia the 24th state to enact this election. As this legislation brings about various questions or concerns, businesses and individuals are encouraged to contact Ryan & Wetmore for more information.
When Does the Virginia PTE Tax Election Become Effective?
S.B. 692 was enacted on April 11, 2022, and becomes effective on July 1, 2022. Once in effect, a qualifying PTE can make an annual election to be taxed at the entity level.
What is the PTE Tax Election?
Under Virgnia’s new law, a qualifying pass-through entity is defined as one that is 100% owned by natural persons or other persons eligible to be shareholders for an S Corporation.
The PTE elective tax rate is set at 5.75%, Virgnia’s highest individual income tax rate. Furthermore, owners of PTE’s who have made the election are able to receive a refundable credit that offsets their personal Virginia income tax liability. However, electing PTE owners must add-back federal state tax deductions that are attributable to the elective PTE tax. Electing PTEs are also entitled to the credits, deductions, and other adjustments the owners would be entitled to receive had the PTE election not been made.
When Can You Make the Virginia PTE Election?
The procedures and process for making the PTE election will be made available at a later date. For tax years beginning on or after January 1, 2021, the legislation details that the date to make the election can be “no earlier than one year after the extended due date for filing the applicable return”.
Furthermore, no interest will accrue on under/overpayments attributable to making the election for tax year 2021. For tax years beginning on or after January 1, 2022, and before January 1, 2026, the election will be annual and will be made with the qualifying PTEs timely filed return by due date (including extensions).
Additionally, for tax years beginning on or after January 1, 2021, and before January 1, 2026, the legislation provides Virginia resident owners with other state tax credits for the amount of state income taxes that are paid by the electing PTE to another state with similar legislation.
Don’t Claim the Credit Just Yet…
The Virginia Tax Bulletin regarding the PTE election (dated April 15, 2022) notes that taxpayers should not pay their elective PTE tax with their taxable year 2021 returns as the Department is unable to accept or process this PTE election tax at this time. As such, individuals should not claim a credit for their elective tax paid by the PTE to Virginia. Attempting to claim the credit could lead to penalties and an assessment of interest. Taxpayers can expect guidance from the Department by October 15, 2023.
Tax Credit for Individual 2021 Tax Returns
The legislation also provides taxpayers with the ability to claim a credit on their individual tax return for certain taxes that are paid by a PTE under another state’s PTE tax structure. This is applicable to states that have a substantially similar PTE tax structure for taxable years 2021 through 2025.
The implementation of this provision is not delayed unlike the new PTE election. Therefore, taxpayers can claim a credit on their individual income tax returns for taxable year 2021 for taxes that were paid by a PTE under another state (in proportion to their ownership in the PTE). Taxpayers who have already filed their 2021 income tax return and who want to make an adjustment are encouraged to review the Department’s website for instructions on filing an amended return.
Individuals and businesses will need to monitor S.B. 692 and work with experts regarding estimated tax payments and the process for claiming the credit retroactively for 2021. Furthermore, taxpayers are encouraged to review current guidance from the department regarding the limitations to claiming credits mentioned above for 2021. For further information, clarity, and support, contact Ryan & Wetmore today.
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Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
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About Rosie Cheng
Rosie Cheng is a Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie graduated from Georgetown University with a Master of Science in Management and from William and Mary with a Bachelor of Business Administration.