Virginia joins other states who have adopted state and local tax (SALT) workarounds to the $10,000 federal deduction limit on an individual’s federal income tax return. PTE owners in a growing number of states can now decrease the impact of the $10,000 SALT cap introduced in the 2017 Tax Cuts and Jobs Act (TCJA).
A PTE will be able to make an annual election for Taxable Years 2021 through 2025 to pay an income tax at a rate of 5.75 percent at the entity level. A PTE that qualifies to make the election (a qualifying PTE) is one that is 100 percent owned by natural persons or, in the case of a Subchapter S corporation, 100 percent owned by natural persons or other persons eligible to be shareholders in an S corporation. The legislation then provides a corresponding refundable income tax credit for Taxable Years 2021 through 2025 for any amount of income tax paid by a qualifying PTE. The effect of such elective income tax and corresponding refundable credit is to allow the qualifying PTE to shift the income tax burden from the PTE owners to the PTE itself.
Due to the timing of the legislation and because the filing season for Taxable Year 2021 is already under way, the Department is required to delay implementation of the elective PTE tax until at least October 15, 2023. Therefore, qualifying PTEs will not be able to make an election, nor will they be able to pay the tax for 2021 income tax returns by the original or extended due date. Similarly, owners of a qualifying PTE will not initially be allowed to claim the refundable income tax credit allowed by this legislation on their Taxable Year 2021 return by the original or extended due date. As a result, qualifying PTEs and their owners should file their Taxable Year 2021 returns and make any required tax payments as they normally would by the applicable due dates under current law in order to avoid penalties and interest. Before October 15, 2023, Virginia will publish guidelines regarding how to make the election retroactively for Taxable Year 2021.
In addition to establishing a new Virginia elective PTE tax, the new legislation allows taxpayers to claim a credit on their individual income tax return for certain taxes paid by a PTE under another state’s substantially similar PTE tax structure for Taxable Years 2021 through 2025. This provision of the legislation overrules previous rulings which denied a credit for a tax paid to other states such as Maryland under that state’s elective pass-through entity tax. Unlike the new elective PTE tax, the implementation of this provision is not delayed. Therefore, taxpayers may claim a credit on their Taxable Year 2021 individual income tax returns for taxes paid by the PTE under another state’s substantially similar PTE tax structure in proportion to their ownership in such PTE.
UHY will continue to monitor these and any other potential tax law changes and provide updates as new information is released. If you have any questions about how this affects you, please reach out to a UHY professional.