By Keiter CPAs
What New Tax Legislation is Impacting Virginians?
There were several tax provisions impacting Virginia individuals and businesses that were passed during the 2022 General Assembly. The following is a summary of some of the key provisions. Several additional tax provisions are still pending/under consideration by the General Assembly and Governor as part of the state’s budget.
In keep with its tradition of annual conformity to the Internal Revenue Code Virginia updated its conformity to the Internal Revenue Code as December 31, 2021 with certain exceptions. A summary of key provisions of the conformity bills, may be found in our blog on the Virginia income tax conformity updates.
Elective Pass-through-Entity Level (PTE) Tax (SALT Cap Workaround) and Credit for Taxes Paid to Other States
New legislation permits qualifying pass-through entities, for taxable years 2021 through 2025, to make an annual election to pay an entity level income tax for the period covered by the return at a rate of 5.75%. A corresponding refundable tax credit on individual or fiduciary tax returns is available to owners of pass-through entities that made such an election and paid the elective entity level income tax. The legislation also provides that individual income taxpayers may claim a credit for entity level taxes paid to other states, also for taxable years 2021 through 2025.
The Virginia Department of Taxation issued Tax Bulletin 22-6, which provides additional information regarding this entity level tax and credit for taxes paid to other states.
For the PTE, the Department of Taxation advises:
“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, the Department will publish guidelines regarding how to make the election retroactively for Taxable Year 2021. A qualifying PTE will then be permitted to make an election and pay the entity-level tax for Taxable Year 2021 according to the guidelines published by the Department. In addition, owners of a qualifying PTE will be allowed to claim the refundable income tax credit for Taxable Year 2021 according to such guidelines. The guidelines will also address the implementation of this legislation for Taxable Years 2022 through 2025.”
The Tax Bulletin stresses:
**Pass through entities should not try to pay the elective PTE tax with the TY 2021 returns. The Dept. of Taxation cannot process the elective PTE tax at this time.**
**Individual owners should not try to claim a credit for the elective tax paid by the PTE to VA.**
Additional guidance regarding the PTE will be issued by the Department of Taxation later this year.
For the Credit for Taxes Paid to Other States, the Department of Taxation advises:
“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. Taxpayers who have already filed a Taxable Year 2021 Virginia income tax return but need to make an adjustment should consult the instructions for the appropriate income tax return and the Department’s website for further information regarding the filing of an amended return.”
Note that the credit is only for taxes paid by a pass through entity to another state where the law (tax) is similar to Virginia’s. It does not apply to other types of entity-level taxes like privilege, business, license, or occupation taxes.
Income Tax Credits:
Community of Opportunity Income Tax Credit: Legislation expands the eligibility for the “community of opportunity” income tax credit for participating landlords to all Virginia census tracts in which less than 10% of the residents live below the poverty level, as defined by the U.S. Government, and determined by the most recent U.S. census. Previously the credit has been limited to census tracts in the Richmond Metropolitan Statistical Area, the Virginia Beach-Norfolk-Newport News Metropolitan, and Washington-Arlington-Alexandria Metropolitan Statistical Areas in which less than 10% of the residents live below the poverty level. House Bill No. 402 (c. 252), effective 07/01/2022
Virginia Worker Training Tax Credit: The sunset date of the worker training tax credit, including that portion of the credit that is for a business primarily engaged in manufacturing, was extended from July 1, 2022, to July 1, 2025. In addition, the definition of “eligible worker training” was expanded to include qualifying courses at any Virginia public institution of higher education. House Bill No. 695 (c. 431), effective 07/01/2022
Permission to Change Basis of the Type of Income Tax Return Filed
Under new legislation, an affiliated group that has filed on the same basis for at least the preceding 12 years may change the basis of the type of return filed from consolidated to separate or from separate or combined to consolidated if it meets certain conditions. Under current law, an affiliated group must have filed on the same basis for 20 years to request a change the basis of the type of return filed.
The Virginia Department of Taxation has the statutory authority to grant or deny requests by corporations to change their Virginia tax filing status. The Department traditionally has disallowed the switching to or from the consolidated filing status because it affects the allocation and apportionment formulas and may distort the business done in Virginia and the income arising from activity in Virginia. However, since separate and combined returns do not affect the allocation and apportionment formulas for each corporation the Department generally has granted permission to change from separate to Virginia combined returns or from Virginia combined to separate returns.
The legislation is effective July 1, 2022, and applications to change the filing basis may be filed with the Department on or after July 1, 2022.
Additional Business Interest Deduction
Although Virginia conformed to the 2017 Tax Cuts and Jobs Act’s (“TCJA”) amendments to the Internal Revenue Code Section 163(j) business interest deduction limitation, the state did not conform to the subsequent increase in the limitation for the 2019 and 2020 tax years from 30% to 50% under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act passed by Congress in 2020. Rather, Virginia-specific deduction has been limited to 20% of the amount of business interest that is disallowed as a deduction under the business interest limitation. New legislation provides that for tax years beginning on or after January 1, 2022, Virginia’s additional individual and corporate income tax deduction for business interest expense disallowed as a deduction under Section 163(j) is increased from 20% to 30%.
Sales and Use Tax
Exemption for Aircraft Components Extended and Clarified
New legislation extends the effective date for the exemption from the Virginia retail sales and use tax for certain aircraft parts and supplies. Specifically, the legislation extends from July 1, 2022, through June 30, 2025, the exemption for parts, engines, and supplies used in maintaining, repairing, or reconditioning aircraft or an aircraft’s avionics system, engine, or component parts. The extended exemption continues to apply to unmanned systems but is applicable only to manned systems (such as drones) with a maximum takeoff weight of at least 2,400 pounds.
See our blog on Virginia sales tax exemptions for aircrafts for more information.
Exemption for Medicines and Drugs Purchased by Veterinarians
Effective July 1, 2022 through June 30, 2025, veterinarians will be entitled to an exemption from sales and use tax on the purchases of prescription medicines and drugs that are administered or dispensed to patients within a veterinarian-client-patient relationship, as well as those that are resold to pet-owners. See our blog on sales tax exemptions for Virginia Veterinarians for more information.
Effective July 1, 2022, new legislation expands the sales tax exemption for broadcasting equipment to include “network equipment.” “Network equipment” is defined broadly in the legislation to include equipment like modems, fiber optic cables, coaxial cables, radio equipment, routing equipment, switching equipment, a cable modem termination system, associated software, transmitters, power equipment, storage devices, servers, multiplexers, and antennas, when the network is used to provide Internet service, regardless of whether the provider of the service is a telephone common carrier or the network is also used to provide services other than Internet services.
New Class of Personal Property Allowed for Localities
Applicable to tax years beginning on or after January 1, 2022, but before January 1, 2025, new legislation provides for the creation of a new class of tangible personal property for local personal property tax purposes. The new class includes most automobiles, passenger trucks, motor vehicles with specially designed equipment for use by the handicapped, motorcycles, mopeds, all-terrain vehicles, off-road motorcycles, campers, and other recreational vehicles. This will give localities the flexibility to assign a different tax rate to this class of property than that levied on other tangible personal property. Under current law most passenger vehicles are classified and taxed as general tangible personal property.
Additional Information Required on Bills from VA TAX
Beginning January 1, 2023, the Virginia Department of Taxation will be required to identify on assessments for omitted tax the date the initial tax return or payment was received by the Department, any payments received from a taxpayer, and an explanation of the taxes, penalties, and interest related to such assessment. This information will allow taxpayers and tax practitioners to better understand the amounts due and tax payments made, if any.
Not Tax-Related But of Interest
Prepayment of Annual Fees Allowed for LLCs
New legislation authorizes the State Corporation Commission to establish a process for domestic and foreign limited liability companies to prepay annual registration fees online for two or three years, making compliance with the payment of fees easier. This legislation is effective July 1, 2022.
As noted above several tax provisions affecting Virginia taxpayers are still under consideration by the Governor and General Assembly. We will continue to monitor these provisions.
If you have questions about the above tax changes, please reach out to your Keiter advisor.
About the Author
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.