Virginia Guidelines for Retroactive 2021 PTET Election

New guidance released for passthrough entities

Virginia has issued guidelines for passthrough entities (PTEs) to follow for the 2021 passthrough entity tax (PTET). The original laws were issued during the 2022 filing season and were retroactive to cover 2021. However, the mechanics of how to file for 2021 were only recently released via Virginia Department of Tax Guidelines.

Filing information and 2024 deadline

Virginia PTEs must file for the 2021 PTET electronically via the Department’s Business Online Services portal by September 16, 2024. The retroactive filing will then generate a PTET credit which can be claimed on the eligible owners’ 2023 income tax returns. The PTE will pass through a federal deduction in connection with the 2021 tax paid during 2024 on their 2024 returns and will also have a corresponding addback for state income tax paid on their 2024 Virginia return.

Virginia Tax has not provided a designated form for electing PTEs to provide information on the 2021 PTE credit to eligible owners. Instead, PTEs have discretion to use any format they choose so long as it includes the eligible owner’s share of the retroactive credit and instructions for claiming the credit on the Taxable Year 2023 returns. The 2021 PTET credit information should not be added to the 2023 VK-1s.

The guidelines for the retroactive 2021 filings do not specify whether the 2021 PTET credit is distributed to the eligible owners as they existed in 2021 or 2023. Therefore, the PTE can elect to distribute the 2021 credit based on its 2021 or 2023 ownership. The election must have owners’ consent and once made, is binding on all eligible owners.

What to consider before making a retroactive election

Assuming a PTE makes the retroactive filing for 2021 during 2024, each eligible owner in the PTE will likely have two years’ worth of PTET credits on their 2023 returns (assuming the PTE is also paying PTET for 2023). The net effect of the “double credit” is that unless an eligible owner has significant income outside of the PTE, the extra PTET credit will likely result in a large state tax refund at the owner level for tax year 2023.  The eligible owner will then need to assess whether the refund will be taxable on the 2024 return under federal tax-benefit ordering rules. Under many scenarios unfortunately, Virginia’s filing mechanism for 2021 PTET will likely diminish the federal benefit of the retroactive election due to taxability of resulting state tax refunds.

The intent of making a PTET election is to enable deductibility of state taxes outside of the federal itemized deduction SALT-cap of $10,000. However, under federal tax-benefit rules, taxpayers must recognize taxable income for state tax refunds that are attributable to a deductible tax expense when previously paid.  This is likely in situations where eligible owners claim two years of PTET credits on 2023 returns, thus generating a refund taxable in 2024 and potentially reducing the benefit of making the retroactive 2021 election in the first place.

Know your filing options

This is a complex scenario that necessitates each PTE and eligible PTE owner to evaluate their own situations, in conjunction with their tax advisors, prior to making the retroactive election for 2021. Other factors, such as changing PTE ownership groups, state residency and apportionment, partnership guaranteed payment structures, and complex income allocations are additional factors that should be considered before making the retroactive PTET election.

The Keiter team is available to help evaluate the Virginia retroactive PTET guidelines and applicability to your specific situation. Contact your Opportunity Advisor if you have any questions specific to your partnership tax situation.