Virginia Pass-Through Entity Tax Guidance Summary

Pass-through entity tax guidance issued by the Virginia Department of Taxation

PTET Overview

In 2022, the Virginia General Assembly enacted legislation authorizing a “SALT Cap workaround” or elective pass-through entity level (PTE) tax. The PTE law effectively allows 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 the individual income tax rate of 5.75%. Certain entity owners are allowed a corresponding refundable income tax credit for the tax paid by the entity. The legislation also allowed individuals to claim a credit for taxes paid to other states when those other states have laws similar to Virginia’s. The PTE law has also been tweaked by the General Assembly since its original enactment.

Given the retroactive nature of the legislation (effective for taxable year 2021) and the complexities of the issues involved, the Department of Taxation (TAX) has only recently released its final guidelines on the PTE tax. This was after much consultation with the Virginia accounting community through the Virginia Society of CPAs.

*Note that the PTE tax (PTET) provisions expire after Taxable Year 2025. Also, there are different guidelines for Taxable Year 2021 and Taxable Years 2022 through 2025.

Highlights of the general PTET provisions

The following highlights some of the general provisions.

Making the election for 2022 through 2025

Paying the tax at the PTE level is optional and must be done annually. The PTE may make the election to pay the PTET at the entity level by doing one of the following for the taxable year:

• Making an estimated payment of the tax;
• Making an extension payment of the tax; or
• Filing a PTE return (Form 502PTET) on or before the extended due date.

Once the Form 502PTET has been filed, the election is binding for that year. However, if that return has not been filed the PTET election can be revoked by filing the Form 502.

Making the election for 2021?

See Filing and Payments section below for the special rules that apply for making the election in taxable year 2021.

*Note that an election to file at the entity level is binding on all eligible owners.

Eligible PTEs and owners

Any PTE can make the PTE election. A PTE is defined in TAX’s guidelines and the Code of Virginia as

any entity, including a limited partnership, a limited liability partnership, a general partnership, a limited liability company, a professional limited liability company, a business trust, or a Subchapter S corporation, that is recognized as a separate entity for federal income tax purposes, in which the partners, members, or shareholders report their share of the income, gains, losses, deductions, and credits from the entity on their federal income tax returns or make the election and pay the tax levied pursuant to Va. Code § 58.1-390.3.

Only the pro rata or distributive share of income, gain, loss, or deduction attributable to eligible owners is subject to the PTET.

An “eligible owner” is defined in the guidelines and the Code of Virginia as

any entity, including a limited partnership, a limited liability partnership, a general partnership, a limited liability company, a professional limited liability company, a business trust, or a Subchapter S corporation, that is recognized as a separate entity for federal income tax purposes, in which the partners, members, or shareholders report their share of the income, gains, losses, deductions, and credits from the entity on their federal income tax returns or make the election and pay the tax levied pursuant to Va. Code § 58.1-390.3.

Electing PTEs must provide a Schedule VK-1 to each of its owners annually but note that the PTET credit may be distributed only to eligible owners.

Owners claiming a credit

Eligible owners may claim a refundable PTET credit against their Virginia individual or fiduciary income tax. Estates or trusts, other than a trust disregarded for income tax purposes, may claim the full PTET credit on their fiduciary income tax returns but may not distribute any portion of the credit to beneficiaries. Electing PTEs must issue the Schedule VK-1s before eligible owners may claim the PTET credit on their returns.

Credit for taxes paid to other states

Credit is allowed on the individual income tax returns of eligible owners for certain taxes paid by a PTE to another state to the extent the other state’s PTE tax law is similar to Virginia’s. The credit for the taxes paid, however, does not apply to state or local entity level taxes such as franchise, privilege, business license, or other similar taxes. It is important to note that the credit may not be the full amount of the allocated PTET paid to the other state because of Virginia’s computation of credit limitations. See the guidelines for clarification.

Filing and payment requirements

Taxable Year 2021 – Special Rules Apply

A PTE has the option to make a retroactive PTET election and pay the PTET for that taxable year by:

• Submitting the 2021 Form 502PTET, including all owner credit allocation information ELECTRONICALLY via Virginia’s Tax Online Services for Businesses platform, and
• Making all payments for 2021 electronically concurrent with the 502PTET filing.

Since the PTE law was not enacted until the 2021 tax filing season, very limited guidance was issued by TAX and PTE returns reporting the tax at the entity level could not be filed. However, the PTET return for taxable year 2021 may be filed NOW and again must be filed electronically. The 2021 return will not be accepted by TAX without full payment of the tax due and no extensions or late filing options are available for 2021 returns.

*Note that owners are not allowed to amend their 2021 returns to claim the PTET credit. TAX guidelines provide that as a convenience to taxpayers, any retroactive 2021 PTET credit will be reported exclusively on the owners’ returns for Taxable Year 2023.

Taxable Year 2021 PTET returns and payments of tax are due no later than September 16, 2024.

Taxable Year 2022

The filing extension deadline for Tax Year 2022 calendar year filers was October 16, 2023. The tax must have been paid in full by the due date to avoid penalties and interest. If payments have not yet been made, they should be in order to avoid the accrual of additional interest and penalties.

Taxable Year 2023

Entities may now file their Taxable Year 2023 PTET forms. Of note is that starting taxable year 2023, electing PTEs were required to make estimated payments.

Resource for Deadlines and Updates

Access the Virginia Department of Taxation’s Elective Pass-Through Entity Tax page for up-to-date information on:

• Eligibility
• Requirements
• Electronic filing
• Submitting payments

Do you have PTET questions specific to you and your business? Please reach out to your Keiter Opportunity Advisor. We are happy to help you navigate eligibility and filing requirements.