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Legislation Watch: Virginia Enacts PTE Tax SALT Workaround

Earlier this month, Virginia Gov. Glenn Youngkin signed into law a new Virginia tax allowing qualifying pass-through entities (PTEs) to make an annual election to pay an elective income tax at a rate of 5.75% at the entity level, effective for taxable years after 2021 through 2025.

The bill also permits a reduction of pass-through income for Virginia business owners — subsequently lessening their federal tax liability — if the election is made at the entity level.

This tax creates savings for both entities and owners by allowing the entity to pay income tax rather than its owners, thus enacting a PTE workaround to the $10,000 cap on the federal deduction for state and local taxes (SALT) paid. This deduction limitation came from 2017’s Tax Cuts and Jobs Act (TCJA) and impacts an individual’s itemized SALT deductions for taxable years through January 1, 2026.

The Virginia Department of Taxation published initial guidance on the annual PTE election on April 15, stating that due to the legislation’s timing, the department will 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 entity-level tax — permitted by this legislation on tax year 2021 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.

The department will publish guidelines regarding how to make the election retroactively for the taxable year 2021 prior to October 15, 2023, as well as guidance on the implementation of this legislation for taxable years 2022 through 2025.

Credit for Taxes Paid to Other States

Several states have passed their own workarounds, including Maryland, which enacted a similar law in 2020 to allow an electing PTE to pay an entity level income tax on its Maryland state taxable income.

With this new legislation, individual income taxpayers may now also claim a credit for similar SALT cap workaround taxes paid to other states for taxable years 2021 through 2025.

The Virginia Department of Taxation stated that unlike the new elective PTE tax, the implementation of this provision is not delayed. This means 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.

E. Cohen will continue to monitor developments related to the Virginia PTE election guidelines.

If you have any questions about the information above, please contact your E. Cohen advisor.