Year-End Planning – Consider the VA PTET

Virginia has joined a rapidly growing number of states that have passed State and Local Tax (SALT) cap workaround provisions in an effort to provide pass-through entity owners with relief from the $10,000 federal tax deduction limit for state and local taxes. As part of year-end tax planning, pass-through entity owners should consider whether it is advantageous for the entity to make a Virginia pass-through entity tax (PTET) payment prior to December 31, 2022.

PTE’s Eligible to Make the VA PTET Election

Generally, a pass-through entity is eligible to make the election only if it is 100% owned by “natural persons”.  The pass-through entity may not have a corporation or another pass-through entity as an owner.  An S corporation can make the election based upon being 100% owned by “natural persons” or other persons eligible to be shareholders in an S corporation.

Planning Note: If your pass-through entity does not currently meet eligibility requirements for making the Virginia PTET, you should consult with your tax adviser to see if the cost of restructuring the entity so it would be eligible to make the election would be worth the benefit, and ensure there are no other unwanted impacts.

Making the Election

The election can be made on the 2022 VA 502 PTET. The election is binding on all of the owners once it is made. An owner does not have the option to “opt out” of an entity’s election.

Pass-through entities are not required to make estimated tax payments of VA PTET for 2022. They can make the VA PTET election for 2022 by filing VA Form 502 PTET in 2023 by the original due date and paying the tax or making an extension payment.

Beginning with the 2023 taxable year, an electing pass-through entity is required to make estimated tax payments if its PTET for the taxable year can reasonably be expected to exceed $1,000.

Revocation of the Election

If VA Form 502 PTET has not been filed for the tax year, the election can be revoked by filing the VA Form 502. Once the Form 502 PTET is filed for a tax year, the election is binding for that tax year.

Calculation of the VA PTET

The Virginia taxable income of an electing pass-through entity is equal to:

    • The total of each VA Resident owner’s share of the electing PTE’s income or loss (subject to required modifications), plus
    • Each VA Nonresident owner’s share of the electing PTE’s income or loss (subject to required modifications) that is attributable to Virginia.

The VA PTET rate is 5.75%

VA Nonresident Withholding & Composite Tax Payments

Entities electing the VA PTET should not make VA nonresident withholding payments or VA composite tax payments.

    • If VA nonresident withholding payments were made before the PTE made the VA PTET election, the guidelines instruct the PTE to claim the withholding payment on the Form 502 PTET.
    • If VA composite tax payments were made before the PTE made the VA PTET election, the PTE should request a refund of any such payments made. If the PTE would prefer to request reallocation of composite payments to its PTET return, it may do so by submitting a written request to the address shown in the guidelines.

If your business operates in Virginia you should consider making a VA PTET payment before the end of the year in order to receive the tax deduction in 2022.  If you have questions regarding the Virginia Pass-through Entity Tax and year end planning, please consult a Snyder Cohn tax adviser.