Virginia Pass-Through Entity Tax: Legislation Passes General Assembly, Awaiting Governor’s Signature

calendar iconApril 1, 2022

Recent legislation (Senate Bill 692 & House Bill 1121) passed by the Virginia General Assembly that is currently awaiting signature by Governor Youngkin would establish, for tax years 2021-2025, an optional entity-level income tax at a rate of 5.75% for electing pass-through entities (“PTE Tax”) such as partnerships and S-Corporations. The legislation also would provide Virginia resident owners of PTEs a credit for taxes paid to other states (“OSC”) on their share of entity-level income taxes paid by the PTE (partnerships and S-Corporations) to other states that are “substantially similar” to Virginia’s PTE Tax.

Entities that are eligible to elect the Virginia PTE Tax are those that are 100% owned by individuals, or in the case of S-Corporations, those eligible to be shareholders under the Internal Revenue Code. Starting with the 2022 tax year, the Virginia PTE Tax election is made on the PTE’s timely filed return (including extensions). However, due to the timing of the legislation, PTE’s must file their 2021 return by the normal due date without making an election. The legislation requires that the Department of Taxation establish procedures for making the 2021 election, and that it cannot be made for at least 12 months after the extended due date of the PTE’s 2021 return (effectively delaying the 2021 tax year election until at least October 15, 2023).

The legislation has until April 11, 2022, to be signed into law by Governor Youngkin. While the PTE Tax and OSC provisions of the legislation are effective starting with the 2021 tax year, note that if passed, the legislation will not take effect until July 1, 2022, the default effective date of all laws passed in the 2022 regular session. With that effective date in mind, Virginia resident owners of PTEs that have made elections and paid PTE Taxes to other states for the 2021 tax year should consider extending their Virginia personal income tax returns and file on or after July 1, 2022, to allow for the OSC provisions to take effect.

For more information about PTE Tax, consult your Cherry Bekaert advisor or visit our website.