2021 Virginia Passthrough Entity Tax

Summary

After a long delay, the Virginia Department of Taxation can now process 2021 passthrough entity tax (PTET) returns.

• Electing passthrough entities (PTE) must file 2021 Form 502PTET through Virginia’s Business Online System by September 16, 2024
• Those companies must pay their PTET electronically no later than the date they file their 2021 returns
• Eligible owners will claim credit for their share of 2021 PTET payments on their 2023 Virginia income tax returns
• PTE owners should consider extending their 2023 tax returns
• Electing PTEs will claim a deduction for their 2021 PTET payments on their 2024 tax returns

Background

In 2022, Virginia enacted a law that allows a pass-through entity (PTE) to pay Virginia tax (PTET) based on its income and allocate credit for that tax to its owners. Effectively, the provision allows businesses operating as PTEs to claim a federal tax deduction for tax that would normally not be deductible under current tax law.

Virginia made the PTET provision retroactive to the 2021 tax year, but until recently a PTE could not take advantage of it because the Virginia Department of Taxation did not have a system in place to process 2021 PTET returns. On February 19, 2024, the Department of Taxation issued guidelines for PTEs and their owners to file 2021 PTET returns and claim credit for 2021 PTET payments.

PTET Filing and Payment

The Department of Taxation implemented an online system for processing 2021 PTET returns. To elect PTET treatment, a PTE must file 2021 Form 502PTET through the online system by September 16, 2024. Virginia will not accept returns filed by a different method and will not accept any returns filed after that date. An electing PTE must make its PTET payment electronically no later than the date it files its 2021 Form 502PTET.

As in other years, a company determines its PTET by applying a 5.75% rate to its Virginia taxable income. If the PTE already paid Virginia withholding on behalf of a non-Virginia owner, it must adjust its 2021 PTET to take that payment into account. Virginia’s nonresident withholding tax rate is 5%, so it is likely that non-Virginia PTE owners will be allocated small 2021 credits.

An electing PTE should deduct its 2021 PTET payment on its 2024 federal tax return.

Owner’s PTET Credit

Electing PTEs will issue revised 2021 Schedules VK-1 to owners to let the owners know the amount of PTET paid on their behalf. Owners may not amend their 2021 Virginia tax returns to claim credit for their shares of PTET payments. Instead, owners must claim their PTET credits on their 2023 Virginia returns. According to Virginia’s guidance, owners may not claim 2021 PTET credits until they receive their revised Schedules VK-1.

The filing deadline for Virginia individual income tax returns is May 1. Because of Virginia’s delay in implementing a filing system, it is quite likely that owners will not receive their revised 2021 Schedules VK-1 before their Virginia tax returns are due. In that case, the best option for an owner is to file for an extension for his or her tax return. Virginia’s extended due date is November 1, well after the 2021 PTET deadline.

Hantzmon Wiebel continues to monitor changes in Virginia’s PTET program. Please contact us if you have questions or if we can assist you.

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Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.