Virginia SALT Cap Workaround

Just when you thought it was safe to file your tax return, the Virginia General Assembly passed new legislation concerning state and local tax (SALT) deduction.

The Change

On March 4, the General Assembly passed two bills (HB1121 and SB692), which clarify that Virginia will issue credits against Virginia tax for taxes paid to other states under SALT cap workaround programs. The legislation also created a similar program for Virginia, meaning that qualifying pass-through entities will be able to elect to pay the tax at the entity level on Virginia-source income, bypassing the cap on state and local tax deductions.

Virginia allows qualifying pass-through entities to elect the entity level tax treatment. Most S Corporations will qualify to make the election. Partnerships and Limited Liability Companies may qualify for the election if 100% of the owners are natural persons.

This is good news for Virginia taxpayers, but it comes with some caveats.

While the legislation passed unanimously by both sections of the General Assembly, it has not yet been signed into law by the Governor.

Additionally, because there is no emergency clause included in the bills, the law will not go into effect until July 1, 2022. While the ability to take the Virginia credit for taxes paid to other states at the entity level is effective for 2021, you cannot file a return claiming that credit for 2021 until after July 1.

Background

When the Tax Cuts and Jobs Act created a cap of $10,000 on the deductibility of state and local taxes – including income taxes, as well as real estate and personal property taxes – on individual tax returns, many states rushed to find a solution for their higher-income resident taxpayers. Mostly, this took the form of allowing a pass-through entity to pay at the entity level the tax that would ordinarily be imposed at the individual level, creating a credit that the taxpayer could use on their individual return.

This turns the tax from an itemized deduction subject to the cap into an ordinary business deduction. In 2020, the IRS issued a Notice indicating that they will acquiesce to this treatment. Final Regulations have yet to be issued and the IRS may still issue guidance less favorable to the state cap workarounds.

Until the recent legislation, Virginia did not have a SALT cap workaround nor give any indication that they would allow a credit to Virginia residents on their individual returns for the tax paid to other states under these programs (as they would if the taxes were paid to the other states on an individual return instead). This meant that before the current legislation, participating in any of these programs for other states did not make sense for Virginia members or shareholders.

Result

The Virginia entity-level tax election, while it is retroactive for 2021, will not be available on a return filed by the original due date of March 15, 2022. It is so late in the filing season that forms and software cannot be changed. This payment will have to be made after the fact. We do not yet know when Virginia will provide the specifics for how payments will be made, what returns will be filed, or how individual returns will be affected.

We wanted to make you aware of these changes immediately, and we will work with our clients in determining the best course of action in filing their 2021 entity and individual returns. We count on our lawmakers to keep our lives interesting, and they rarely disappoint.

We will continue to keep you updated as more information becomes available. Please feel free to contact a Hantzmon Wiebel team member if you have further questions.

Disclaimer of Liability
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.