The Virginia General Assembly recently passed bills that give qualifying pass-through entities (PTE) the ability to pay state entity-level taxes; i.e. the workaround for the State and Local Tax (SALT) cap.
The federal Tax Cuts and Jobs Act of 2017 (TCJA) imposed a $10,000 limit on the amount of non-business State and Local Taxes (SALT) that individuals can deduct for federal income tax purposes, regardless of how much is actually paid. For individual owners of Pass-Through Entities (PTEs), this change created a particular hardship. Where “C” corporations had no limitation deducting state and local taxes, owners of PTEs were faced with paying state income taxes without an available deduction on the federal tax return. However, there was no similar limitation put into place for state and local taxes attributable to a trade or business.
In response, over 20 states have enacted an election for PTEs aimed at circumventing the $10,000 SALT deduction limitation. Generally, this election allows PTE owners to have their net income taxed (for state purposes) at the entity level instead of at the individual partner level, thereby creating an entity-level federal tax deduction. This has become known as the “PTE SALT cap workaround.”
The Virginia PTE and SALT cap workaround passed unanimously. Because the bills do not have an emergency clause, they will go into effect on July 1. We are awaiting published guidance from the Virginia Department of Taxation. The bills also expanded available Out of State Tax Credits (OSC) for state and local taxes paid by on behalf of Virginia residents by out-of-state PTE’s.
Guidance on implementing these SALT tax workarounds are not expected from the Virginia Department of Taxation until later this year. Until then, we are working with clients on a case-by-case basis to determine the best course of action based on individual circumstances. If you have any questions, please do not hesitate to contact your MUAC professional.