Virginia partnerships and S corporations, defined by Virginia as Pass-Through Entities (“PTEs”), should consider paying state income taxes by December 31 in order to obtain a 2022 federal tax deduction.
The new Virginia Pass-Through Entity Tax (“PTET”) law will potentially allow individual owners of pass-through entities (“PTEs”) to have the PTE pay their state income tax liability and obtain a federal tax deduction for those taxes paid. Since 2018, deductibility of state income taxes by individuals on their federal individual returns has been limited—removing the benefit for most taxpayers.
We are part of a select committee of state and local tax experts from firms throughout Virginia who have been working since May to review and assist the Virginia Department of Taxation with refining and clarifying the new Virginia Pass-Through Entity Tax (“PTET”) law. Virginia issued draft guidelines October 31st which the committee is currently reviewing.
How it Works
The PTE computes and pays the state income tax to Virginia. The payment of state income tax by the PTE is deductible on the PTE federal return, reducing federal taxable income reported to the owner (tax savings). Virginia issues a refundable tax credit for the tax paid by the PTE. The PTE distributes the tax credit to the owner for use on the owner’s individual return. Example: PTE pays $10k of tax and owners get a Virginia tax credit worth $10k to use on individual return (owner in same tax position).
Current IRS guidelines require that the payment be made electronically by December 31, 2022, in order to qualify as a 2022 deduction. The website for the PTE tax payment is:
You will need your PTE federal EIN and the entity account suffix (usually 001). For calendar year entities, check the payment as an “estimated payment” and enter voucher number 4 for this initial payment. When the PTE annual return is filed, each owner/member will receive an allocation of the estimated state tax payment on their associated K-1.
If you choose to make the payment, entity owners do not need to make a 4th quarter individual state tax payment. Any state overpayments on their individual return (from combined estimates, withholding and Pass-Through Entity Tax payment) will be refunded when individual returns are filed.
Under current guidelines, only PTEs that are 100% owned by individuals or other disregarded entities such as single-member LLCs may qualify for the PTE tax. Ownership by other tiered entities, corporations, or tax-exempt entities disqualifies the PTE from participating.
If you have any questions about the PTET and how it applies to you, please contact your MUAC professional.