VA Senate Bill 692 Creates VA PTE Tax, Offers Savings

February 21, 2022

While still in its infancy, Draft VA Senate Bill 692 offers the possibility of a new VA tax: allowing qualifying pass-through entities (“PTE”) to make an annual election for Taxable Years 2022 through 2025 to pay an elective income tax at a rate of 5.75 percent at the entity level.

If the election is made at the entity-level, the bill also allows for a reduction of pass-through income for Virginia business owners, which would subsequently lessen an owner’s federal tax liability. 

The effect of this tax and corresponding subtraction would allow the entity to pay income tax rather than its owners and, thereby, enact a Virginia PTE workaround to the $10,000 cap on the federal deduction for state and local taxes paid. The PTE tax would create tax savings for both entities and owners.

This bill would be effective for taxable years beginning on and after January 1, 2022, but before January 1, 2026. This sunset date coincides with the currently scheduled expiration date for the $10,000 cap on the federal deduction for state and local taxes paid.

Virginia is not the first state to introduce such a tax; among others, Maryland enacted a similar law in 2020.

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