Virginia Pass-through Entities Tax Election Update

November 17, 2022

During the 2022 Virginia General Assembly, legislation was passed to allow 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 (as compared to paying taxes at the individual level previously). 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 (lower their tax bill).

What Entities Qualify for This Tax Election?

  • Pass-through entities that are 100% owned by “natural persons” (Virginia defines “natural persons” as human beings, but also includes disregarded entities such as grantor trusts and Single member LLCs so long as they are owned by a human being)
  • S corporations owned by individuals or qualifying trust shareholders
  • Upper tier entities in a tiered entity structure

How Can Qualifying Entities Take This Tax Election?

Entities have numerous options to make the election for the PTE tax. The election can be made by:

  • Filing form 502V PTE tax payment
  • Making an estimated PTE tax payment
  • Extending a PTE tax payment
  • Or filing a PTE tax return on or before the extended due date (15th Day of the 10th month following the organization’s year-end)

Virginia’s proposed PTE tax election, similar to those of other states with current PTE entity-level tax elections (including Maryland’s), allows for an impactful tax strategy to reduce, not only Virginia resident tax liabilities, but also tax liabilities of nonresident shareholders/partners of qualifying Virginia PTEs.

Although the guidelines for this election are still subject to change (and possibly before the upcoming tax filing season), the outlined information in the most recent draft release allows business owners to reduce their federal taxes and keep more money in their business.

If you’re interested in learning how this election may benefit your business, contact us for more information and we’ll connect you with a Lanigan Ryan tax expert.

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