By Matthew R. Staul, EA, MBA
During the 2022 session, the Virginia General Assembly enacted a bill allowing partners or shareholders in pass-through entities to elect to pay their share of the Virginia state liability from their business’ gains at the entity level. Whoever pays their share of the Virginia state liability of 5.75% at the entity level can take a deduction on the tax return, as well as get whatever excess money they paid refunded back to them on their 1040 return. This bill passed in the form of a draft, so there are likely to be revisions to the bill in the coming months. The form used to file for the payment is Form 502-V. The form can be found and filed on the Virginia Department of Taxation website.
House Bill 1121:
Income taxation; pass-through entities. Permits a qualifying pass-through entity (Partnerships and S Corporations) to make an annual election in taxable years 2021 through 2025 to pay an elective income tax at a rate of 5.75% at the entity level for the taxable period covered by the return. The bill also creates a corresponding refundable income tax credit for taxable years 2021 through 2025 for any amount of income derived from a pass-through entity having Virginia taxable income if the pass-through entity makes the election and pays the elective income tax imposed at the entity level and allows an individual to claim a credit for similar taxes paid to other states for taxable years 2021 through 2025. HB 1121 is identical to SB 692.
When to File Form 502-V:
The format and procedures to make the election for the tax year ending December 31, 2021, will be provided by the state legislature in the coming months. The legislation specifies that the guidelines for filing the election for 2021 will be no later than one year after the extension deadline for corporations, so we should have the final regulations soon. There will not be any interest or underpayment penalties associated with making the election for 2021 while the state is finalizing the legislation. The election for tax years beginning January 1, 2022, through January 1, 2025, will be made as an annual election on or before the pass-through entity’s timely filed return, including the extension. We believe this opportunity will benefit all Virginia business owners in the coming years.
Matthew R. Staul is an enrolled agent with the Medical Management Consulting Group, Inc., a full-service consulting and accounting firm based in Virginia Beach. mmcgonline.com