Since the passing of the TCJA in 2018, most states have given pass-through entities (PTEs) the option to pay the state income tax at the entity level instead of at the individual shareholder/partner level. The PTE gets to take a state tax deduction from the entity’s Federal taxable income for these taxes paid. This is advantageous because there is a $10,000 limit on the amount of state income tax that individuals can deduct on their personal returns via Schedule A itemized deductions. Having the PTE make these state tax payments allows the PTE to take the full Federal deduction for these tax payments, thus navigating around this $10,000 limit.

Since the 2022 legislative session, Virginia has given PTEs the option to make an election to pay the state taxes at the entity level, effective for tax years beginning on or after January 1, 2021. However, Virginia had not instructed taxpayers and practitioners on how to make the election for Tax Year 2021 until they released guidance in February 2024. This guidance directed a PTE to file a retroactive election online via the Virginia Department of Tax website, so there would be no need to amend the PTE’s 2021 partnership or S-corporation returns or the PTE owner’s 2021 personal tax return.

This retroactive Virginia PTE election is advantageous to PTE owners because the PTE will get to take a Federal deduction for this state income tax payment in the 2024 tax year, and the individual shareholders/partners will get a Virginia state income tax credit for this payment on their 2023 personal tax return. If the shareholders/partners have already filed their 2023 tax returns, the PTE owners would need to amend their Virginia return in order to utilize the 2021 flowthrough credit.

The Virginia retroactive PTE election for 2021 has a deadline of September 16, 2024, so if you think you may benefit from this, please contact your tax advisor as soon as possible.