Virginia’s 2021 retroactive pass-through entity tax election

Background

In 2022, Virginia enacted H.B. 1121/S.B. 692 (the Legislation) which permits a qualifying pass-through entity (PTE) to make an annual election to pay an elective pass-through entity tax (PTET) at a rate of 5.75% at the entity level for tax years beginning on or after Jan. 1, 2021, but before Jan. 1, 2026. The legislation also allows a corresponding refundable income tax credit to certain PTE owners for income tax paid by a PTE.

The Legislation was passed in 2022, allowing for a retroactive application of the election for 2021 (the Election), but Virginia advised taxpayers to wait for further guidance on how to make the Election due to the timing of the Legislation. (See: Virginia Tax Bulletin 22-6)

As a result, Virginia began issuing guidance earlier this year regarding the process to make the Election along with other considerations.

2021 retroactive PTET election by the PTE

Election deadline

• The return (2021 Form 502PTET) must be filed by Sept. 16, 2024, and Form 502 cannot be used to make the Election. There are no extensions or late filing options.

How to make the election and filing the 2021 return

• For taxable year 2021, a PTE can make the Election and pay the 2021 PTET by submitting 2021 Form 502PTET, including all owner credit allocation information, using Virginia’s Business Online Services on or before Sept. 16, 2024, and making all payments electronically either prior to or at the time the 2021 Form 502PTET is submitted.

Consent and notification to eligible owners

• Each electing PTE must obtain consent from its eligible owners in a manner chosen by the PTE.
• The election is binding on all eligible members once the election is made and an eligible member does not have the option to “opt out” of the entity’s election.
• An electing PTE must notify its owners (1) that the election has been made and (2) whether or not they are an eligible owner entitled to receive the information and benefits of the election.