Under the new legislation, Virginia businesses that operate as pass-through entities can make the election for the 2021 tax year “in a format and according to such requirements and procedures to be established by the Department.” Since the legislation just passed, the Virginia Department of Taxation has not had an opportunity to issue such guidance. This adds a new challenge to taxpayers and their preparers who are trying to file tax returns or extensions by both the federal April 18, 2022, and Virginia May 2, 2022 filing deadlines.
While we wait for the new guidance, there need to be conversations between tax preparers and their pass-through entity clients to determine the best course of action for 2021 and each subsequent year.
The level of Virginia tax, and its impact on the amount of federal income tax paid by the owners of the PTEs, should be the driving factor in whether or not the election is taken. Discussions may lead to the decision to wait for the guidance and file 2021 extensions rather than the tax returns. If 2021 tax returns have already been filed, and the federal tax savings are significant enough, preparation of amended tax returns may be in our future.
Since we are into a new year, it is likely that the majority of the 2021 taxes have already been paid. If PTEs opt to take the election, they will have to pay taxes again and the individual owners will likely have to wait for refunds once they file their 2021 original or amended tax returns.
Another important factor to consider is the timing of the tax deduction. Since the election is being considered in 2022, rather than 2021, and the tax amount is being paid in 2022, it is likely that both cash-basis and accrual-basis PTEs will not get the tax deduction until 2022.
The Brown Edwards SALT team is available to discuss this new legislation and we will continue to update you when the Virginia Department of Taxation provides the necessary guidance.