A celebratory mood

In 2019, the VSCPA began its campaign in earnest to make rolling income tax conformity a reality in the Commonwealth. VSCPA members were fed up waiting for the General Assembly to pass legislation year after year for emergency conformity to federal definitions of income — and that frustration was especially unwelcome during tax season.

But rolling conformity required a shift in legislators’ mindsets, as well as communication and education about how such a law would affect Virginia’s bottom line. Over the past several years and through COVID-related delays, we’ve had dozens of conversations with legislators and their staff about what conformity is, how it will affect taxpayers, how it will alleviate burdens on preparers and citizens, and how it could benefit Virginia.

Going into the 2023 General Assembly session, we knew the time was ripe for getting this legislation across the finish line. The House and Senate bills (HB 2193 and SB 1405) both provided for Virginia generally conforming to federal tax laws on a rolling basis, “meaning that Virginia tax laws incorporate changes to federal income tax law as soon as Congress enacts them on or after Jan. 1, 2023,” the bills state.

The bills passed by each chamber, however, were not identical. The Senate version had a substitute for a $25 million impact threshold with a $75 million aggregate cap. The House version included a $10 million threshold. Ultimately, the bills were reconciled in conference to a $15 million impact threshold and $75 million aggregate cap, meaning Virginia will automatically conform to changes under the $15 million threshold but that automatic conformity is limited to an aggregate of $75 million worth of changes. Extenders to which Virginia already conforms will also be automatic and are not subject to either the threshold or the cap.

Gov. Glenn Youngkin did attach a technical amendment to the bill to address the transition from fixed-date to rolling conformity. At press time, the General Assembly was scheduled to reconvene on April 12, and we did not expect any issues in the bill ultimately getting approved and signed.

We could not have done this without you! 2022–2023 VSCPA Chair George Forsythe, CPA, made rolling conformity a top priority of his term, and a special Board task force on conformity addressed our opportunities and challenges. Members, leaders, volunteers, staff and legislative counsel all worked tirelessly over the past 18 months contacting legislators. VSCPA member Rep. John McNamara, CPA, sponsored the House legislation and educated his colleagues on conformity and why fixed-date posed challenges during tax season. And we had the largest number of members ever use our online advocacy platform, VoterVoice, to easily send messages to legislators.

In short, thank you.

PTE tax legislation

If you’re a Virginia tax practitioner relying on your software provider to make changes to incorporate the pass-through entity tax (PTET) form, this spring may have been stress-inducing. Several software providers did not make updates in a timely fashion — or at all. The VSCPA had multiple discussions with the Virginia Department of Taxation (TAX), but there will not be a waiver for the online PTET form submission. At press time, TAX had indicated plans to create an option to directly e-file through the Department’s website, but indicated it will not be available until late summer/early fall. In the meantime, TAX is advising impacted practitioners to take advantage of the automatic extension.

The PTE issue began last year when we successfully helped push through legislation to adopt the ability to pay entity-level taxes for qualifying pass-through entities, i.e., the workaround for the State and Local Tax (SALT) cap. In December 2022, the VSCPA Tax Advisory Committee sent comments to the Virginia Department of Taxation on its draft PTET guidelines for the PTE tax. In addition to redlining the draft guidelines, the VSCPA asked for additional clarification related to the credit for taxes paid to other states as it relates to apportionment. The VSCPA strongly believed the definition of “qualifying pass-through entity” was too restrictive and disqualified more PTEs than intended by the General Assembly.

To fix the issue, companion bills were introduced to repeal the definition of “qualifying entity” and replace it with “eligible owner,” and ensure the calculation of tax is based on the share of Virginia income, gain, loss or deduction attributable to the eligible owners. Prior to the legislation, a PTE could only make the PTET election if it was 100% owned by natural persons or persons eligible to be shareholders of an S corporation. As a result, PTEs owned in part or in full by corporations, other PTEs, and other entities were prohibited from making the election.

Ultimately, the bills were passed and signed by the governor on March 27, 2023.

On March 29, TAX released Tax Bulletin 23-3 to respond to the new law. The bulletin clarifies the new definition of “eligible owner”:

Only a direct owner of a PTE who is (1) a natural person subject to Virginia’s individual income tax or (2) an estate or trust subject to Virginia’s fiduciary income tax may claim a refundable PTET credit. Consequently, all PTEs can make the PTET election, but only owners meeting the eligible owner requirement are eligible to claim refundable PTET credits.

The changes made to PTET are in effect for taxable year 2021 and thereafter. The Bulletin provides further guidance on filing returns as well as the automatic six-month filing extension. We’ll continue to post updates in our Pass-Through Tax Resource Center at www.vscpa.com/pte-tax.