Letter to TAX on final elective pass-through entity tax (PTET) guidelines

May 30, 2023

James Ford
Tax Policy Analyst
Virginia Department of Taxation
P. O. Box 546
Richmond, VA 23218-0546

RE: Solicitation of Comments on the Final Elective Pass-Through Entity Tax Guidelines

Dear Mr. Ford:

The Virginia Society of Certified Public Accountants (VSCPA) Tax Advisory Committee is responding to the request for comments regarding the Final Guidelines for the Pass-Through Entity Tax (PTET), including the changes made by HB 1456 and SB 1476 during the 2023 Session of the Virginia General Assembly. The VSCPA is the leading professional association in Virginia dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. The VSCPA membership consists of nearly 13,000 individual members who actively work in public accounting, private industry, government, and education. The Committee continued to rely on its special task force comprised of members who work with pass- through entity tax issues and provided feedback and recommendations on the draft guidelines.

At a high level, we request the final guidelines incorporate all guidance related to the PTET within the guidelines. Currently, this information is spread throughout the draft guidelines, Tax Bulletins, instructions, FAQs and the Department’s website. To the extent possible, this information should be consolidated into the final guidelines in order to provide greater clarity and consistency for all stakeholders. In addition, we offer the following specific comments for your consideration:

Include plain English descriptions of eligible owners, with examples, particularly with respect to eligible trusts.
Include plain English descriptions for ordering of credits on individual and fiduciary returns.
Clarify whether taxpayers with less than six months of residency are considered nonresidents. The draft guidelines indicate taxpayers with more than six months of residency are deemed full year resident.
Clarification is needed related to the addback of PTET on Virginia returns. We recommend this be referenced as “addback required of federal deduction for taxes based on taxable income for any state where such taxes were paid” rather than a detailed description of adding back credit. The actual payment should be used, therefore the deduction on the federal return may be different from the pass through of the credit in cases where PTET has been paid in multiple years.
Clarification is needed related to the timing of the Virginia addback for taxes paid by the entity. For example, many calendar-year 2022 pass-through entities which made PTET elections have paid PTET for the 2022 year when returns were filed in 2023. As such, the Federal deduction for PTET will not occur until 2023, however the PTET credit will get passed through on a 2022 K-1. With Virginia’s starting point for taxable income tied to Federal adjusted gross income, it would be appreciated if Virginia could clarify if the Virginia addback for PTET taxes paid by the entity should 1) follow timing of the Federal deduction, or 2) follow timing of the Virginia PTET credit. It would also be appreciated if Virginia could clarify how the addback should be allocated to qualifying PTE owners (i.e. in the same proportion as the Federal deduction).
Clarification is needed for estimated tax requirements and applicable penalties because the PTET election and/or eligibility can change from year to year.
Form 502PTET instructions should stand on their own and not presume knowledge or reference to Form 502 Instructions.
The current version of the guidelines require a pass-through entity making the PTET election to pay PTET on the sum of (1) the total income of resident owners and (2) the apportioned share of income for nonresident owners. For S Corporations, this creates a potential issue of a nonproportional distribution, which may cause the S Corporation to lose its federal status as an S Corporation, as federal rules require that all distributions and allocations of income be in proportion to ownership interest. For S Corporations with both Virginia resident and nonresident owners, this may effectively prevent them from utilizing the Virginia PTET election.

For the other states that have addressed this issue related to S Corporations and PTET, there have been two primary approaches:

Tax only the apportioned share of income for all S Corporations that elect PTET with respect to the pro rata income shares of both resident and nonresident shareholders. Maryland has taken this approach, among other states.
Provide two different categories for S Corporations that can elect Virginia PTET: 1) one category that apportions S Corporation income for the PTET base with respect to the pro rata income shares of both resident and nonresident shareholders and 2) a second category that allows the S Corporation to include its non-apportioned (modified federal) income in the PTET base when the S Corporation is held by all resident shareholders. New York has adopted this methodology.

A comment letter from the American Institute of CPAs (AICPA) to the IRS related to this issue (PDF) is also attached for your reference.

The Committee appreciates the opportunity to offer comments on this matter. Please feel free to contact me or VSCPA Vice President, Advocacy Emily Walker, CAE, at (804) 612-9428 or [email protected] if we can be of further assistance.

Sincerely, Sarah Adams, CPA

Chair, 2023–2024 Tax Advisory Committee
Virginia Society of CPAs

CC: Kristin Collins — Assistant Commissioner, Tax Policy
James Savage — Lead Tax Policy Analyst