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Virginia Department of Taxation responds to SALT CAP workaround

December 30, 2021

On Dec. 28, 2021, the Virginia Department of Taxation (TAX) responded to the VSCPA's August 2021 request for a ruling on the pass-through entity (PTE) SALT cap workaround and related taxes paid to other states. Specifically, the VSCPA requested clarification related to a credit for state income taxes paid to another state by Virginia residents who are owners in pass-through entities (PTEs) which make an election to be taxed at the entity level. The issue originated in regards to legislation enacted by the state of Maryland.

TAX issued the following ruling on the matter:

The Maryland PTE SALT cap workaround involves a tax on income for which a Virginia credit for taxes paid to another state is typically available. However, for purposes of the out-of-state credit allowable under Virginia Code § 58.1-332, a tax imposed at the entity level is not attributable to the individual members, unless they are shareholders of an S-corporation. Virginia residents who are shareholders of an S corporation that elects to be taxed at the entity level pursuant to Maryland’s PTE SALT cap workaround must then determine on a case-by-case basis if the tax payment would otherwise qualify for the credit for taxes paid to another state in the hands of the individual shareholder. If so, the Virginia resident would be entitled to claim the credit as if it had been paid by the individual directly.

Under current law, however, Virginia resident taxpayers holding interests in other types of PTEs that make the election in order to take advantage of Maryland’s PTE SALT cap workaround will not be eligible for the credit.

For more information, download TAX's full SALT cap ruling (PDF). If you'd like to discuss the issue with other Virginia CPAs, log into the Connect online community and pose a question.