Nov. 21, 2023
Craig Burns
Tax Commissioner
Virginia Department of Taxation
P. O. Box 546
Richmond, VA 23218-0546
Via email: [email protected]
RE: Relief from Penalties Due to the Implementation of the Virginia Pass-Through Entity Election
Dear Commissioner Burns:
The Tax Advisory Committee of the Virginia Society of CPAs (VSCPA) is requesting your assistance with respect to the implementation of the Virginia pass-through entity tax (PTET) and subsequent penalties and interest imposed on taxpayers on the newly imposed tax. While we understand only the Virginia General Assembly has the authority to waive interest, the Committee respectfully requests the Virginia Department of Taxation (TAX) consider leniency in imposing penalties on the 2022 individual and PTET returns and 2023 PTET estimates for the reasons listed below.
Background
As you are aware, the PTET was enacted to provide a benefit to Virginia taxpayers. As of Aug. 10, 2023, 35 states and one locality have implemented a PTET.
Virginia’s PTET was enacted on Apr. 11, 2022, when Governor Youngkin signed S.B. 692 into law. The election is available for tax years beginning on and after Jan. 1, 2021, but before Jan. 1, 2026. However, upon enactment, there were many unanswered questions on how the election would be implemented, and TAX was charged with issuing guidelines.
On Oct. 31, 2022, TAX issued DRAFT Guidelines for the Pass-through Entity Tax. These guidelines were provided in Draft and the VSCPAs and taxpayers provided feedback on the guidelines. As of the date of this letter, the draft guidelines have not been finalized.
On Mar. 27, 2023, Governor Youngkin signed S.B. 1476 (identical to H.B. 1456). The bill’s primary purpose was to remove the requirement that a PTE must be 100% owned by natural persons or, for an S corporation, persons eligible to be shareholders, to be able to make the Virginia PTE tax election. Under prior law, any PTE owned by another PTE or C corporation was ineligible to make the election. Under the new law, retroactively effective for tax years beginning on or after Jan. 1, 2021, the PTE tax election may be made by most PTEs.
On Mar. 29, 2023, TAX issued Tax Bulletin 23-3 to provide taxpayers with guidance on the legislation, including how to compute the elective PTE tax if the PTE has a mix of eligible owners (natural persons and trusts) and noneligible owners (other PTEs and C corporations).
Tax Bulletin 23-3 included a section on interest and penalties which notified taxpayers that interest and penalties would apply if PTET 2022 tax payments were not made by April 17, 2023. The first quarter estimated payments for 2023 were also due beginning on this date.
In addition, the new Form 502PTET had to be electronically filed. Some software vendors are unable to support the filing of Form 502PTET.
The guidelines for making the 2021 PTE election have still not been issued.
Challenges Faced by Virginia Taxpayers
As with any legislation needing to be implemented quickly, there have been many challenges with compliance, including:
- Implementation timeline. TAX and software vendors must implement form, processes and instructions and infrastructure to support taxpayers making the PTET.
- Tax nuances. The tax is brand new with many facets to the computation base, K-1 reporting requirements and impacts on the individual owners.
- First year financial burden. Many taxpayers, prior to enactment, had already made significant individual quarterly estimated tax payments and were unable to request that those be applied to PTET tax, thus significantly increasing the financial burden to taxpayers by requiring payments of much more than expected in one tax year. Additional penalties only exacerbate the financial burden.
- Statute changes from 2023 legislation. The most recent law change was enacted shortly before the 2022 return due date. Many PTEs, which had been ineligible under the prior law, suddenly became eligible for the PTET election. In some cases, there was insufficient time to analyze and make the extension payment. And in other cases, because the federal return was due Mar. 15, 2023, the Virginia return may have already been filed without the election.
- Electronic filing requirement. Some software providers had the Form 502PTET available but did not compute the tax due correctly. Other software providers have not made the form available at all. These issues have led to delays with filing.
- Difficulty estimating tax liability. Individuals must add back the credit for PTET taxes in determining their Virginia individual income tax liability. Individuals may not be aware the PTEs in which they are investing are making the elections, may not understand the mechanics of the credit add-back, and may not be paid in, and are subsequently receiving underpayment interest and penalties.
We applaud TAX for working so diligently to implement the PTET tax system and answer taxpayer and tax practitioner questions directly and through information on TAX’s website. However, the tax practitioner community has noted that taxpayers (individually and at the PTE level) are receiving penalty and interest notices related to the PTE taxes for issues such as late payment and increased taxes due to the PTE tax. As this is a newly implemented tax with many complicating factors, we respectfully request that TAX consider a general suspension of penalties for the 2022 tax year and 2023 estimated tax payments related to PTET, including permitting refunds for any taxpayers who may have already paid penalties. Such a program will help the taxpayer community with the implementation of the PTET and reduce the burden on TAX of reviewing the many taxpayers impacted by the implementation.
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 — Acting Tax Policy Director