VA Passes PTE Tax Election: What to Know

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Starting in 2022, business owners of pass-through entities (PTEs) in the state can be taxed at the entity level at a rate of 5.75 percent.

This change could mean big things for small businesses and their owners, so let's take a closer look at what it means and how it could impact you.

What Is the Virginia Pass-Through Entity Tax Election?

In 2022, Virginia enacted House Bill 1121 and Senate Bill 692 to allow PTEs (which include LLCs, partnerships, and S corporations) to pay an elective income tax at the entity level. This legislation means that instead of paying taxes on the business's profits through individual or corporate taxes, you can elect to be taxed as a single entity at a rate of 5.75 percent.

Requirements & Considerations

There are some restrictions on who can qualify for this tax election. A PTE must be 100% owned by natural persons to be eligible. S corps may also qualify if their owners are natural persons or others eligible to be shareholders.

Another vital factor to consider is that entity-level taxes are not deductible from individuals' taxes. Therefore, business owners who switch to this option will still have to pay personal income tax for any distributions they receive from their PTEs.

Questions

Overall, the VA Elective PTE Tax may make it easier for business owners of PTEs to lower their debt. Contact us to meet with our team of business and individual tax experts to decide whether or not this option is right for you.