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2023 SESSION
23102579DBe it enacted by the General Assembly of Virginia:
1. That §§ 58.1-390.1 and 58.1-390.3 of the Code of Virginia are amended and reenacted as follows:
§ 58.1-390.1. Definitions.
The following words and terms, when used in this article, shall have the following meanings unless the context clearly indicates otherwise:
"Eligible owner" means an owner of a pass-through entity who is a natural person or, in the case of a Subchapter S corporation, an owner that is a natural person or other person eligible to be a shareholder in an S corporation.
"Owner" means any individual or entity who is treated as a partner, member, or shareholder of a pass-through entity for federal income tax purposes.
"Pass-through entity" means any entity, including a limited partnership, a limited liability partnership, a general partnership, a limited liability company, a professional limited liability company, a business trust, or a Subchapter S corporation, that is recognized as a separate entity for federal income tax purposes, in which the partners, members, or shareholders report their share of the income, gains, losses, deductions, and credits from the entity on their federal income tax returns or make the election and pay the tax levied pursuant to § 58.1-390.3.
"Qualifying
pass-through entity" means a pass-through entity that is 100 percent owned
by natural persons or, in the case of a Subchapter S corporation, 100 percent
owned by natural persons or other persons eligible to be shareholders in an S
corporation.
§ 58.1-390.3. Elective income tax on pass-through entities.
A. 1. For taxable years beginning on and after January 1,
2021, but before January 1, 2022, a qualifying
pass-through entity may make an election, in a format and according to such
requirements and procedures to be established by the Department, to pay the tax
levied by this section at the entity level for the taxable year. Such election
shall be made on or before a date to be determined by the Department, which
shall be set no earlier than one year after the extended due date for filing
the applicable return. Notwithstanding §§ 58.1-1812 and 58.1-1833, no interest
shall accrue on underpayments or overpayments solely attributable to such
election.
2. For taxable years beginning on and after January 1, 2022,
but before January 1, 2026, a qualifying
pass-through entity may make an annual election, on its timely filed return
pursuant to § 58.1-392, to pay the tax levied by this section at the entity
level for the taxable period covered by such return. Such election shall be
made on or before the due date for filing the applicable return, including any
extensions that have been granted.
B. A tax at the rate of 5.75 percent is hereby annually
imposed on the Virginia taxable income, as calculated pursuant to § 58.1-391 but taking into account only the distributive
share of each item of income, gain, loss, or
deduction attributable to eligible owners, for each taxable
year of every qualifying
pass-through entity that makes the election provided under subsection A.
C. A qualifying
pass-through entity that elects to pay the tax levied by subsection B shall be
eligible for all credits, deductions, or other adjustments to taxable income
under § 58.1-391, provided that a qualifying
pass-through entity's taxable income shall be adjusted to eliminate any federal
deduction for state and local income taxes.
D. Any person that is subject to the tax imposed under §
58.1-320 or 58.1-360 and is an eligible
owner of a qualifying
pass-through entity making the election pursuant to this section shall be
entitled to a credit against the tax imposed, provided that taxable income has
been adjusted to add back any deduction for state and local income taxes paid
by the qualifying pass-through
entity. Such credit shall be in an amount equal to such person's pro rata share
of the tax paid under this section by any
qualifying pass-through entity of which such person is an
owner. If the amount of the credit allowed pursuant to this subsection exceeds
such person's tax liability for the tax imposed under § 58.1-320 or 58.1-360,
as applicable, such excess shall be treated as an overpayment and refundable
pursuant to § 58.1-499.
E. If any qualifying
pass-through entity makes an election pursuant to this section, the Department
shall assess and collect tax, interest, and penalties as if such tax is a
corporate income tax imposed pursuant to the provisions of Article 10 (§
58.1-400 et seq.).
F. The Department shall develop and make publicly available guidelines implementing the provisions of this section and the credit authorized by subdivision C 2 of § 58.1-332.
2. That the provisions of this act shall apply only to taxable years beginning on and after January 1, 2023