On December 28, 2021, the Virginia Tax Commissioner (“Commissioner”) issued a ruling to a question posed by the Virginia Society of CPAs (“CPAs”). The question was whether Virginia residents would receive credit for taxes paid in Maryland under that state’s tax on pass-through entities (PTEs). The tax was implemented as a workaround to the federal limitation on individual deductions of state and local taxes. Maryland allows PTEs to be taxed at the entity level, and pass through that tax payment to the owners of the PTE.
Virginia considered a similar case in 1983 in Howell’s Motor Freight, Inc., et al., v. Virginia Department of Taxation, Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983). In Howell’s, the court determined that although Virginia allows residents to claim credit for income taxes paid to another state, the statute (Virginia Code § 58.1-332 C) did not allow for income taxes paid by an S corporation to be treated as paid by the shareholders. In dicta, the court stated that the question of whether taxes paid by an S corporation should be treated as if it was paid by the shareholders, should be considered by the Legislature. Subsequently, the statute, and VAC 10-110-221C, now allows for a credit for taxes paid by an S corporation as creditable to the individual shareholders.
The Commissioner reached a similar conclusion with respect to the question posed by the CPAs. The only tax that would be creditable by a Virginia resident would be if the PTE were an S corporation and paid tax at the S corporation level. The Commissioner said that the Department is bound by the laws as they exist. The question of whether a resident should receive credit for tax paid by other PTEs would also require legislation for the state to allow the credit.
Ryan’s Virginia tax experts would be happy to answer any questions on this topic.
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