On March 28, West Virginia Gov. Jim Justice signed Senate Bill 151, which allows a qualifying PTE to annually elect to be subject to the personal income tax at the entity level for tax years beginning on or after Jan. 1, 2022. The legislation is intended to allow owners of electing entities to get the benefit of deducting state taxes in excess of the current $10,000 limitation for federal income tax purposes.
A qualifying PTE means any partnership or other business entity not subject to the state’s corporation net income tax. These entities include a partnership, S corporation, limited liability company, limited liability partnership, limited partnership, or similar entity recognized under the laws of West Virginia.
The PTE tax is paid on behalf of owners, which are defined as a person that is a partner, member, shareholder, or investor in an electing PTE for any portion of the taxable year. The tax rate applied to determine the PTE tax is the state’s top marginal individual income tax rate in effect on the last day of the PTE’s taxable year. The PTE tax liability is calculated without regard to any deductions or credits permitted to be claimed by an owner or member of the electing PTE in computing the owner’s aggregate tax liability. Once the election is made, it is irrevocable and binding for the tax year.
The PTE owner can claim a nonrefundable state tax credit equal to their proportionate share of state tax paid by the PTE. If the state tax credit exceeds the owner’s West Virginia tax due, the excess credit amount may be carried forward for five years.
The bill also provides West Virginia resident individuals that are partners, members, or shareholders of a PTE a credit for taxes substantially similar to the tax amount imposed by West Virginia but paid in other states by the PTE at the entity level. The amount of the credit is limited to the amount of tax paid to other states as if the resident individual’s income were taxed by West Virginia.
On April 6, the West Virginia Tax Commissioner issued Administrative Notice 2023-01, which provides guidance for making the election, extensions, and payments. For tax years beginning on or after Jan. 1, 2022, but before Jan. 1, 2023, the election must be made after June 8, 2023, but before Sept. 15, 2023. For tax years ending on or after Jan. 1, 2023, the election may be made anytime during the taxable year, but not later than the 15th day of the third month of the following calendar year or the 15th day of the ninth month of the following calendar year in the case of an extension.
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The West Virginia Tax Division is expected to issue additional guidance on how to make payments in future years.
West Virginia does not currently have a form or a specific method for paying the PTE tax. Therefore, until further guidance is issued, West Virginia has instructed PTEs to make the payment of the PTE tax in the same manner as making payments of nonresident withholding.
