In March of 2023, the West Virginia legislature passed a bill allowing pass-through entities (PTE) to annually make an election to pay West Virginia income tax at the entity level for the 2022 tax year and beyond. The bill affected primarily partnerships and S corporations; however, other entities that pass-through income to individuals can also be impacted. This article deals only with the impact on partnerships and S corporations. The PTE tax rate is the top marginal individual rate for the year. The PTE tax rate was 6.5% for 2022 and is 5.12% for 2023.
The significance of the elective pass-through entity tax is that the state income tax paid qualifies as a deduction at the entity level for calculating the federal taxable income that will flow through to the individual owners’ (partners or S corporation shareholder) return. This state income tax deduction at the individual level was limited to $10,000 as a component of property and other deductible taxes as an itemized deduction.
An example of the federal tax savings available for those electing the pass-through entity tax for 2022 follows:
Net income before pass through entity tax: $1,000,000
Elective Pass-Through Entity Tax @ 6.5%: $65,000
Reduction in Qualified Business Income 20%: $13,000
Net Reduction in Federal Taxable Income: $52,000
Federal Tax Savings on Elective PTET @ 37%: $19,000
For 2023, an estimated payment for the first three quarters was due on Sept. 15, 2023. The final estimated payment for 2023 is due Dec. 15, 2023.
The elective pass-through entity tax is allocated to the partners and shareholders of the companies and is claimed as a non-refundable credit on the WV personal income tax return. Excess credits may be carried forward for up to five taxable years.
A cautionary note for non-resident owners: some states do not allow the pass-through entity tax as a credit for income taxes paid to another state. An example of this is Pennsylvania. Pennsylvania allows a pass-through entity tax as a credit for income taxes paid to another state for S corporation shareholders but not for partners in entities taxed as partnerships. Proper planning for non-resident owners needs to be considered.
In most instances, the elective PTE tax is a benefit to the partners and shareholders of profitable pass-through entities. There are situations where electing the PTE tax is not advantageous to the taxpayer when the taxpayer’s personal income is reduced by losses from other sources. You should consult with your tax advisor before making the election.
Leon M. (Lonnie) Rogers, CPA/ABV/CFF, is the managing member of Tetrick & Bartlett, PLLC and has been providing accounting, tax, valuation, and consulting services to automobile dealers since 1977. Tetrick & Bartlett, PLLC currently serves over fifty dealers in West Virginia, Virginia, Ohio, and Pennsylvania and is a member of the AutoCPA Group, a nationwide organization of CPA firms specializing in services to automobile dealers. Lonnie can be reached at lrogers@tb.cpa or (304) 624-5564.
