One of the most lively topics in the world of state and local tax over the last few years has been the ongoing efforts to work around the limitations on the federal deductibility of state and local taxes (SALT) put into place with the 2017 Tax Cuts and Jobs Act. The most common strategy adopted by states are to adopt so-calledSALT cap workaround laws, which allow taxes to be paid by pass-through entities. Thisconvertsthe tax expense into a business expense, with some variation on an equivalent credit being then granted to individual owners of the entity. Because the SALT deduction limitation does not apply to pass-through entities, this puts the owners of a pass-through entity in the position they would have been in before the limitation was enacted.

Thus far, approximately 20 states have enacted such laws, leading to a patchwork national landscape. For any given state, pass-through entity owners must ask themselves two questions. First, does the entity qualify for pass-through entity taxes (PTET) in any of the states in which it does business? Second, does the owner's home state allow an individual tax credit for entity level taxes paid to those states? If both of these questions are answered with aYes, generally there is only upside (i.e., federal tax savings) to participating in as many states’ PTET programs as possible.

Virginia was previously one of the most restrictive states in the nation, with no PTET of its own and a credit for taxes paid to other states written in a way that was generally considered to foreclose on resident credits for other states’ PTETs (with the exception of S corporation owners).

On April 11, 2022, with Virginia's governor signingHB 1121, this has all changed. The signing of this bill not only brings Virginia fully into the national conversation with its own take on a PTET, but also brings some level of assurance to Virginia pass-through entity owners that they will receive credits for taxes paid related to other states’ PTETs.

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