Notably, HB1447 imposes a 5.75% tax on the Virginia taxable income of the electing pass-through entities, while allowing these entities to benefit from various credits and deductions under existing tax laws. For nonresident owners, their taxable income will be limited to income sourced within Virginia. This aligns tax practices within the state and supports both the entities and their owners by potentially leading to fewer complications in tax obligations.
Summary
House Bill 1447 proposes amendments to Section 58.1-390.3 of the Code of Virginia, relating to the elective income tax on pass-through entities. The bill allows pass-through entities, beginning from taxable years on or after January 1, 2021, to elect to pay taxes at the entity level rather than having individual owners report these on their personal tax returns. This aims to simplify tax reporting for entities with multiple owners and provide a clearer tax structure for pass-through income.
Contention
A significant aspect of the bill is the proposed waiver of penalties related to tax underpayments for some pass-through entities for the specified taxable years. Advocates argue that this penalty waiver is a necessary relief, particularly as entities adapt to new tax structures. Conversely, critics might be concerned that this could lead to compliance issues or reduced state revenue during the transitional period as entities shift to this new taxation method.