Virginia Pass-Through Entity Tax: Election, Filing, and Credits

A Virginia pass-through entity tax election lets an S corporation, partnership, or multi-member LLC pay Virginia income tax at the entity level at a flat 5.75 percent rate, and each eligible owner then claims a refundable credit for their share on their personal Virginia return.¹ The election is annual, made on a timely filed Form 502PTET, and the entity’s payment is deductible on its federal return because the federal SALT cap applies to individuals rather than businesses. For owners whose Virginia tax bills run well above what the individual SALT deduction allows, the result is a federal deduction they couldn’t otherwise claim.

Which Entities and Owners Qualify

The election is open to S corporations, general partnerships, limited partnerships, limited liability partnerships, LLCs, professional LLCs, and business trusts, provided the entity is recognized as a separate entity for federal income tax purposes.² Sole proprietorships and single-member LLCs that are disregarded for federal tax purposes cannot elect, because the IRS does not treat them as separate from their owner. Eligibility is determined by the entity’s structure at the close of the taxable year.

Not every owner’s share gets taxed at the entity level even in a qualifying business. Virginia defines an “eligible owner” as a direct owner who is either a natural person subject to Virginia individual income tax or an estate or trust subject to Virginia fiduciary income tax.² If a partnership has corporate partners alongside individuals, the PTET applies only to the individuals’ and qualifying trusts’ shares. Corporate owners stay outside the calculation.

Making the Election Each Year

The election is not permanent. A business must affirmatively choose it on each year’s Form 502PTET, and the choice must be made by the due date of that return including any extensions.³¹ For calendar-year entities, that base deadline is April 15, with an automatic six-month extension pushing the outer limit to October 15, or 30 days after the extended federal due date, whichever is later.

An entity can revoke the election at any point before Form 502PTET is filed. Once the return goes in, the election is binding for that tax year.⁴ If the entity has already made estimated payments during the year but decides the election no longer makes sense, the window to change course closes the moment the return is filed.

Filing Form 502PTET

Form 502PTET must be filed electronically through Virginia Tax Online for Business. Virginia does not accept paper submissions and will not grant waivers of the electronic filing requirement.⁴

Along with the main form, the entity submits Schedule PTET ADJ for Virginia-specific income adjustments, a Schedule VK-1 for each owner, and Schedule 502A where applicable. The entity must also attach its federal return as filed, either Form 1120-S or Form 1065 with Schedule K.⁴

The tax is computed on Virginia taxable income, with an addback for any federal deduction the entity took for state and local income taxes.¹ For nonresident eligible owners, only income attributable to Virginia sources enters the calculation, using the same sourcing rules that would apply to a nonresident individual.

Estimated Payments and Late Penalties

If the entity’s total PTET liability is reasonably expected to exceed $1,000, it must make quarterly estimated payments.⁴ Payments go through Virginia’s online portal on Form PTET-PMT, with vouchers numbered 1 through 4.⁵ For calendar-year filers the deadlines generally fall on April 15, June 15, September 15, and January 15 of the following year.

Penalties are steep. A late-filed return triggers a penalty of 30 percent of the tax due, with a $100 minimum even when no tax is owed. Late payment adds another 6 percent per month on the unpaid balance, capped at 30 percent.⁴ The automatic extension buys time to file, not to pay. Tax is still due by the original due date.

How Owners Claim the Credit

The entity reports each owner’s share of the tax it paid on Schedule VK-1. Owners then claim that amount as a credit on their individual Virginia return, which for residents is typically Form 760.⁴

The credit is fully refundable. If an owner’s share of the PTET exceeds their total personal Virginia tax liability for the year, the state refunds the difference rather than requiring a carryforward.¹ One prerequisite matters: the Department of Taxation will not allow owners to claim the credit until the entity has filed Form 502PTET and all required schedules. A late entity filing locks owners out of their credits until the paperwork catches up.

Owners must also add back any deduction for state and local income taxes the entity paid on their behalf when computing their own Virginia taxable income. The credit then offsets the resulting tax, so the same income is not taxed twice.

Nonresident Owners

An electing entity cannot file a composite return on behalf of its nonresident owners.⁶ Each nonresident owner whose only Virginia-source income comes from the electing entity files their own Virginia nonresident return to claim the PTET credit. If the entity made composite payments for nonresident owners earlier in the same year before electing, those payments should be claimed on Form 502PTET and the entity should request a refund for the composite amounts.

Sunset and the Out-of-State Credit

Virginia’s PTET is not permanent. The 2025 General Assembly extended the sunset date to January 1, 2027, so the election is available for tax years beginning before that date.⁷ The 2026 tax year is covered. The 2027 tax year is not unless the legislature acts again, though a separate bill has been introduced to make the PTET permanent.

The out-of-state tax credit connected to the PTET expired on January 1, 2026, even though the core election was extended.⁷ Entities with owners who pay income tax to other states should factor this in when deciding whether the election still produces a net benefit in 2026.

When the Election Is Worth Making

The PTET is not automatically beneficial. The math depends on each owner’s situation. The election tends to produce the largest savings when owners have Virginia tax obligations well above the federal SALT cap and they itemize their federal deductions. An owner who takes the federal standard deduction gets no additional benefit, since they were not claiming a SALT deduction to begin with.

The One Big Beautiful Bill Act, signed on July 4, 2025, raised the individual SALT cap to $40,000, with a phaseout for higher earners. Earlier drafts of the bill would have eliminated PTET workarounds entirely, but those restrictions were stripped from the final legislation, so the strategy remains available for 2026. The higher cap does narrow the benefit for some owners whose state taxes now fit under the regular SALT deduction. Owners at the upper end of the phaseout, where the cap drops back toward $10,000, still benefit most from the entity-level election.

Entities with a mix of eligible and ineligible owners face added complexity, because the election only covers the eligible owners’ shares. Entities with owners in multiple states should also account for the expired PTET out-of-state credit, which can produce situations where owners pay Virginia at the entity level but cannot offset taxes owed to their home state the way they previously could.

1
Virginia Code Commission. Code of Virginia 58.1-390.3 – Elective Income Tax on Pass-Through Entities
2
Virginia Code Commission. Code of Virginia 58.1-390.1 – Definitions
3
Virginia Tax. Elective Pass-Through Entity Tax Guidelines
4
Virginia Department of Taxation. 2024 Form 502PTET Instruction Package
5
Virginia Department of Taxation. Form PTET-PMT – Virginia Pass-Through Entity Elective Income Tax Payment Voucher
6
Virginia Tax. Ruling 24-12
7
Virginia Department of Taxation. 2026 Fiscal Impact Statement