By: Chris M. Hunter
The West Virginia Legislature recently passed a bill that could grant business owners relief from what’s become known as the “SALT cap.” Owners of pass-through entities need to understand the changes enacted by this law immediately because its retroactive nature provides a potential benefit for the 2022 tax year, whose filing deadlines are rapidly approaching.
The Federal Tax Cuts and Jobs Act of 2017 (“TCJA”) changed deductions, depreciation, expensing, tax credits and various other items that affected businesses. One of the major changes implemented by the legislation was the creation of a state and local tax (“SALT”) cap. Prior to the TCJA, individual taxpayers could deduct all state and local taxes paid (income or property) from their federal taxable income (subject to alternative minimum tax limitations). However, beginning with tax year 2018, the TCJA capped the SALT deduction for individuals at $10,000 per year on federal returns though 2025 for the following categories of taxes:
- State and local real property taxes (not paid or accrued in carrying on an IRC §162 trade or business or in an IRC §212 activity);
- State and local personal property taxes (not paid or accrued in carrying on an IRC §162 trade or business or in an IRC §212 activity);
- State and local income, war profits, and excess profits taxes; and
- State and local general sales taxes.
The TCJA SALT cap, however, does not apply to corporations or pass-through entities (“PTEs”); accordingly, several states have enacted PTE legislation—creating an entity-level income tax as a workaround—so that SALT can be deducted notwithstanding the cap.
West Virginia, through Senate Bill 151,[1] is poised to become the most recent state to enact such legislation. The bill allows every PTE to elect to pay West Virginia’s income tax at the entity level—as opposed to passing its income and the associated income taxes through to its individual owners. This way, all of the entity’s West Virginia state income tax may be deducted from entity’s income, and then the PTE’s owners will get to take individual income tax credit against each taxpayer’s aggregate tax liability in an amount equal to the respective owner’s proportionate share of the income tax paid at the entity level, thereby avoiding the $10,000 individual SALT cap. The law will allow unused portions of the credit to be carried forward to subsequent tax years—up to five years.
Under the new law, the tax rate on an electing PTE is equal to the top marginal rate imposed on individuals: 6.5%. See (proposed) W.Va. Code §11-21-3a(k). The bill also directs the West Virginia Tax Division to promulgate rules to administer the newly-created PTE tax.
Legislative action was completed on SB 151 on March 10, 2023. Assuming Governor Justice signs the bill or, at least, doesn’t veto it, the PTE tax/SALT workaround will be effective 90 days from passage. West Virginia will become the 31st state to pass similar legislation.
Perhaps the most important thing owners of PTEs need to be aware of immediately is that the changes in the law implemented by SB 151 apply retroactively to January 1, 2022—meaning PTE owners can get relief from the TCJA SALT cap for their 2022 taxes.[2] Although laws are generally not to be applied retroactively in the absence of a specific directive from the Legislature, SB 151 contains such a directive at (proposed) W.Va. Code §11-21-3(f): “[t]his section as amended in 2023 shall apply to taxable years beginning on and after January 1, 2022.” PTE tax returns (Form PTE-100) for TY 2022 must be filed by March 15, 2023,[3] which means PTE owners/members who have not yet filed their returns may wish to seek an extension of the filing deadline to allow the Tax Division time to issue guidance and/or promulgate rules detailing the procedure for making the PTE election.
[1] https://www.wvlegislature.gov/Bill_Text_HTML/2023_SESSIONS/RS/bills/sb151%20sub1.pdf
[2] Cash basis taxpayers who elect to pay 2022 taxes with their 2023 return pursuant to this change will receive the deduction for 2023. For accrual basis taxpayers, there are questions concerning how to property account for payment of 2022 taxes that should be discussed with your return preparer.
[3] https://tax.wv.gov/TaxCalendar/Pages/TaxCalendarMarch.aspx.