I'm a Virginia resident who owns a stake in a partnership or LLC that elected Maryland's entity-level 'PTE SALT cap workaround' tax -- can I claim a Virginia credit for the tax Maryland collected from the entity?

Plain-English summary

After the 2017 federal Tax Cuts and Jobs Act capped the federal deduction for state and local taxes (SALT) at $10,000 for individuals -- but left business-entity SALT deductions uncapped -- many states, including Maryland, created an elective "entity-level" tax option for pass-through entities (partnerships, LLCs, and S-corporations) specifically to route around that cap. Under Maryland's version, a pass-through entity can elect to have Maryland tax imposed directly on the entity itself (instead of passing the tax obligation through to its individual owners), and Maryland law expressly treats that tax as imposed on the entity, not the owners, once the election is made. A professional society asked Virginia whether its members -- Virginia residents who own interests in entities making this Maryland election -- could still claim Virginia's ordinary credit for income tax paid to another state.

The answer split cleanly along entity type. Virginia's credit statute has always had a special carve-out for S-corporations: when an S-corporation itself is taxed by another state, Virginia treats the tax as if it had been paid directly by the individual shareholders, in proportion to their ownership -- letting them claim the credit as though they'd paid the Maryland tax personally. That specific statutory language doesn't extend to other pass-through entities like partnerships or LLCs, and a Department regulation directly says the credit isn't available for a tax imposed on a "distributing entity" except when that entity is an S-corporation. The Department also leaned on a 1983 court decision (a case about S-corporation credits from BEFORE the current pass-through statutory language existed) reinforcing that credit statutes are read narrowly, in favor of the state and against the taxpayer. So a Virginia resident who's an S-corporation shareholder can potentially claim the credit (subject to the credit's usual requirements being independently satisfied), but a Virginia resident who owns a partnership or LLC interest making the same Maryland election currently cannot -- under the letter of the statute as written, the tax is legally the entity's, not theirs, and only S-corporation shareholders get the special "deemed paid by you" treatment.

What this means for you

Virginia residents who are S-corporation shareholders in a business making Maryland's PTE-level election

You may still be eligible for Virginia's credit for taxes paid to another state on the Maryland entity-level tax attributable to your ownership share -- but you'll need to separately confirm the credit's other requirements (the underlying income must be earned/business income or capital gain sourced outside Virginia and also taxed by Virginia) are met in your specific situation.

Virginia residents who own partnership or LLC interests (not S-corporation stock) in an entity making a similar election in Maryland or another state

Under the law as analyzed in this ruling, you will NOT be able to claim Virginia's out-of-state credit for that entity-level tax, even though you're economically paying tax to Maryland on the same income Virginia is also taxing. This is a real double-taxation gap worth flagging to your tax advisor before relying on the credit.

Anyone weighing whether to have a pass-through entity elect a state's SALT-cap-workaround tax

Entity structure matters. Before an entity elects an out-of-state PTE-level tax, Virginia owners should check whether their entity type is an S-corporation or something else, since it directly determines whether they'll be able to offset the resulting double taxation with Virginia's out-of-state credit.

Common questions

Q: Does Virginia give a credit for tax paid under another state's "PTE SALT cap workaround" law?
A: Only for S-corporation shareholders, based on this ruling. Virginia's credit statute specifically deems tax paid by an electing S-corporation as paid by its individual shareholders, but doesn't extend that treatment to other pass-through entity types like partnerships or LLCs.

Q: Why does the entity type matter so much for this credit?
A: Because Virginia's credit is generally only available for tax that's legally imposed on and paid by an individual (or treated as such by statute). An entity-level tax is, by definition, imposed on the entity -- Virginia's statute only overrides that distinction for S-corporations, not other pass-through entities.

Q: Could this analysis change in the future?
A: Yes -- this ruling explicitly notes it's applying current law as written, and flags that the outcome for non-S-corporation entities is the kind of issue "appropriate for legislative reform." Confirm current Virginia law before relying on this ruling, since state PTE-tax rules have been an active area of legislative change nationally.

Citations and references

• Va. Code § 58.1-332 A (credit for income tax paid to another state on income also taxed by Virginia)
• Va. Code § 58.1-332 C (tax paid by an electing S-corporation is deemed paid by its shareholders proportionally)
• 23 VAC 10-110-221 C (credit not available for tax imposed by another state on a distributing entity, except an S-corporation)
• Md. Code Ann. § 10-102.1(b), (c)(3) (Maryland's elective entity-level pass-through-entity tax)
• Howell's Motor Freight, Inc. v. Virginia Department of Taxation, Cir. Ct. City of Roanoke, Law No. 82-0846 (10/27/1983) (credit statutes are strictly construed against the taxpayer)

Subject

Credit : Taxes Paid to Another State - Entity level tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 21-156

Original ruling text

December 29, 2021

Re: Ruling Request: Credit for Taxes Paid to Another State

Dear *:

This will respond to your letter in which * (the “Society” requests a ruling on the availability of Virginia’s credit for taxes paid to another state for taxpayers who are owners of a pass-through entity that makes an election to be taxed at the entity level in Maryland.

FACTS

The federal Tax Cuts and Jobs Act, Public Law (P.L.) 115-97 (12/22/2017) (the “TCJA”), amended Internal Revenue Code (IRC) § 164(b)(6) to limit the federal deduction for state and local taxes (SALT) to $10,000 for most individuals. There is no similar limitation on the SALT deduction available to business entities. In response, several states including Maryland have implemented an elective entity-level tax for certain pass-through entities (PTEs), thereby avoiding the federal deduction limitation for individuals. These schemes have become commonly known as “PTE SALT cap workarounds.” The Society requests a ruling as to whether Virginia’s credit for taxes paid to another state will be available to Virginia taxpayers who are owners of PTEs that make an election to be taxed at the entity level in Maryland.

ANALYSIS

Maryland’s PTE SALT Cap Workaround

Md. Code Ann. § 10-102.1(b) allows PTEs subject to tax in Maryland to elect between being taxed at the member level or the entity level. If the PTE chooses to be taxed at the member level, it pays tax on the distributive or pro rate share of its nonresident members’ income. The tax is treated as being imposed on the members themselves. If the PTE chooses to be taxed at the entity level, it pays tax on the distributive or pro rata share of all members. The individual members may then claim their share of the tax paid by the PTE on their Maryland individual income tax returns. Maryland law expressly provides that when the PTE makes the election, the tax is treated as a tax imposed on the PTE itself. See Md. Code Ann . § 10-102.1(c)(3). To the extent that this treatment is respected for federal tax purposes and the tax is considered to be imposed on the PTE and not any individual owners, this PTE SALT cap workaround avoids the federal deduction limitation for individuals. The issue addressed in this ruling is whether a Virginia owner of a PTE making the election is eligible to claim a credit for taxes paid to another state on their Virginia individual income tax return.

Virginia’s credit for taxes paid to another state

Virginia Code § 58.1-332 A allows Virginia residents a credit on their Virginia individual income tax return for income taxes paid to another state provided the income is either earned or business income or gain from the sale of a capital asset, derived from sources outside Virginia, and subject to Virginia’s income tax.

The credit is limited to taxes imposed on income. Pursuant to Virginia Code § 58.1-332 A, no franchise tax, excise tax, unincorporated business tax, occupation tax or any tax characterized as such by the taxing jurisdiction, although applied to earned or business income, shall qualify for a credit, nor shall any tax which, if characterized as an income tax or a commuter tax, would be illegal and unauthorized under such other state’s controlling or enabling legislation qualify for a credit under this section.

By reason of their character as legislative grants statutes relating to credits allowed against a tax liability must be strictly construed against the taxpayer and in favor of the taxing authority. See Howell’s Motor Freight, Inc., et al. v. Virginia Department of Taxation , Circuit Court of the City of Roanoke, Law No. 82-0846 (10/27/1983). Virginia generally allows residents to claim a credit for income tax imposed by other states on their distributive share of PTE income sourced to that state.

Pursuant to Virginia Code § 58.1-332 C, the amount of tax paid by an electing S-corporation shall be deemed to have been paid by its individual shareholders in proportion to their ownership of the corporation’s stock. The statute, however, does not include similar treatment for other types of PTEs. In fact, Title 23 VAC 10-110-221 C expressly provides that the credit may not be claimed by an individual for tax imposed by another state on a distributing entity in which the individual is a beneficiary or shareholder, except when the distributing entity is an S-corporation.

In addition, the Howell’s case cited above addressed a claim by Virginia resident shareholders of an S corporation that they should be entitled to a credit for income tax paid by the corporation to other states. At the time Howell’s was decided, the statute did not yet allow for the income tax paid by the S corporation to be treated as paid by the shareholders. In upholding the Department’s denial of the credit, the court held that the statute had to be construed as written but noted that the plaintiffs had raised a issue appropriate for legislative reform.

The Society argues that Virginia should allow the credit even if the PTE makes the election because the Virginia resident taxpayer is subject to Maryland income tax on Maryland source income regardless of whether the election is made or not. It asserts that functionally, the mechanics of how the taxes are paid at the state level remain the same, it is only the character of the tax for federal income tax purposes which changes.

Like the court in Howell’s , however, the Department is bound by the statutes and regulations as they currently exist. As stated above, Virginia Code § 58.1-332 expressly provides for the out-of-state credit when paid by S-corporations. Under the canon of statutory construction expressio unius est exclusio alterius , which provides that the mention of a specific item in a statute implies that other omitted items were not intended to be included within the scope of the statute, PTEs other than S-corporations would not come within the scope of the statute. In any event, 23 VAC 10-110-221 makes it clear that the credit is not available if the tax is imposed by another state on the distributing entity. Under the Maryland statute at issue, the tax is imposed on the distributing entity if the election is made.

RULING

The Maryland PTE SALT cap workaround involves a tax on income for which a Virginia credit for taxes paid to another state is typically available. However, for purposes of the out-of-state credit allowable under Virginia Code § 58.1-332, a tax imposed at the entity level is not attributable to the individual members, unless they are shareholders of an S-corporation. Virginia residents who are shareholders of an S-corporation that elects to be taxed at the entity level pursuant to Maryland’s PTE SALT cap workaround must then determine on a case-by-case basis if the tax payment would otherwise qualify for the credit for taxes paid to another state in the hands of the individual shareholder. If so, the Virginia resident would be entitled to claim the credit as if it had been paid by the individual directly.

Under current law, however, Virginia resident taxpayers holding interests in other types of PTEs that make the election in order to take advantage of Maryland’s PTE SALT cap workaround will not be eligible for the credit.

The Code of Virginia section and regulation cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at , or via email at **.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/3896-C