United States

Virginia: Updated Pass-Through Entity Withholding Guidance Effective for Tax Year 2015 Onward

Jan 11, 2016
From KPMG TaxWatch

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On December 22, 2015, Virginia issued long-awaited updates to its pass-through entity withholding guidelines effective for tax years beginning on or after January 1, 2015. The most significant changes relate to exemptions from withholding and composite return requirements. 

In a marked departure from prior policy, Virginia will now permit both an individual and a corporate owner in a pass-through entity to claim a current year exemption from withholding if such owner (i) filed a Virginia income tax return in the prior year reporting zero tax liability, and (ii) expects to file a Virginia return and have a zero Virginia income tax liability for the current year. The pass-through entity must obtain a signed affidavit from the owner certifying that the owner qualifies for this exemption. For an individual owner, the affidavit must be obtained annually; for a corporate owner, an affidavit may remain in effect until revoked.  

With respect to Virginia composite returns, although specific consent by nonresident owners is still required, pass-through entities may now file on behalf of some non-resident individual owners, whereas previously all nonresident individual owners were required to be included on a composite return.  In addition, a group of pass-through entities that meets Virginia’s “common ownership” definition may now file a single composite return, and prior approval by the Department of Taxation is not required. 

Under the revised composite return rules, individuals with income from other Virginia sources may be included on a composite return, but they must file a nonresident individual income tax return in Virginia and claim credit for the tax paid on their behalf in the composite return. Note that Virginia continues to disallow the inclusion of non-individual owners on composite returns.

Virginia’s updated withholding guidelines include clarifications concerning penalties imposed on pass-through entities. In addition, an “investment pass-through entity” is now specifically exempt from filing returns and withholding tax in Virginia, and its corporate or non-corporate owners are not required to file Virginia returns based solely on their ownership in the investment pass-through entity. For more information the Virginia pass-through entity withholding changes (Public Document Ruling 15-240), please contact Diana Smith at (703) 286-8214.

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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.