How to Make a Virginia PTET Election

Say a management consultant runs her firm as an S-corp in Fairfax and it clears $300,000 of Virginia profit. Her household income is well into the six figures, so the federal deduction for state and local taxes is already used up. She pays Virginia income tax on that profit at 5.75% and gets nothing for it on her federal return. The Virginia PTET election fixes that, and it costs her no extra state tax to use. This consultant is theoretical, not an EntityIQ client, but her setup is the one I see most often in the D.C. suburbs.

What the Virginia PTET is

Virginia calls its workaround the elective pass-through entity tax, and it lives in Code of Virginia § 58.1-390.3. The General Assembly enacted it in 2022 as a response to the federal cap on the state and local tax deduction. When a qualifying entity elects, it pays Virginia income tax on its own income, and the owners take a credit on their personal returns so the same dollars are not taxed twice at the state level. The Virginia Department of Taxation runs the program and publishes the forms and guidelines.

The reason any of this exists is the federal cap. The One Big Beautiful Bill Act raised the state and local tax deduction ceiling under IRC § 164(b)(6) to $40,400 for 2026, but that larger cap phases back toward $10,000 once modified adjusted gross income passes $505,000. A tax the business pays and deducts never lands on Schedule A, so it sidesteps both the cap and the phaseout. That treatment rests on IRS Notice 2020-75, which confirmed a state income tax imposed on and paid by the entity is deductible in figuring the entity's income, with no cap applied.

The rate is a flat 5.75%

The Virginia PTET is a flat 5.75%, the same as the state's top individual income tax rate. It applies only to the pro rata or distributive share of income attributable to eligible owners, meaning natural persons, estates, and trusts. On $300,000 of eligible-owner income, the entity tax is $17,250. Because the PTET rate matches the rate the owner would pay anyway, the credit that comes back on the owner's return lines up almost exactly with the Virginia tax on that income, which is cleaner than states where the entity rate and the owner rate differ.

Who can elect, and the 2023 change

When the tax first passed, an entity had to be owned entirely by natural persons, or by persons eligible to be S-corp shareholders under IRC § 1361, before it could elect. That knocked out any partnership with a corporate partner or an entity partner. During the 2023 session the General Assembly passed House Bill 1456 and Senate Bill 1476, which removed that all-or-nothing ownership rule. Now a mixed-ownership entity can still elect, but the tax and the credit only reach the eligible owners. Any share held by a corporation or another pass-through is left out of the base and gets no credit. For a straightforward single-owner S-corp none of this bites, since the one shareholder is a natural person.

How to make the election on Form 502PTET

You make the election by filing Form 502PTET and checking the election box on page 1, by the return due date including any extension. For a calendar-year entity that is April 15, or October 15 on the automatic six-month extension. The election is annual and, once the return is filed, binding for that year. There is no separate one-page form to mail ahead of time. Filing the 502PTET, checking the box, and paying the tax is the election, and you decide again the next year.

Estimated payments are not optional

This is where owners get tripped up. Starting with tax year 2023, an electing entity that expects to owe more than $1,000 of PTET must make quarterly estimated payments. For a calendar-year filer they are due in four equal installments of 25% on April 15, June 15, September 15, and December 15. Miss them and the entity owes underpayment charges, even though the election itself is not final until the return is filed. So start the estimates as soon as the decision looks likely, not after the year closes.

The owner side is an addback plus a refundable credit

Here is the part worth slowing down on. Eligible owners claim a refundable credit on their Virginia return, reported on Schedule VK-1, equal to their share of the tax the entity paid. Virginia keeps itself whole by having the electing entity add the deducted PTET back into the income it reports to the state, so the Virginia result is roughly a wash and the federal deduction is the actual savings. In plain terms, the state still taxes the full profit, the owner still gets full credit for the tax the business paid, and the only figure that moves is the federal deduction.

The math, side by side

Back to the theoretical Fairfax consultant. Her S-corp has $300,000 of Virginia income, all of it attributable to her as the sole eligible owner, and her federal marginal rate is 35%. Her income has already phased the personal SALT cap down to the $10,000 floor, and her property tax uses that up, so Virginia income tax on the firm buys her nothing on Schedule A. The Virginia tax she owes is the same either way, and only the federal deduction moves.

The swing is about $6,038 a year on one election, and the only thing separating the two columns is whether the Virginia tax sits on the business return or on Schedule A. The state tax is identical. The federal deduction is the whole game. One note of honesty on the number: if you still get the full 20% qualified business income deduction, shrinking the flow-through income by $17,250 also trims that deduction, so the real benefit lands a bit under the headline. Plenty of higher earners are already past the QBI wage limit, and for them the full amount stands.

Virginia made the election permanent in 2026

The PTET started life with an expiration date, like most of these state workarounds. During the 2026 session the General Assembly removed the sunset and made the pass-through entity tax election permanent, effective February 20, 2026. Under prior law the election would have expired for taxable years beginning on or after January 1, 2027. That change matters for planning, because you can now build a multi-year strategy around the Virginia election without watching a state clock. The one clock still worth watching is the federal one: the larger SALT cap is scheduled to snap back to $10,000 in 2030, which is the whole reason the workaround pays off.

When it is not worth the paperwork

The election is not free. It means a separate Virginia business return, quarterly estimates on the entity's behalf, and a credit to track on each owner's return. If your income sits under $505,000 and your total state and local taxes come in under the $40,400 cap, the larger federal cap may already capture everything you pay, so the election just adds work. It earns its keep when the Virginia tax on your business profits is large, your income is high enough to shrink the personal cap, or both. Run the numbers before you file, because the answer turns on where your income lands.

If you want to see whether an S-corp election makes sense in the first place, the EntityIQ calculator models the self-employment tax side, and our guide on the PTET SALT cap workaround walks through the federal mechanics. For how another high-income state handles its version, compare the New York PTET election or the Oregon PTE-E election.

This article is educational and is not legal or tax advice. The figures above are 2026 amounts, and the consultant is theoretical. Virginia rules change, and the deduction interacts with the QBI deduction and multistate credits, so please consult a qualified CPA before making the election.