What Is the VK-1 Form and How Is It Used for Tax Filing?

Taxpayers receiving income from partnerships, S corporations, trusts, or estates may need to report it on their Virginia state tax returns. The VK-1 form details an individual’s share of income, deductions, and credits from these pass-through entities, ensuring accurate tax reporting and compliance with state regulations.

Who Issues the Document

The VK-1 form is issued by Virginia-based pass-through entities, which must report each member’s share of income, deductions, and credits. These entities file a composite return with the Virginia Department of Taxation and distribute VK-1 forms to their partners, shareholders, or beneficiaries.

Entities must comply with Virginia’s tax reporting requirements, including deadlines and documentation standards. Partnerships and S corporations must file their state tax returns by the 15th day of the fourth month after their tax year ends, aligning with federal deadlines. Trusts and estates follow a similar timeline but may have different filing obligations based on their structure and income distribution.

Failure to issue VK-1 forms correctly can result in penalties ranging from $100 to $1,000. If an entity does not provide VK-1 forms to recipients, those individuals may face tax complications, including underpayment penalties or the need to file amended returns.

Pass-Through Income Sources

Pass-through entities do not pay income tax at the business level. Instead, their earnings, deductions, and credits are distributed to individual members, who report this information on their personal tax returns. The VK-1 form provides a breakdown of these amounts.

Partnerships

A partnership is a business where two or more individuals or entities share profits and losses. Partnerships do not pay income tax directly but file Form 502 with the Virginia Department of Taxation and issue VK-1 forms to partners.

Partners must report this income on their individual state tax returns. For example, if a partnership earns $200,000 in taxable income and has four equal partners, each partner would report $50,000.

Certain deductions and credits may also be passed through. If a partnership qualifies for Virginia’s Research and Development Tax Credit, each partner’s share will be listed on their VK-1. Partners may also be responsible for self-employment taxes on their earnings, though this is reported separately on federal tax filings.

S Corporations

An S corporation passes income, deductions, and credits to shareholders. Like partnerships, S corporations do not pay state income tax at the corporate level but file Form 502 and distribute VK-1 forms to shareholders.

Shareholders must report their VK-1 amounts on their Virginia tax returns. If an S corporation generates $500,000 in taxable income and has five equal shareholders, each reports $100,000. This income is subject to Virginia’s individual income tax rates, ranging from 2% to 5.75%.

S corporations may also pass through tax credits, such as the Virginia Enterprise Zone Credit. Unlike partnerships, S corporation shareholders are not subject to self-employment tax on their earnings, as they are considered passive investors.

Trusts and Estates

Trusts and estates manage and distribute assets to beneficiaries. When they generate income, they must report it to the Virginia Department of Taxation and issue VK-1 forms to beneficiaries. The income reported may include interest, dividends, rental earnings, or capital gains.

Beneficiaries must include VK-1 amounts on their Virginia tax returns. For example, if a trust earns $100,000 in investment income and distributes $40,000 to a beneficiary, that individual reports $40,000 in income.

Trusts and estates may also pass through deductions, such as administrative expenses or charitable contributions, reducing a beneficiary’s taxable income. Certain tax credits, like the Historic Rehabilitation Tax Credit, may also be allocated to beneficiaries.

Subtractions on the VK-1

Virginia tax law allows certain income adjustments to reduce taxable income at the state level. These subtractions, reported on the VK-1, can lower a recipient’s tax burden.

One common subtraction applies to interest from U.S. government obligations, such as Treasury bonds, which are taxable federally but exempt in Virginia. If a pass-through entity holds these securities, the VK-1 will reflect the subtraction.

Virginia also offers an exclusion for up to $12,000 in retirement income for individuals aged 65 and older, subject to income limitations. If a trust or estate distributes qualifying retirement benefits, the VK-1 will indicate the subtraction. Military retirement pay and certain benefits for surviving spouses of military personnel may also qualify for full or partial subtraction.

Income earned outside Virginia can sometimes be subtracted. For example, if a Virginia-based partnership operates in multiple states and allocates income to a nonresident partner for work performed entirely outside Virginia, that income may be excluded from Virginia taxation. The VK-1 will identify such subtractions.

Reporting Credits

Virginia offers various tax credits that pass-through entities can allocate to their members, reducing tax liability. These credits, reported on the VK-1, can offset state income tax owed.

One commonly reported credit is the Virginia Land Preservation Credit, which incentivizes conservation efforts by allowing taxpayers to claim a credit for donating land or conservation easements. If a pass-through entity makes such a donation, the credit is distributed among its members based on their ownership percentage. Since Virginia allows unused portions of this credit to be sold, recipients may either apply the credit to their tax liability or transfer it for cash.

Historic Rehabilitation Tax Credits provide another opportunity for tax relief when an entity invests in restoring certified historic properties. To qualify, rehabilitation expenses must meet certain thresholds, and the project must be approved by the Virginia Department of Historic Resources. Pass-through entities engaged in these projects allocate the credit to members, who can apply it against state income taxes or carry it forward for up to ten years.

Nonresident Filing Details

Nonresidents receiving income from Virginia-based pass-through entities must determine their state tax obligations based on VK-1 amounts. Since Virginia taxes income sourced within the state, nonresidents may need to file a Virginia nonresident tax return (Form 763) if their share of income meets the filing threshold.

To mitigate double taxation, Virginia allows nonresidents to claim a credit for taxes paid to their home state on the same income. However, this credit is only available if the taxpayer’s state of residence does not have a reciprocal agreement exempting Virginia-sourced income. Some pass-through entities elect to file a composite return on behalf of their nonresident members, paying Virginia taxes at the entity level. If a composite return is filed, the VK-1 will indicate this, and nonresidents may not need to submit an individual Virginia return.

Including Form Data on Tax Returns

Taxpayers must accurately incorporate VK-1 information into their Virginia state tax return. The income, deductions, and credits reported should be transferred to the appropriate sections of Form 760 (for residents) or Form 763 (for nonresidents).

Credits reported on the VK-1 should be applied to reduce tax liability, but taxpayers must verify whether the credits are refundable or nonrefundable. Proper documentation, including a copy of the VK-1, should be retained in case of an audit or inquiry from the Virginia Department of Taxation.