What Is the WV Pass-Through Entity Tax?

West Virginia implemented an elective Pass-Through Entity (PTE) tax, effective for tax years starting January 1, 2022. This tax provides a workaround to the federal $10,000 limitation on the state and local tax (SALT) deduction for individuals, which was introduced by the Tax Cuts and Jobs Act of 2017. By making this election, certain businesses can pay West Virginia income tax at the entity level on behalf of their owners.

The purpose of this tax structure is to shift the state tax payment from the individual owners to the business entity itself. This allows the business to deduct the full amount of state taxes paid as an ordinary business expense on its federal income tax return, without being subject to the individual SALT deduction cap. The owners then receive a credit on their personal West Virginia income tax returns for the amount of tax paid by the entity on their behalf, preventing double taxation at the state level.

Determining Eligibility for the Election

To utilize the pass-through entity tax, a business must first qualify as an “electing pass-through entity.” Under West Virginia law, this category is available to partnerships and S corporations. These are entities that typically do not pay income tax themselves; instead, their income, losses, deductions, and credits are passed through to their owners to be reported on their individual tax returns. The election allows these specific business types to opt into paying state income tax directly.

Certain business structures are explicitly excluded from making this election. C corporations are not eligible because they are already subject to the state’s corporate income tax and do not pass income through to owners in the same manner. An exclusion is any entity that is disregarded for federal income tax purposes, most commonly a single-member limited liability company (LLC) that has not elected to be taxed as a corporation. These entities are not considered separate from their owner for tax purposes and therefore cannot make the PTE tax election.

Calculating the Entity Level Tax

The election to pay the pass-through entity tax is made annually by filing Form EPT-100, the Elective Pass Through Entity Tax Return. The act of filing the return serves as the election for that tax year. This form can be filed online through the West Virginia Tax Division’s MyTaxes portal or electronically via approved software providers. The election is binding for the tax year and cannot be revoked once the return has been filed.

Calculating the tax begins by determining the entity’s West Virginia taxable income. This process starts with the total income, gains, losses, and deductions that would normally flow through to the owners. The calculation must include the distributive share of income or loss for every resident owner. For nonresident owners, only their share of income that is apportioned to West Virginia is included in the tax base.

The tax is calculated on the income attributable only to eligible owners, which are individuals, estates, and trusts. Any income that is allocated to ineligible owners, such as C corporations, must be excluded from this calculation.

From this initial income figure, the entity must make several West Virginia-specific adjustments. A modification is to add back any federal deduction taken for state and local income taxes. The entity may then apply other state-specific additions and subtractions to arrive at the final West Virginia taxable income base. This adjusted income base is then subject to a tax rate of 5.12%, which is the highest marginal rate for individuals in West Virginia.

Payment Requirements and Deadlines

For tax years beginning on or after January 1, 2023, an electing pass-through entity is required to make quarterly estimated tax payments. These payments are mandatory if the entity’s total expected tax for the year is reasonably anticipated to exceed $2,400. Failure to make these required estimated payments can result in penalties and interest.

The deadlines for these quarterly estimated payments for a calendar-year filer are:

• April 15
• June 15
• September 15
• December 15

Entities can submit their tax payments to the West Virginia Tax Division through the state’s online portal, MyTaxes, or by mail using the appropriate payment vouchers. The annual return, Form EPT-100, is due on or before the 15th day of the third month following the close of the tax year (March 15 for calendar-year filers). An extension to file can be granted, which moves the filing deadline to September 15 for calendar-year filers. However, an extension to file is not an extension to pay; any final tax amount owed must be paid by the original March 15 deadline.

How Owners Claim the Tax Credit

After the electing entity files its Form EPT-100 and pays the tax, the entity is required to provide each eligible owner with a West Virginia Schedule EK-1. This document details their specific share of the entity’s income and the amount of the tax credit they can claim on their personal tax return. The entity must furnish this schedule to its owners on or before the date it files its EPT-100.

Owners use the information from Schedule EK-1 to claim the credit on their West Virginia Personal Income Tax Return, Form IT-140. The credit is reported on the Recap Schedule (Schedule E) of the personal return. The taxpayer should report this amount as a pass-through entity tax credit and not as withholding, as misreporting it can cause processing delays. The owner must attach the Schedule EK-1 received from the entity to their IT-140.

This credit directly reduces the owner’s West Virginia income tax liability on a dollar-for-dollar basis. For example, if an owner has a state tax liability of $5,000 and a PTE tax credit of $4,500, their final tax due to the state is reduced to $500. Should the credit amount be greater than the owner’s tax liability for the year, the owner can carry forward any unused portion of the credit for up to five subsequent taxable years.