A new nonresident owner withholding rule, enacted by the Commonwealth of Virginia, will be effective for tax years beginning on or after January 1, 2008. The requirement applies to any pass-through entity (partnership, LLC or S Corporation) that does business in Virginia and has owners who are not Virginia residents. The law requires pass-through entities doing business in Virginia to pay a withholding tax equal to 5% of the nonresident owners’ share of taxable income from Virginia sources.
Pass-through entities will be required to pay this tax for the first time when 2008 returns are filed in 2009. Currently, there are no requirements for quarterly estimated payments or any other advance payments. The Tax Commissioner shall proscribe forms for filing and paying the tax as well as related forms for
claiming exemptions and any other required reporting. These forms and the actual regulations regarding this new law will not be available until 2008 according to the Virginia Department of Taxation.
There are several exemptions from the withholding requirement, but for the most part, these exemptions will not be applicable to owners of law firm partnership or LLC interests. However, if the firm files a Form 765, Unified Return for Nonresident Owners, then the withholding requirement does not apply because the tax is being paid with the unified return.
The liability for the tax is determined annually without regard to whether or not the pass-through entity has actually withheld any amounts from any owner’s distributions, allocations or payments. The withholding tax must be paid and the return filed when the Pass-Through Entity Return, Form 502, is due, which is the 15th day of the fourth month following the close of the taxable year, or in most cases, April 15th. An extension of time to file the return will be available, but the tax still must be paid by the original due date.
For 2008, if the pass-through entity files an extension, at least 90% of the tax due for 2008 must be paid by the original due date in order to avoid a penalty. In subsequent years, the pass-through entity must pay either 90% of the tax due for the taxable year or 100% of the tax paid for the prior year, if that was a taxable year of 12 months and withholding tax was paid for that taxable year. Any balance due must be paid with the filing of the Form 502.
The withholding tax that is paid on behalf of a nonresident owner should be accounted for as a distribution to the owner and not as a deduction from the firm’s income. This new withholding requirement is similar
to the current requirement for Maryland and several other states.
John Niehoff
703 923 8224
Bill Apple
703 923 8287
Please contact us for additional details and to discuss your specific situation prior to taking action. To ensure compliance with requirements imposed by the IRS, you are hereby advised that any written tax advice contained in this communication (including any attachments) was not written or intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.