My irrevocable trust owns interests in pass-through entities that elect to pay Virginia's Pass-Through Entity Tax (PTET) at the entity level -- can I pass the resulting tax credit through to my trust's beneficiaries?

Plain-English summary

An irrevocable business trust -- itself taxed under Virginia's fiduciary income tax provisions (Va. Code § 58.1-360) -- owns interests in several pass-through entities (PTEs). Some of those PTEs elect to pay Virginia's Pass-Through Entity Tax (PTET) at the entity level under Va. Code § 58.1-390.3, generating a tax credit for their owners. The trust asked the Department whether it could pass that credit further down to its own beneficiaries.

Who counts as an "eligible owner." Only an "eligible owner" of an electing PTE can claim the PTET credit, and Va. Code § 58.1-390.1 defines that term narrowly: a natural person subject to Virginia's individual income tax, or an estate or trust subject to Virginia's fiduciary income tax -- but specifically a direct owner of the PTE. Because the trust directly owns interests in the PTEs at issue, it qualifies as an eligible owner and can claim a credit for its pro rata share of PTET paid, assuming all other requirements are met.

Why the beneficiaries don't get anything. The trust's beneficiaries don't own the PTEs -- they own an interest in the trust, which in turn owns the PTEs. That makes them indirect owners of the PTEs, not direct owners. Since the credit under Va. Code § 58.1-390.3 E is available only to direct owners and Virginia law doesn't provide a mechanism to pass it through to indirect owners, the beneficiaries are not entitled to any share of the PTET credit generated by the trust's PTE investments -- even though the trust's income (and the underlying PTE income) may itself eventually pass through to them for other tax purposes.

What this means for you

Trusts (or trustees) that own interests in PTET-electing pass-through entities

The trust itself can claim the PTET credit for its own tax liability if it directly owns the electing PTE and meets the other statutory requirements -- but don't expect to be able to allocate or pass that specific credit down to the trust's beneficiaries on their own returns.

Beneficiaries of a trust with PTE investments

If your trust invests in pass-through entities that pay PTET, don't assume you'll see a PTET credit show up on your own personal return because of that investment -- the credit is only available to the trust as the direct owner, not to you as an indirect owner through the trust.

Anyone structuring multi-tier ownership of PTET-electing entities generally

This ruling is a reminder that Virginia's PTET credit mechanism is deliberately limited to one layer of direct ownership -- credits don't automatically cascade through additional tiers of pass-through ownership (trusts, or presumably other indirect-holding structures) the way the underlying income might.

Common questions

Q: Can a trust that owns a pass-through entity claim a PTET credit?
A: Yes, if the trust is a direct owner of an electing PTE and meets the other requirements of Va. Code § 58.1-390.3 -- a trust subject to Virginia's fiduciary income tax counts as an "eligible owner."

Q: Can the trust then pass that PTET credit through to its beneficiaries?
A: No. The credit is available only to direct owners of the electing PTE. The trust's beneficiaries are indirect owners (they own an interest in the trust, not the PTE), so they're not entitled to any share of the credit.

Q: Does this affect the trust's ability to distribute the underlying income to beneficiaries?
A: This ruling addresses only the PTET credit itself -- it doesn't change how the trust's distributable net income from the PTEs is otherwise passed through to beneficiaries for other tax purposes.

Citations and references

Statutes:

• Va. Code § 58.1-390.1 -- definitions for the Pass-Through Entity Tax, including "eligible owner"
• Va. Code § 58.1-390.3 -- PTET election and the credit available to eligible owners (subsection E)
• Va. Code § 58.1-360 -- taxation of business trusts under Virginia's fiduciary income tax

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 24-13

Original ruling text

March 12, 2024

Re: Ruling Request: Pass-Through Entity Tax

Dear. *:

This will respond to your letter, in which you request a ruling regarding the application of the pass-through entity tax (PTET) provisions of Virginia Code § 58.1-390.1 and § 58.1-390.3 to business trust beneficiaries.

FACTS

The * Irrevocable Trust (the “Trust”) is a business trust subject to tax under Virginia Code § 58.1-360. The Trust owns interests in other pass-through entities (PTEs). The Trust may have distributable net income and tax credits from such entities which are passed through to its beneficiaries. The PTEs in which the Trust owns an interest may make an election under Virginia Code § 58.1-390.3 to be taxed at the entity level. The Trust requests a ruling that it may pass credits for such taxes through to its beneficiaries.

RULING

An “eligible owner” of an electing PTE is entitled to a credit for their pro rata share of the tax paid if all other requirements are met. See Virginia Code § 58.1-390.3 E. Virginia Code § 58.1-390.1 defines an “eligible owner” as “a direct owner of a pass-through entity who is a natural person subject to the tax imposed by Article 2 (§ 58.1-320 et seq .) or an estate or trust subject to the tax imposed by Article 6 (§ 58.1-360 et seq .)” [emphasis added]. Thus, the Trust is an “eligible owner” of any PTEs in which it owns a direct interest and, if the other requirements are met, would be entitled to a credit against its tax liability for its share of any tax paid by such entities under Virginia Code § 58.1-390.3. The Trust’s beneficiaries, however, are not eligible owners of such PTEs because they are not “direct owners” of the PTEs. The credit allowed by Virginia Code § 58.1-390.3 E is available only to direct owners and may not be passed through to indirect owners. Accordingly, beneficiaries of the Trust are not entitled to any tax credits attributable to the Trust’s ownership of PTEs that elect to pay PTET at the entity level under Virginia Code § 58.1-390.3.

The Code of Virginia sections cited are available online at www.tax.virginia.gov in the Laws, Rules, & Decisions section of the Department’s website. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at (804) ***.

Sincerely,

Craig M. Burns

Tax Commissioner

AR/4528.X