- The Virginia Department of Taxation (the “Department”) recently released Tax Bulletin 25-5, which provides updated guidance to corporate taxpayers on the allocation of income from non-unitary pass-through entities.
- Corporations must treat income from non-unitary pass-through entities as allocable non-business income.
- Corporations may amend returns for tax years prior to 2025 to reflect the change in treatment of income from non-unitary pass-through entities, but the change in treatment is not required for prior year returns.
Background
In Va. Dep't of Tax'n v. FJ Mgmt., Inc., 907 S.E.2d 541 (Va. App. Ct. 2024), the Court of Appeals of Virginia held that a corporate partner’s income from a non-unitary partnership was allocable income and that the corporate partner was not required to flow up its share of the partnership’s income and apportionment factors. For a discussion of the decision in FJ Management see Virginia Appellate Court Treats Partnership Income as Allocable. The Department issued Tax Bulletin 25-5 after the Supreme Court of Virginia refused to hear the Department’s appeal in FJ Management.
Allocation of Non-Unitary Income from Pass-Through Entities
Prior to the issuance of Tax Bulletin 25-5, the Department took the position that income and apportionment factors from any corporate owned pass through entity (“PTE”), including non-unitary entities, should flow up to the corporate owner’s level and be included (blended) with the corporate owner’s income and apportionment factors. Tax Bulletin 25-5 provides that corporate owners of non-unitary PTEs will now treat the PTE’s income as allocable income, determined at the PTE level, by separately apportioning the PTE’s income using the PTE’s apportionment factors.
In Virginia, allocation or apportionment of PTE income by a corporate owner is now dependent on whether the entities are part of a unitary business. In FJ Management, the court based its unitary analysis on the United States Supreme Court’s decision in MeadWestvaco Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16 (2008), examining functional integration, economies of scale, and centralized management to determine if the entities were part of a unitary business. Accordingly, corporate owners will need to consider these factors in determining whether to allocate or apportion income from a PTE for Virginia income tax purposes.
For corporate owners of non-unitary PTEs, Tax Bulletin 25-5 provides line-by-line filing instructions for the 2025 tax year. The bulletin notes that this is a temporary solution and Schedule 500A may be updated in the future to address the allocation of income from non-unitary PTEs.
Tax Bulletin 25-5 also provides transition rules for tax years prior to 2025 (subject to the statute of limitations). For these prior years, the bulletin clarifies that allocation of income from non-unitary PTEs is not required but is permitted. The bulletin advises that the Department’s website must be consulted for instructions on how to include income from a non-unitary PTE on a prior year tax return.
Forvis Mazars Insight: For calendar year taxpayers the Virginia corporate income tax extended filing deadline for the 2024 tax year is quickly approaching (November 15, 2025); therefore, any corporate taxpayer with income from a PTE should consider the potential impact of the guidance found in Tax Bulletin 25-5 on their 2024 Virginia income tax returns.
How Forvis Mazars Can Help
Forvis Mazars can collaborate with you to help you understand whether the relationship between entities rises to the level of a unitary business, in Virginia and elsewhere. Additionally, Forvis Mazars can assist you with the process of determining whether to file amended Virginia corporate income tax returns and filing such returns if appropriate.