Is a Virginia PTET tax refund taxable?

[mnielsen]

I have a Virginia PTET refund for 2024 and I believe this refund is taxable to the S Corporation as income in tax year 2025 since the initial estimated state payments were deducted as a business expense in 2024. Is this correct?

[PatriciaV]

The IRS hasn't ruled on how a PTET refund should be handled. However, you are correct that it represents a prior year expense to the business. Under the Sec. 111 tax-benefit rule, recovered amounts that reduced prior-year tax liability should be included in current year income. The conservative action would be to report the PTET tax refund as other income on the current tax return.

[mnielsen]

Hi Patricia,

Thank you for responding! Yes, I completely agree with you on how it should be handled. Would be nice if the states and the IRS would address this.

Thank you again!