Navigating Taxes
in West Virginia

In 2023, the Tax Foundation ranked West Virginia 20th in its State Business Tax Climate Index. This ranking represents an improvement over the past few years, up from 22nd in 2021. Other sources place West Virginia at the bottom of the list regarding overall business favorability, although the West Virginia Center on Budget & Policy has scrutinized these rankings. Regardless of the statistics, tax issues represent a significant concern not only for West Virginian businesses but also for high-earners and major transactions. An attorney in West Virginia may help guide you through various tax-related challenges. To learn more about tax issues in West Virginia and evaluate options for tax planning in compliance with state and federal tax laws, reach out to Zeni Law at your earliest convenience. 

Business Entity Taxation in West Virginia

Different business structures require varied tax considerations in West Virginia on the federal and state levels. Understanding the interplay between these systems can help business owners make strategic decisions in the type of business structure they choose to form.

A sole proprietorship is a “pass-through” tax entity, meaning profits pass directly to the business owner. The business owner, therefore, declares these profits and relevant expenses on their personal tax return. Sole proprietorship owners do not need to file business tax returns. Instead, they claim their gains and losses through their personal tax returns as a self-employed individual. Individual tax rates in West Virginia range from 3-6.5%.

Partnerships are not subject to income tax in West Virginia or at the federal level but may pay tax at the entity level. Profits from partnerships pass through to the partners, who then declare these profits and losses on their personal income returns. This is similar to a sole proprietorship, except that partners divide their profits and losses. If a partnership chooses to be taxed at the entity level, it experiences the same general tax implications as a corporation. 

Corporations are taxed at the entity level, unlike sole proprietorships and some partnerships. The corporation pays taxes to the state and federal government, declaring its profits and losses on a separate tax return. Corporations distribute dividends to shareholders, and these shareholders pay additional tax on this income in a process known as “double taxation.” For 2023 earnings, West Virginia taxes corporations at 6.5%, while the federal government levies a different corporate tax rate of 21% – leading to a total corporate tax rate of 27.5%.

Like partnerships, LLCs offer their owners a degree of flexibility regarding taxation. LLCs may take the form of pass-through entities (like sole proprietorships), or they may be taxed at the entity level (like corporations). If LLC owners choose the latter option, they must file Form 8832 with the IRS and formally request to be taxed as a C-corporation. 

Which Business Structure Leads to the Lowest Taxes in West Virginia?

Taxes depend on numerous factors, including potential deductions, total income, permissible expenses, etc. While the maximum individual income tax rate in West Virginia is 6.5%, additional federal income taxes can reach as high as 37% in a graduated system based on total personal income. Alternatively, corporate tax is a flat rate of 27.5% across the board. Therefore, a corporate structure may lead to more significant tax savings for individuals with higher business income levels. Pass-through business structures may be more effective for those who fall into lower tax brackets. That said, it is worth noting that shareholders do still encounter additional taxation based on any dividends or income they receive from their corporations.

Employment Taxation in West Virginia

Employment taxation applies to anyone who works as an employee in West Virginia. Numerous graduated brackets range from 3% at the lowest bracket to 6.5% at the highest. According to the West Virginia Tax Division, a bill signed into law in 2023 is expected to cut personal income tax by an average of 21.25% across all tax brackets. This tax cut can be applied retroactively to January 1st, 2023. Additional elements of the bill include:

  • 100% tax credit for vehicles if taxpayers pay personal property taxes
  • A refundable tax credit for disabled veterans for property taxes
  • Maximum of 10% personal income tax reductions for individual income

Individual Income Tax

Of course, most individuals who own or operate a business in West Virginia do so in hopes of earning a living. This personal motivation means that individual income tax, beyond relevant corporate taxes, will be a consideration for most West Virginia residents. 

Depending on an individual’s role in their business, a pass-through business structure that avoids the federal corporate tax rate may still leave them subject to the 15.3% federal self-employment tax, according to the Internal Revenue Service (IRS). While this tax is noticeably lower than the 27.5% corporate tax rate, it should be considered in tandem with the graduated tax brackets calibrated for total income – and business owners should bear in mind that pass-through structures do generally imply a greater degree of personal risk for other financial liabilities related to their business.

Individuals employed by a company formed as a separate business entity may need to pay West Virginia employment tax, rather than self-employment tax, on their earnings –– even if they are owners or co-owners of the company they work for. At the federal level, employment tax, like self-employment tax, stands at 15.3% – but roughly half of that amount will be paid by the company, which can have implications for both West Virginian business owners’ individual and business taxes, particularly if they own a company with an extensive roster of employees.

West Virginia Tax Exemptions

Several tax exemptions may be advantageous to certain parties in West Virginia. Here are a few examples:

  • 50% refundable tax credit against personal income taxes on any tax paid on the purchase of business machinery, inventory, or equipment
  • All purchases of manufacturing machinery and equipment are exempt from sales tax
  • Acquisition of tangible personal property for resale is exempt from sales tax
  • Sales of textbooks are exempt from all tax
  • Sales of lottery tickets are exempt from sales tax
  • Sales of advertising services are exempt from sales tax
  • Daycare services are exempt from sales tax

In addition, a handful of entities are entirely exempt from taxation. According to the West Virginia Tax Division’s list of Sales and Use Tax Exemptions, these include:

  • Government organizations
  • Qualifying nonprofit organizations
  • Schools
  • Churches

Tax on Corporate Transactions in West Virginia

Many types of corporate transactions in West Virginia may lead to tax implications. Here are a few examples:

  • Mergers and acquisitions: These transactions may qualify as tax-free reorganizations on the federal level. 
  • Share buybacks: A new excise tax of 1% was implemented on share buybacks in 2022 as part of the Inflation Reduction Act.
  • Initial public offerings (IPOs): Whenever a company sells shares for a profit, they may incur tax on the resulting income. Tax planning has become a key element in financial strategy for businesses engaging in IPOs, especially concerning long-term capital gains.

Speak with a Tax Lawyer Today

Tax issues are complex and highly specific based on the factors affecting each situation. Learning about tax laws in West Virginia is one thing. Still, it is also crucial to understand which rules apply to the circumstances at hand – whether they involve business transactions, corporate tax, income tax, or home sales. Although internet research can provide a basic foundation of knowledge in this area, a business lawyer experienced in West Virginia tax law may be able to assess each situation and deliver personalized advice based on the unique needs of individuals and businesses. Contact Zeni Law today to begin the discussion.