By Kevin Krieg, CPA, and Amy Sandlin, CPA
In 2022, through legislation signed by Governor DeWine, Ohio joined the growing list of states to pass SALT Cap workarounds.
Ohio Senate Bill 246 allows qualifying pass-through entities (PTEs) to elect to be subject to a new entity-level tax. The legislation makes the entity level tax fully deductible at the federal level and not subject to the federal $10,000 state and local tax cap for itemized deductions.
Beginning in tax year 2022, PTEs treated as Partnerships or S-Corporations are qualified to utilize the workaround. (Disregarded entities are not eligible for the workaround.) Ohio business income will be taxed at a 5% rate for 2022 and 3% for tax years thereafter, regardless of whether the tax is paid by PTE owners or at the PTE level. This could provide a significant benefit to taxpayers with substantial business operations in Ohio.
The PTE makes the election annually to pay the Ohio tax at the entity level. The election must be made on or before April 15th of the year following the entity’s taxable year (the due date for OH’s PTE tax returns).
Once it is made, it is irrevocable. All PTE owner’s qualifying income must be included in the PTE-level tax filing.
If elected, resident and non-resident owners are included in the PTE-level tax filing. Non-resident and trust investors do not have to file a separate Ohio return if the PTE elects to pay entity-level tax and they have no other Ohio-sourced income.
For individual PTE owners who continue to file an Ohio return, they can claim a refundable credit on their IT 1040 for their proportionate share of the PTE-level tax paid. This credit is what prevents PTE income from being taxed twice by Ohio.
PTEs that elect to pay entity-level tax are required to make estimated tax payments; therefore, PTEs should be considering this election before year-end.
If you need help understanding Ohio’s SALT Cap Workaround and its application, or if you have any questions for the state in which you operate, please contact your Blue & Co., LLC advisor.