On June 14, 2022, Ohio Gov. Mike DeWine signed legislation that creates a workaround to the $10,000 state and local tax (SALT) deduction cap imposed by the Tax Cuts and Jobs Act of 2017. The legislation creates an elective entity-level tax on qualifying pass-through entities and authorizes a refundable income tax credit for the owners of such entities equal to the owner’s proportionate share of the entity-level tax paid.
The elective pass-through entity (PTE) tax allows S corporations, partnerships, or limited liability companies treated as S corps or partnerships for federal income tax purposes to pay Ohio income taxes at the entity level beginning in 2022. The entity-level tax is fully deductible at the federal level and not subject to the federal $10,000 SALT cap. The election must be made on or before the 15th day of April following the end of the entity’s taxable year in the preceding calendar year. The election is irrevocable for the tax year that the election is made.
For taxable years beginning in 2022, the PTE tax rate is 5% of the electing PTE’s qualifying taxable income for the taxable year. For an electing PTE’s taxable year that begins in 2023 and in any subsequent year, the statutory rate equal to the tax rate imposed on taxable business income applies (currently 3%). The “qualifying taxable income” of an electing PTE means the sum of the entity’s business income multiplied by the apportionment fraction and the electing PTE’s nonbusiness income allocated to Ohio. Entities making such an election must pay estimated taxes. Information on when and how to make those payments is forthcoming from the Department of Revenue.
An owner with an interest in an electing PTE for any portion of the taxable year, i.e., a person who is a partner, member, shareholder, or investor, is entitled to claim a refundable credit against the owner’s Ohio income tax liability equal to the owner’s proportionate share of the entity-level tax paid by the PTE. To claim the credit, the owner must add back to the owner’s Ohio taxable income the owner’s proportionate share of the entity-level tax paid by an electing PTE for the taxable year. The credit must be claimed for the owner’s taxable year that includes the last day of the electing PTE’s taxable year for which the tax levied was paid and in the priority order of credits as required by statute. If the credit amount exceeds the owner’s tax liability, the owner will be refunded the unused credit balance. Under the new law, if an owner is a nonresident or trust whose only source of income from Ohio is income from one or more electing PTEs, the owner is not required to file an individual income tax return. In those instances, an owner can file an individual income tax to claim the refundable credit.
There is no provision for Ohio residents to claim credits for similar PTE taxes paid to other states.
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