On June 14, 2022, Ohio Governor Mike DeWine signed into law Senate Bill 246, which allows a Pass-Through Entity (PTE) to elect into an entity-level tax. In response to the provision in the 2017 federal Tax Cuts and Jobs Act that capped the federal itemized deduction for state and local taxes at $10,000, close to 30 states have now enacted an entity-level tax for PTEs as a “SALT cap” workaround.
In IRS Notice 2020-75, the Internal Revenue Service (IRS) discussed that income tax payments paid by a partnership or S corporation under these PTE taxing regimes are deductible by the entity in computing its non-separately stated income or loss. Further, the IRS confirmed that such payments are not considered in applying the SALT cap to an individual partner. This IRS guidance opened the door for states to enact entity-level PTE taxes to benefit individual taxpayers.
Ohio’s elective PTE tax imposes income tax directly on the PTE rather than on its owners. The entity’s partners, members or shareholders are required to add back to their Ohio taxable income their proportionate share of the entity-level tax paid by the PTE. The owners are then able to claim a refundable credit on their Ohio individual income tax returns also equal to their proportionate share of the tax paid by the PTE. Under the elective PTE tax, income apportioned to Ohio will be taxed at a rate of 5% for tax years beginning in 2022 and 3% in subsequent years. The election to file and pay Ohio income tax at the entity level is an annual election made by the PTE and is irrevocable for the tax year that the election is made.