A new Ohio law provides a SALT cap workaround and will save some taxpayers tens of thousands in federal tax. On June 14, 2022, Ohio Governor Mike DeWine signed Senate Bill 246 which allows a workaround to the $10,000 state and local tax (SALT) deduction cap imposed by the Tax Cuts and Jobs Act of 2017.
With the signing of this legislation, Ohio joins 22 other states that have enacted a pass-through entity (PTE) level tax. This workaround allows qualifying pass-through entities to make an annual election to pay an entity-level state income tax for taxable years beginning on or after January 1, 2022.
Ohio’s PTE Tax Explained
S corporations, partnerships, and limited liability companies taxed as partnerships may elect to pay Ohio income taxes at the entity level beginning in 2022. Ohio PTEs will pay an entity-level tax on their Ohio income at a rate of 5% in the tax year beginning in 2022, and 3% in later years (beginning in 2023).
For calendar year taxpayers, the election must be submitted on or before April 15th following the end of the entity’s taxable year. The election is made annually and is irrevocable for the year made.
Unlike withholding payments distributed to PTE owners, entity-level taxes are fully deductible at the federal level and are not subject to the federal $10,000 SALT cap. This ultimately allows taxpayers to reduce their federal taxable income (by lowering ordinary income) and consequently, federal taxes paid.
Tax Credit for PTE Owners on Their Individual Returns
By utilizing this workaround, an owner is entitled to claim a refundable credit against the owner’s Ohio income tax liability, equal to the owner’s share of the entity-level tax paid by the PTE. If the credit exceeds the owner’s tax liability, the owner will be refunded the unused credit. For nonresident or trust owners 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.
What Steps to Take Now
The best strategy for your organization is going to depend on the facts and circumstances of your situation. No taxpayer is the same. Proper analysis should be performed to see if elected for the Ohio PTE tax could yield tax savings for the owners of a PTE entity. Owners included in an Ohio composite filing should also consider if exiting the composite filing and having the tax paid at the PTE level could also yield tax savings.
Talk to a Top Tax Pro
If you believe that the Ohio PTE level tax could benefit you or your business, contact us and connect with one of our top tax pros for a free consultation. We’re here to help.