Ohio Issues Guidance on Law Allowing Pass-Throughs to Skirt SALT Cap

On June 1, the Ohio legislature passed SB 246 allowing Ohio pass-through entities (PTEs), like S and limited liability corporations, to elect to be taxed at the “entity level,” at a rate of 5 percent of 2022 taxable business income, then 3 percent in subsequent years Ohio Bill Allows Pass-Through Entity Deduction. The bill is considered Ohio’s workaround for the $10,000 limit on the deductibility of state and local taxes set by the Tax Cuts and Jobs Act of 2017.

Previously, Ohio PTEs filed a withholding tax (form IT 1140) or a composite tax (form IT 4708). Both taxes were to be filed and paid by the entity, but on behalf of the entity’s shareholders or members. Because neither tax is imposed on the entity directly, the taxes paid using either form are deductible as an itemized deduction federally, and therefore subject to the SALT cap.

SB 246 provides qualifying PTEs a third filing option, effective for the tax year 2022, an entity-level tax (form IT 4738). Provisions of the bill for entities choosing the SALT cap workaround include:

  • Refundable tax credits will be available to the entity’s owners equal to their proportionate share of the tax.
  • Entities must elect the entity level tax separately and irrevocably each tax year.
  • Entities paying the entity tax are not subject to current Ohio withholding requirements.
  • In August, the Ohio Department of Taxation issued additional guidance on the law known as SB 246. The guidance lays out the types of partnership/S Corp tax payments that are subject to deduction in computing federal adjust gross income (AGI), and which must be itemized. In short:

  • Taxes imposed on the entity are deductible in computing federal AGI, and thus circumvent the SALT Cap.
  • Taxes paid by the entity on behalf of its shareholders are deductible as an itemized deduction, and thus subject to the SALT Cap.
  • IT 4738 serves as the Ohio filing for the entity’s nonresident and trust investors, provided they don’t have other Ohio-sourced income.
  • Like the credits allowed for IT 1140 and IT 4708 payments, investors can claim a refundable credit for their proportionate share of the tax paid by the entity on the IT 4738.
  • In its additional guidance, the Department included a list of yet-to-be-answered questions about SB 246, including:

  • What if an electing PTE is owned by other PTEs?
  • Does a PTE’s election bind PTEs that invest in it?
  • How are credits/deductions allocated among the electing PTE’s investors?
  • Does the investor PTE need to file?
  • What if the electing PTE is owned by a C Corp or other exempt entity?
  • Can the C Corp claim the refundable credit paid by the electing entity?
  • The law had passed both the Ohio House and Senate with overwhelming majorities. About two dozen other states have voted on legislation to provide a workaround for the SALT deduction cap. Proponents of SB 246 argued that the cap left Ohio businesses less competitive with companies domiciled in those states.

    For more information on how rulings and legislation related to state and local taxes might impact your business, contact an HBK SALT professional at hbksalt@hbkcpa.com or visit our website.

    About the Author(s)
    Bryan M. Holm, CPA, MST, Manager, State and Local Tax Bryan Holm is a Manager in the Cherry Hill, NJ office of HBK CPA's and Consultants. He joined the firm in 2021 as a member of the HBK State and Local Tax (SALT) team. His background includes work with top 10 accounting firms. Prior to specializing in state and local taxation, Bryan worked in tax resolution for the Internal Revenue Service. He has served clients in a variety of industries including private equity firms, manufacturing, the restaurant industry, retail, construction, and the banking industry. Bryan has provided a variety of state and local tax services to clients, including; Audit Defense, Refund Reviews, Nexus Reviews, Voluntary Disclosure Agreements, Income/Franchise Tax Compliance, M&A Due Diligence, and SALT Consulting and Advisory Services. Bryan has also been a speaker and writer on state and local tax matters.
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