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:

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:

In its additional guidance, the Department included a list of yet-to-be-answered questions about SB 246, including:

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.