Ohio Senate Bill 246: Pass-Through Entity Tax and the New Ohio SALT Cap Workaround
Ohio Governor Mike DeWine recently signed Senate Bill 246, which will save many Ohio taxpayers thousands of dollars in federal income tax. Senate Bill 246 (the “Bill”) functions as a workaround to the $10,000 state and local tax (SALT) itemized deduction cap implemented by President Trump’s 2017 tax act. Nearly two dozen other states have adopted similar bills, and Ohio has decided to follow suit.
The Bill creates a new pass-through entity (PTE) level tax. Beginning this year, S corporations, partnerships and limited liability companies taxed as partnerships may elect to pay Ohio income taxes at the entity level. For Ohio PTE’s that elect this form of taxation, their Ohio income will be taxed at 5% for the 2022 tax year and 3% in the tax years that follow.
To take advantage of this opportunity, PTEs must make an annual election to pay their Ohio income tax at the entity level. The election is irrevocable, and all PTE owner’s qualifying income must be included in the PTE-level tax filing. Estimated tax payments are also required. While this planning opportunity is available this year, 2023 will be the first year that this can be set-up and planned for at the start of the year.
Uniquely, entity-level taxes are fully deductible at the federal level and are not subject to the federal $10,000 SALT-cap. In turn, taxpayers can reduce their federal taxable income and thus their federal taxes paid. This is the fundamental benefit of the Bill. Individual taxpayers are subject to the SALT cap, while PTEs are not.
Utilization of this workaround also entitles a PTE owner to claim an Ohio refundable tax credit. This credit is equal to the owner’s share of the entity-level tax paid by the PTE, and if the credit exceeds the owner’s tax liability, the owner will be refunded the unused credit.
The Ohio Department of Taxation has provided guidance with respect to the new PTE level tax, and plans on continuing to answer developing questions. Bailey Cavalieri will continue to monitor the effects Senate Bill 246 will have on Ohio’s tax landscape.