March 29, 2022
Ohio Senate passes SALT deduction cap workaround
On March 16, 2022, the Ohio Senate passed Senate Bill 246 (SB 246), which would create an elective entity-level tax on pass-through entities beginning in 2022. SB 246 is currently under consideration by the Ohio House.
Ohio income tax applies to income received by an owner or investor in a pass-through entity (PTE) from the PTE's business activities in Ohio. PTEs include partnerships, S corporations and limited liability companies treated as either partnerships or S corporations. Currently, a PTE must withhold the Ohio personal income tax due from its nonresident investors on their distributive share of the PTE's Ohio income and report the tax on Ohio Department of Taxation (OH DOT) Form IT 1140 Withholding Income Tax Return). Alternatively, a PTE may elect to file a composite return (OH DOT Form 4708) covering any or all of its owners (i.e., including both Ohio resident and nonresident owners) and paying tax for them at the highest marginal rate for nonbusiness income, which is currently 3.99%.
SB 246 would allow PTEs to elect annually to pay income tax at the entity level by filing the prescribed form with the Commissioner of the OH DOT by the annual filing deadline for its tax return (i.e., the 15th day of the fourth month following the end of a PTE's qualifying tax year, which is April 15th for calendar-year filers). An electing PTE's tax year for Ohio income tax purposes is the same as its tax year for federal income tax purposes and may not necessarily be a calendar year. Under the proposal, any PTE tax election would be irrevocable for the tax year made.
The tax base for the elective PTE tax would be "qualifying income," defined as:
The PTE tax rate for 2022 would be 5% and the rate for 2023 and forward would be the tax rate on business income as prescribed by Ohio Rev. Code Section 5747.02(A)(4)(a) (currently 3%).
Under SB 246, the PTE's owners could then claim a refundable credit on their individual income tax returns equal to their proportionate share of the Ohio income taxes levied on and paid by the PTE. To claim the refundable income tax credit, an owner would first add back to its Ohio taxable income its proportionate share of the Ohio income taxes levied on and paid by the electing PTE. The credit would be claimed for the owner's tax year that includes the last day of the electing PTE's tax year for which the tax was paid. Under current law, Ohio residents may not claim credits for similar PTE taxes paid to other states.
In addition, SB 246 would allow a nonresident PTE investor or trust to forgo filing an individual Ohio income tax return for the investor's or trust's tax year if they do not have any Ohio income other than income from one or more PTEs that have elected into the Ohio PTE tax regime. The nonresident investor or trust could still file an annual Ohio individual income tax return in order to claim a refundable credit.
Ohio could join the majority of other states that have adopted similar elective PTE taxes over the last three years. By allowing PTEs to pay tax at the entity level, the state would enable Ohio taxpayers to "work around" the federal $10,000 limitation on state and local tax deductions.
Unlike the PTE taxes enacted by many other states, SB 246 does not appear to provide Ohio resident PTE owners with a mechanism for claiming a credit for their share of elective PTE tax paid to another state. Unless current law is specifically amended, the Ohio resident credit (Ohio Rev. Code Section 5747.05(B)) is only available for other state income taxes paid by the individual; the proposal does not appear to clarify that Ohio resident owners could likewise claim as a credit their share of PTE tax paid to another state as an offset against their own Ohio personal income tax liability. EY will continue to monitor the development of the Ohio elective PTE tax proposal.