Last month, Governor Mike DeWine signed Senate Bill 246, authorizing Ohio pass-through entities (PTE), including S corporations, partnerships and limited liability companies taxed for federal income tax purposes as partnerships, to elect to pay a PTE level tax as a workaround to the $10,000 ($5,000 in the case of a married individual filing a separate return) federal income tax deduction cap on state and local taxes (SALT) paid by the owners.
Under current law, an owner of a PTE is subject to Ohio income tax on income received by the owner from the PTE’s Ohio business activities, and a PTE is required to withhold the income tax liability of any nonresident owner. A PTE may file a composite return for any or all of its owners and pay tax for those owners at the highest graduated tax rate for nonbusiness income. Under current law, in calculating a taxpayer’s federal income tax liability, a taxpayer may take an itemized (below-the-line) deduction in an aggregate amount up to $10,000 for state and local property taxes, income taxes and sales taxes paid by the taxpayer.
Beginning in 2022, a PTE may elect to pay Ohio income taxes at the entity level at a rate of 5% for tax years beginning in 2022, and in tax years thereafter at the same rate as Ohio’s rate on taxable business income (currently 3%). The PTE must file an election annually with the Tax Commissioner on or before April 15 of the year beginning after the end of its taxable year for which the election is being made. Once an election is made for any tax year, it is irrevocable for that tax year. The entity level tax is intended to be fully deductible at the federal income tax level and not subject to the $10,000 SALT deduction cap pursuant to the announcement by the IRS in Notice 2020-75.
An electing PTE must file estimated tax returns and an annual return and must make quarterly estimated tax payments. The PTE is entitled to a refund for overpayments and is subject to penalties and interest on underpayments or for failure to file.
An electing PTE is not required to withhold income tax from its nonresident owners for any taxable year for which the PTE makes the election. The amount of any taxes that have previously been withheld by a PTE for a tax year for which the PTE makes the election may be applied to the PTE’s income tax liability.
Can I Claim a Refund?
The owners of an electing PTE are entitled to claim a refundable tax credit on their individual income tax returns equal to their proportionate share of the income taxes paid by the PTE. If an owner’s tax credit exceeds the owner’s tax liability, the owner will be entitled to request a refund for the unused credit.
If a nonresident owner or trust has no income other than income from one or more electing PTEs, then the nonresident owner or trust is not required to file an individual income tax return for that year. However, the nonresident owner or trust must file an annual income tax return in order to claim the refundable income tax credit.
For further questions or clarifications regarding Senate Bill 246, please contact Kevin O’Connor (216.736.7213; KTO@kjk.com), Peggy Beistel (PSB@kjk.com; 216.736.7207) or another member of KJK’s Tax practice group.