What You Need to Know About Ohio’s Recently Enacted Flow-Through Entity Tax Law
On June 14, 2022, Ohio Governor Mike DeWine signed into law Senate Bill 246 (SB 246). This enactment allows businesses structured as PTEs (such as partnerships, LLCs, and S corporations) to elect to be taxed at the entity level for state income tax purposes. This election, which begins with the 2022 tax year, will provide owners of flow-through entities with a deduction for federal income tax purposes. As passed, Ohio’s PTE tax rate is 5% for 2022 and 3% for years after 2022. A fully refundable Ohio PTE tax credit is also allowed for property owners. PTEs for their share of the Ohio PTE tax paid by the entity.
As a backdrop, the Tax Cuts and Jobs Act (TCJA) limits individuals who itemize deductions for federal income tax purposes to a $10,000 deduction for state and local income, as well as property taxes. (often referred to as “SALT Cap”). A recent IRS Notice, 2020-75, clarifies that for states that pass PTE tax legislation, taxes paid by the PTE will not count toward this limitation. That said, many states have enacted PTE-level tax legislation (now up to 29) or have enacted legislation (3 with PTE tax bills) to serve as a “SALT workaround” to the TCJA limitation.
For federal income tax purposes, state taxes paid by an ETP on behalf of its owners are generally treated as distributions to its owners. These taxes are more often levied for non-resident owners as composite or non-resident withholding taxes. Homeowners who itemized deductions for federal income tax would claim those taxes paid on their behalf as a state tax deduction, which, as mentioned, is limited to $10,000.