Understanding Ohio’s Pass-Through Entity Tax

By:  Jessica A. Distel, CPA, MBA  - Managing Director of Business Services and Development

The Tax Cuts and Jobs Act of 2017 imposed a $10,000 cap on the deduction of state and local taxes (SALT) for individuals who itemize their deductions. Over the years, many states have adopted a SALT Cap workaround and after the signing of Senate Bill 246 into law, Ohio now allows pass-through entities (PTEs) to elect to be taxed at the entity level starting with the 2022 tax year. 

For tax years starting on or after January 1, 2022, qualifying PTEs, such as partnerships and S corporations, can file an election by the due date of the tax return to tax qualifying income at the entity level. The Ohio income tax rate is 5% for 2022 and 3% for years following. The entity will be able to reduce taxable income by the amount of the Ohio income tax payment, therefore reducing federal taxable income that is passed through to the PTE owners and without having to deduct state taxes as an itemized deduction. In addition, the owners will be able to report a refundable credit on their Ohio income tax return for their portion of the Ohio PTE tax paid by the entity.

Should all Ohio PTEs elect to be taxed at the entity level? Not necessarily. There are several factors to consider. This is an annual and irrevocable election, and all owners will be bound to the tax treatment. PTEs that have made the election will be required to make quarterly estimated tax filings and payments for the current year. To properly analyze the savings, we need to make adjustments to calculate the qualifying taxable income, consider the federal income tax rate for the owner, and incorporate the reduction of the qualified business income tax deduction. 

As always, if you have questions regarding the Ohio PTE Tax, please reach out to one of our team members in the Tax & Business Services Department at Buckingham Advisors. We will be happy to review your unique facts and circumstances.