New Ohio Pass-Through Entity Election Tax

On June 14, 2022, Ohio joined numerous other states in adopting a pass-through entity tax election. The Ohio election allows a qualified pass-through entity to directly pay Ohio income tax at the entity level, and then allows owners to receive a refundable credit on their individual income tax return for their share of the entity level Ohio tax paid.  For individual owners, the new provisions provide relief from the $10,000 State and Local Tax (SALT) cap currently in place at the federal level.  

How It Works

  • An election to pay tax at the entity level is made by the pass-through entity (“PTE”) and is available for tax years beginning on or after 1/1/2022
  • It is an annual election and is irrevocable for each year it is made
  • The PTE must make the election by the deadline to file its return for the tax year
  • The Ohio Department of Taxation has not yet issued guidance on how to make the election
  • The PTE taxable income is defined as
    • PTE’s business income apportioned to Ohio; plus
    • PTE’s nonbusiness income allocated to Ohio
      • Computed without regard to any deductions or credit that can be claimed by a PTE owner
  • The entity level tax is
    • 5% for tax year 2022 and
    • 3% for tax year 2023 and later
  • Electing PTEs are entitled to refunds of overpayments and are subject to penalties and interest for underpayments
  • The law does not address how the elective PTE tax applies to entities in a tiered structure   
  • The interplay between the investment PTE rules and the new elective PTE tax is unclear at this time
  • Nonresident withholding does not apply in a year in which the entity has made a PTE election 

Qualifying Pass-Through Entities Include:

  • Partnerships
  • S Corporations
  • Limited Liability Companies taxed as partnerships

Estimated Payments

The law specifies that estimated payments may be required for 2022; however, the Ohio tax commissioner has the authority to waive penalty and interest. As these provisions were passed in mid-2022, it appears reasonable that the commissioner could grant waivers for first and second quarter estimates.  Further, PTEs are, and without an election, will continue to be, subject to nonresident withholding. If the PTE already withheld tax for nonresidents, that amount may be applied to the PTE income tax liability.  
 
We are monitoring the issue and will provide guidance as it becomes available. 

Owners 

  • The income tax credit is available to owners of electing PTEs
  • The credit is equal to the owners proportionate share of the tax levied on the PTE
  • The credit must be claimed in the taxable year that includes the last day of the electing PTE’s taxable year for which the tax was paid
  • The ultimate taxpayer does not have to file an Ohio individual income tax return if their only Ohio income is from the electing PTE, but may want to file to claim a refund 

Action to Take 

Each taxpayer situation should be analyzed to ensure that a net tax benefit exists prior to making an election.  For example, nonresident owners of electing pass-through entities may lose the credit for taxes paid to other states which could increase their overall effective tax rate.
 
Reach out to your trusted Rehmann advisor for assistance in completing an analysis of this other state pass-through entity elections. 
Published in Tax

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