Mid-June of this year, Senate Bill 246 was signed into law creating an elective pass-through entity (PTE) tax in the State of Ohio. The PTE tax is effective beginning with tax year 2022 and serves as a means for individual taxpayers to circumvent the Federal state and local tax (SALT) deduction limitation of $10,000 when itemizing on their personal tax returns.

Eligible entities (partnerships, LLCs, or S Corporations) that make the PTE tax election pay tax on behalf of its owners’ distributive share of the PTE’s net taxable income apportioned to Ohio. This tax payment at the entity level is in lieu of having the income passed through to the owner’s personal tax return, and paying the tax individually. The PTE election would also eliminate and replace the filing of a withholding tax return or composite tax return with the State by the company. Any overpayment of the tax paid by the PTE is fully refundable on the individual’s Ohio personal tax return, however the owner must file an Ohio tax return to receive any eligible refund.

The new PTE tax election serves as a roundabout to the Federal SALT deduction limitation because the PTE tax payment made by the company will fall to its bottom line, thereby reducing the total amount of taxable income the owner would recognize on their personal tax return. Since the SALT deduction is limited to $10,000, and anything in excess of that amount is lost (does not carry forward or backward), making the PTE election benefits the taxpayer by providing a direct reduction in the owner’s tax liability by reducing taxable income, and negates the lost benefit of SALT paid in excess of $10,000.

For tax year 2022, the PTE tax rate is 5%. For tax year 2023 and forward, the rate is decreased to 3%, which is in line with the Ohio Business Income tax rate assessed to individuals on their Ohio Form IT-1040 on taxable business income in excess of the $250,000 Ohio Business Income Deduction. The PTE election must be made by eligible pass-through entities no later than the 15^th day of the fourth month following the PTE’s tax year end. The election must be made annually, and is irrevocable.

Making the PTE election in Ohio will be beneficial to many taxpayers, but not all. It is important to consult with your tax advisor to determine whether or not making the PTE election is the most advantageous strategy for you.

Neitzel, Luke & Salopek, Inc. is available to answer any questions you have. We can be reached at (440) 835-1040 or email us at LParente@nlacpas.com to get into touch.