Last month, Governor Mike DeWine signed Senate Bill 246, authorizing Ohio flow-through entities (PTEs), including S corporations, partnerships and limited liability companies imposed for the purposes of federal income tax as partnerships, to elect to pay a PTE level tax as a workaround. the federal income tax deduction limit of $10,000 ($5,000 in the case of a married person filing a separate return) on state and local taxes (SALT) paid by landlords.
Under current law, the owner of a PTE is subject to Ohio income tax on income earned by the owner from the business activities of the PTE in Ohio, and a PTE is required to withhold the income tax of any non-resident owner. A PTE can file a composite return for any or all of its owners and pay tax for those owners at the highest progressive tax rate for non-trading income. Under current law, when calculating a taxpayer’s federal income tax, a taxpayer may take an itemized (below the line) deduction totaling up to $10,000 for state and local property taxes, income taxes and sales taxes paid by the taxpayer. .
Election of ETPs
Beginning in 2022, a PTE may elect to pay Ohio entity-level income tax at a rate of 5% for tax years beginning in 2022, and subsequent tax years at the same rate as Ohio’s rate on taxable business income (currently 3%). The PTE must file an election each year with the Commissioner of Taxes by April 15 of the year beginning after the end of its tax year for which the election is made. Once an election is made for a 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 SALT deduction limit of $10,000 as announced by the IRS in the 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 reimbursement for overpayments and is subject to penalties and interest on underpayments or for failure to report.
An electing PTE is not required to withhold income tax from its non-resident owners for any taxation year for which the PTE makes the election. The amount of any tax that has already been withheld by a PTE for a taxation year for which the PTE makes the election may be applied to the tax liability of the PTE.
Can I request a refund?
Owners of an elective PTE are entitled to claim a refundable tax credit on their personal 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 claim a refund for the unused credit.
If a nonresident owner or trust has no income other than income from one or more electing PTEs, the nonresident owner or trust is not required to file a personal income tax return for that year. However, the non-resident owner or trust must file an annual tax return in order to claim the refundable tax credit.