Potential Tax Break for Ohioans with Pass Through Entity

Tuesday, September 13, 2022 |

In June, Ohio’s legislature passed SB 246 which provides a potential work around for the $10,000 state and local tax (SALT) deduction cap imposed by the Tax Cuts and Jobs Act of 2017.  With the signing of this legislation, Ohio joins 22 other states that have enacted a direct pass-through entity (Direct PTE) level tax.  This workaround allows qualifying pass-through entities to make an annual election to pay an entity-level state income tax for taxable years beginning on or after January 1, 2022.

In other words, under this new regime, a qualifying PTE may elect to file and pay this Direct PTE level tax and the individual owners will receive a corresponding credit equal for the tax paid at the entity level.  Entity-level taxes are fully deductible at the federal level and are not subject to the federal $10,000 SALT cap. Qualifying PTE’s include S corporations, Partnerships, and Limited Liability Companies taxed as partnerships that are not treated as corporations for federal income tax purposes; however, disregarded entities such as single member Limited Liability Companies are NOT eligible. 

Ohio PTEs will pay an entity-level tax on their Ohio income at a rate of 5% in the tax year beginning in 2022, which is ~1% higher than the current top individual rate, and 3% beginning in 2023, which is less than the current top rate. For eligible owners of qualifying PTE’s, circumventing the $10,000 cap on state and local income tax deductions could result in very significant reduction in federal income taxes.

Further information is available here on the Ohio Department of Taxation’s website.  If you haven’t already done so, as with any such decisions, you should seek the advice of your accountant.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only.