Ohio is the latest state to offer a SALT cap workaround. Ohio Governor Mike DeWine has signed Senate Bill 246 to allow a workaround of the $10,000 state and local tax (SALT) deduction limit that was part of the 2017 Tax Cuts and Jobs Act.
Signed on June 14, 2022, Ohio now joins 22 other states that have provided taxpayers with the potential for meaningful relief in federal tax.
In order to work around the limit, Ohio will enact a pass-through entity (PTE) level tax that allows qualifying PTEs to make an annual election to pay the state income tax at the entity-level for taxable years beginning on or after January 1, 2022.
How Ohio’s new PTE Tax Works
Beginning in 2022, partnerships, S corporations, and LLC's taxed as partnerships can elect to pay their Ohio income taxes at the entity level. For 2022, the entity-level tax for Ohio income will be taxed at 5%, and then 3% for 2023 and beyond.
This is an optional tax, and an election must be made annually on or before April 15th and is irrevocable for the year in which the election is made. This new entity-level tax differs from withholding payments distributed to the PTE owners in that they are fully deductible at the federal level. This deduction lowers the federal tax burden by reducing the owner's federal taxable income by the amount of the entity-level tax. By paying the tax at the entity level rather than on the owner's individual return, the taxes are not subject to the $10,000 SALT cap at the individual level.
How the Tax Credit Applies to the Individual Returns
When the election is made, the owners are able to claim a refundable credit against their Ohio income tax liability equal to their share of the entity-level tax. Because it is refundable, if the credit is greater than the owner's individual tax liability, the difference will be refunded to the owner. If an owner is a nonresident or a trust, and their only Ohio sourced income is from one or more PTEs that have made the election, the owner is not required to file an individual income tax return.
What does this mean for you?
Before the 2017 TCJA, if you itemized your deductions on your personal return, you could take a deduction for state and local taxes paid. After the tax law overhaul, SALT deductions were limited to $10,000, and for a lot of taxpayers in states like Ohio who pay property taxes along with state and local income taxes, that limitation left a lot of money on the table. With the passage of this workaround, small business owners whose businesses are taxed as partnerships or S Corporations will be able to bring some of the deductions they've been missing out on the last few years back into their tax planning.
Next Steps
As always, no tax situation is the same, and the best strategy for your business will depend on a number of circumstances. Rudler, PSC can help analyze your specific scenario to determine if the new PTE tax election will be beneficial for the owners of the entity. If owners are included in composite filings for Ohio, determining whether to switch from composite filing to electing the PTE level would generate tax savings should also be considered.
Please reach out to your Rudler, PSC advisor at 859-331-1717 to determine the best course of action for you and your business.
RUDLER, PSC CPAs and Business Advisors
This e-Tip is presented by James Ray, CPA.
If you would like to discuss your particular situation, contact James at 859-331-1717.
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