Ohio recently joined 28 other states who have enacted the “SALT Cap Workaround” with Governor DeWine’s signing of Senate Bill 246.
Due to the Tax Cut and Jobs Act (TCJA), individuals can currently only deduct up to $10,000 of state and local taxes (SALT) on their federal income tax return. IRS Notice 2020-75 allowed states to enact legislation clarifying that taxes paid by a pass-through entity (PTE) do not count toward this limit.
Effective for the 2022 tax year, PTE investors can avoid the SALT cap by electing to be subject to the Ohio PTE tax by the due date of the return. The election is made on an annual basis and is irrevocable. The election form is being developed by the Ohio Department of Taxation. This allows the investor to shift the taxes the entity pays, thereby deducting the tax due on the entity’s return, not on the individual. PTEs that make this election will pay at a tax rate of 5% for 2022 and 3% for 2020 and on.
This benefits Ohio PTE owners because they will receive a 5% deduction for taxes paid and ultimately get a 2% refund on their filed individual return. (With business income being subject to a 3% tax.) It is not yet clear whether Ohio residents can claim a credit for taxes paid to other states that employ the same taxing regime, and taxes are paid at the entity level.
Estimated payments that have already been made for either the IT 1140 or 4708 can be taken as a credit against the new PTE tax return. Ohio PTEs and their owners should continue to monitor the situation as more guidance will be coming from the Ohio Department of Taxation.
Contact me to learn more about the risks and benefits of these new elections.
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