Ohio Enacts PTE Tax Election

July 2022

BY

Scott SmithNational Tax Office Managing Director, Technical Practice Leader - State & Local Taxes

Geoff FrazierManaging Director, State & Local Tax

Mike MayManaging Director, State & Local Tax


Ohio Governor DeWine on June 14 signed into law S.B. 246, establishing an elective pass-through entity (PTE) tax regime in the state that is intended as a workaround to the federal $10,000 state and local tax (SALT) deduction cap. 
 

The PTE Tax Election

 Effective for tax years beginning on and after January 1, 2022, an “electing pass-through entity” can make an annual and irrevocable election to be taxed at the entity level.  A “pass-through entity” means a S corporation, limited liability company or any other person if the partnership, limited liability company or other person is not classified for federal income tax purposes as an association taxed as a corporation.  

The PTE tax will be imposed on the electing PTE’s “qualifying taxable income,” which is the sum of (1) the electing PTE’s business income apportioned to Ohio after certain adjustments and (2) the electing PTE’s nonbusiness income allocated to Ohio.

Electing PTEs shall be required to file an estimated tax returns and make the following quarterly estimated tax payments:
  1. 1st quarter payment of 22.5% of the PTE’s estimated tax liability for the tax year.
  2. 2nd quarter payment of 45% of the PTE’s estimated tax liability for the tax year.
  3. 3rd quarter payment of 67.5% of the PTE’s estimated tax liability for the tax year.
  4. 4th quarter payment of 90% of the PTE’s estimated tax liability for the tax year.
 
Penalties will accrue on any underpayments of estimated taxes.  The legislation does not provide any waivers of penalties and interest on any underpayments attributable to making the Ohio PTE tax election with respect to tax year 2022. 
 
The elective PTE tax rate is statutorily set at 5% for tax year 2022. For tax year 2023 and thereafter, the same rate as Ohio’s rate on taxable business income (currently 3%) will apply.  When computing their Ohio income tax liability, individual, trust and estate owners of electing PTEs will be required to add-back their respective federal state tax deductions attributable to the Ohio elective PTE tax.  
 
Owners of electing PTEs are also entitled to a refundable credit equal to their pro rata share of the Ohio PTE tax paid by the entity.  The refundable credit offsets an owner’s Ohio income tax liability pursuant to the Ohio credit ordering rules specified in Ohio Rev. Code § 5747.98. 
 
A nonresident individual or trust owner with Ohio adjusted gross income from only one or more electing PTEs is not required to file an Ohio nonresident income tax return.  However, a return is required to claim the amount of the refund from the refundable Ohio PTE tax credit.