On September 23, 2022, the Ohio Department of Taxation published a list of Frequently Asked Questions and a draft tax form for the newly enacted pass-through entity election. The pass-through entity election was enacted into law earlier this year when Governor DeWine signed Senate Bill 246 and is Ohio’s workaround to the federal “SALT cap”, which limits a taxpayer’s itemized deduction for state and local income taxes to $10,000 on his or her federal income tax return.

Qualifying electing pass-through entities that make the election will be subject to an entity level tax on the business’s Ohio apportioned income and Ohio allocable income and pay the tax on behalf of all of its members, partners, and shareholders. The election is made through the filing of Form IT-4738 and is irrevocable for the tax year. The election is made at the entity level and the qualifying income of all members, partners, and shareholders of the qualifying entity must be included in the filing of the Form IT-4738 and all members, partners, and shareholders are bound by the entity’s election.

For tax years beginning on or after January 1, 2022, the tax rate is 5.0% and for tax years thereafter, the rate is equal to the tax imposed on taxable business income, which is currently 3.0%. Each owner of the pass-through entity will receive a refundable credit for his or her proportionate share of the tax paid on the IT-4738, and thus, owners that wish to file an IT-1040 to claim an overpayment of the tax may do so by applying the credit in computing their Ohio tax liability. However, the owners must add back the tax the entity paid on their behalf in computing Ohio adjusted gross income.

As of the date of this writing, the Ohio Department of Taxation has not published any estimated coupons for the Form IT-4738 and recommends that estimated payments be remitted on either a Form IT-1140 UPC or IT-4708 UPC and subsequently transferred to the IT-4738.

For more information, please contact Adam Hines at ahines@mmbadvisors.com or at (513) 310-6302.