Last year, this post explained that investors in Ohio pass-through entities (PTEs) may be able to avoid the $10,000 state and local tax (SALT) deduction cap using Ohio’s composite return election. Now a little over a year later, Ohio has ended any uncertainty and joined the growing number of states passing SALT Cap Workaround laws specifically aimed at allowing PTE owners to bypass the $10,000 SALT deduction cap. See S.B. 246.
Similar to Ohio’s existing composite return election, SB 246 allows PTEs to annually elect to pay income taxes at the entity level and claim a refundable credit on their individual returns equal to their distributive share of Ohio income taxes paid by the PTE. In Notice 2020-75, the IRS states that these elective PTE-level taxes, referred to as Specified Income Tax Payments, are respected as entity-level taxes and avoid the SALT cap. The tax rate for electing PTEs will be 5% for tax year 2022 and will conform to Ohio’s rate on taxable business income for each year after (currently 3%). So, for 2022, investors of electing PTEs will benefit from claiming the Federal deduction based upon the higher taxes owed by the PTE, while also receiving a credit / refund for taxes paid by the PTE against income from other sources.