The Ohio Department of Taxation on Jan. 20 released a third round of guidance for pass-through entities (PTEs) who “elect” to be subject to a new entity-level tax in response to the federal $10,000 SALT deduction cap limit placed on individuals.
The ODT created the new Form IT 4738 after the enactment of OSCPA-supported Senate Bill 246, also known as Ohio’s version of the SALT cap deduction parity/workaround. The guidance includes a final version of the new IT 4738 form and instructions, a new payment coupon, and an additional 13 FAQs bringing the total to 33 FAQs. All of the prior guidance also can be found by clicking here.
S.B. 246 authorizes PTE owners to claim a refundable credit against the owner’s Ohio income tax liability equal to the owner’s proportionate share of the tax paid by the PTE. IRS Notice 2020-75 permitted states to enact legislation to clarify that taxes paid by a PTE do not count towards an owner’s $10,000 SALT deduction cap limitation for federal income tax purposes. Twenty-nine states have addressed this issue, and three states have introduced bills. See the map of states with pending or enacted legislation.
Although ODT has been releasing guidance and adding FAQs, S.B. 246 requires ODT to enact rules regarding multi-tiered entities, including partnerships. Those rules have not been adopted yet.
***(F) The tax commissioner shall adopt rules to administer the tax levied under this section. Such rules shall include a description of how the adjustments to income under divisions (A)(36) and (S)(15) of section 5747.01 of the Revised Code and the credit under section 5747.39 of the Revised Code apply to direct or indirect owners of an electing pass-through entity based on various ownership structures. Any rule adopted under this section is not a regulatory restriction for the purpose of section 121.95 of the Revised Code.****
Finally, OSCPA-supported Senate Bill 18 is now in effect, which lowers Ohio’s withholding rates on nonresident investors in Ohio-operating PTEs. The effective date of the withholding rate change to 3% applies to PTE’s taxable years beginning on or after Jan. 1, 2023. Prior law required these entities to withhold on behalf of nonresident individuals at 5% and other PTEs (nonindividuals) at 8.5%.