By Greg Saul, Esq., CAE, director of tax policy
Last year, Senate Bill 246 (134th GA) authorized pass-through entity (PTE) owners to “elect” to file a new form IT 4738 and be subject to a new entity-level tax in response to the federal $10,000 SALT deduction cap limit placed on individuals – see the Ohio Department of Taxation’s (ODT) guidance page here. However, Ohio was one of the only states that authorized a PTE tax (see the map of states), but did not allow a credit for taxes paid to another state.
The Ohio Society of CPAs made it a top advocacy priority to fix this issue. House Bill 33 now permits Ohioans who are currently subject to double taxation to get back to a status quo position. This change (see TAXCD92) authorizes an Ohioan to use our resident credit (in existence since at least 1991) for PTE taxes paid to other states while requiring an add-back of taxes deducted from that individual’s federal adjusted gross income. See House Bill 200 for the language that was amended into H.B. 33 and ultimately enacted.
These provisions are effective for taxable years ending on or after Jan. 1, 2023, but taxpayers are allowed to apply, at their option, the provisions to taxable years ending on or after Jan. 1, 2022, with an amended or original return.
To claim the credit, ODT recently added FAQ #1 on its website under the topic: Income - Ohio Residency and Residency Credits. FAQ #1 is also copied below.
Can I claim the resident credit for pass-through entity (PTE) SALT cap taxes imposed by another state or the District of Columbia on a PTE in which I am an investor?
Yes, if you make certain adjustments to include these taxes in your Ohio adjusted gross income (AGI). Effective for tax year 2023*, taxes paid by a PTE in which you are an investor to another state or the District of Columbia that are related to IRS notice 2020-75 must be added on the corresponding line on the Ohio Schedule of Adjustments. Additionally, if the income on which the tax is based qualifies as business income under Ohio law, the add-back also qualifies as business income and should be reported on the corresponding line of the Ohio Schedule of Business Income. Any portion of the tax remaining in Ohio AGI, after accounting for the Business Income Deduction, is eligible for the resident credit. See the FAQ "How should a resident taxpayer account for the Business Income Deduction in calculating their Ohio Resident Credit?" for more information.
*Important: Ohio H.B. 33 permits taxpayers to apply all the adjustments above to tax year 2022 by filing an amended or original return. Because this law passed after the 2022 income tax forms were finalized, there are no designated lines to make these adjustments. If you would like to claim the resident credit for these taxes on your 2022 original or amended, you should make the adjustments as follows:
Add the other states' PTE SALT cap tax amount to your Ohio AGI using line 2 of the Ohio Schedule of Adjustments to the extent it was deducted from federal adjusted gross income.
Enter any portion of those taxes added back on line 2 that qualify as business income on line 7 of the Ohio Schedule IT BUS. This includes both the taxpayers' proportionate share of taxes paid by a PTE to another state related to IRS notice 2020-75 and on Ohio's IT 4738.
Any portion of the tax remaining in Ohio AGI after accounting for the business income deduction can be used to calculate the Ohio resident credit on form IT RC.