Ohio Pass-Through Entity Tax

Starting in 2022, many states came out with a Pass-Through Entity Tax. A pass-through entity tax is an entity-level income tax that partnerships, S corporation, and Limited Liability Companies (LLCs) may elect to pay.

Many businesses organize themselves into pass-through entities. Meaning the income earned in the business throughout the year is not taxed at the entity level and is instead, passed through to the owners who pay taxes on the business income on their personal 1040 returns.

This new pass-through entity tax allows owners of a business to elect to tax their business income at the entity level rather than letting it pass through.

The main draw for this is that owners can hopefully avoid the $10,000 SALT cap that 1040's currently are subject to. Owners electing pass-through entity tax (PTET) can deduct a larger portion of their state income taxed paid against federal income. Currently, in Ohio, the pass-through entity tax rate is 3%. This means that whatever the total qualifying taxable income in Ohio, the entity will be taxed 3% and be required to pay that amount when filing their Ohio Electing Pass-Through Entity Tax return (IT 4738). The amount paid is added back to the Owners' Ohio individual income tax return on the Schedule of Adjustments.

The election is once-a-year and binding once made for the year. A payment or refund may be calculated when filing the form, which is due on April 15th.

The pass-through entity tax does involve a bit more work with an election to be made and a different form to file but could greatly help owners of businesses pay less tax on their state income tax returns. If you own a business, ask your tax professional today if the pass-through entity tax is the right choice for you this coming season.