On September 23, 2022, Senate Bill 246 went into effect. Beginning with tax year 2022, Ohio pass-through entities (PTEs) may elect to be taxed at the entity level, allowing them to deduct from their federal income the amount of PTE tax they paid for the year. The measure is meant to allow individuals to deduct more than the annual $10,000 federal itemized deduction for state taxes paid, a provision imposed by the Tax Cuts and Jobs Act in 2017. The Ohio Department of Taxation (ODT) recently published guidance to help taxpayers make this election.

How Do You File the Ohio Pass-Through Entity Tax Return?

Ohio has created a new tax form, Ohio Form IT 4738, on which PTEs can make the election if they do so on or before the filing deadline. This is effective for years beginning on or after January 1, 2022. The due date for filing the IT 4738 is April 15 after the year in which the entity’s fiscal year ends.

Estimated payments are due the 15th of the month following the end of each quarter. As there are currently no forms to make estimated payments for the IT 4738, ODT recommends using the IT 1140 UPC form for this purpose. The IT 4738 will have a line to transfer estimated payments made on the IT 1140 or IT 4708 forms. Ohio withholding overpayments can also be applied to the new IT 4738. Further, ODT will not impose an interest penalty for electing PTE entities for 2022 that fail to make timely estimated payments. Ohio will begin subjecting entities to the interest penalty for tax years beginning January 1, 2023.

How Do First Time Pass-Through Entity Tax Filers Register?

If your entity is a first-time Ohio PTE filer, you must complete and send the PTE Registration Form with your first estimated payment. You can send the form by:

• Uploading it on the Online Notice Response Services (ONRS), 
• Emailing it to the PTE & Fiduciary Income Tax Division at pass-throughentity@tax.state.oh.us, 
• Faxing it to 206.984.1685, or 
• Mailing a copy along with your check for estimated payments. 

Additional Considerations on the Ohio PTE

There are a few other items to note if you are considering making this election:

• ALL partners/shareholders of the qualifying PTE must be included on the IT 4738.  
• The election is irrevocable for the year once it’s made. However, it is an annual election, and the PTE can file the IT 4738 one year, and the following year elect to instead file the IT 4708.
• A trust is not considered a qualifying PTE.
• Disregarded entities, including SMLLCs and Schedule C activities, are not a qualifying PTE.
• PTEs cannot claim payments from other PTEs. We anticipated Ohio would publish more insight around the impact of PTE elections on tiered entities with this guidance, but ODT did not directly address this topic at this time.

Additionally, Ohio nonresident owners included on an Ohio PTE filing are not required to personally file with Ohio if they have no other source income. However, it could be beneficial for owners to do so to benefit from Ohio’s business income deduction (BID) and reduced BID tax rates in 2022. 

Owners of electing entities must continue to evaluate how this refundable PTE credit will impact their personal tax liability. It is important that PTEs making an election timely communicate the anticipated income and PTE credit an owner may receive, so each owner can carefully evaluate the impact on their personal Ohio tax estimates.
 
We will provide updates as ODT releases additional information.

Contact Karen Raghanti at kraghanti@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.