As part of Ohio Senate bill 246, passed by the General Assembly and signed by Gov. Mike DeWine, certain Ohio businesses are now able to pay and deduct at the entity level income tax that was previously attributed to the owners of the business.
“Previously, a pass-through entity in Ohio did not pay income tax on its taxable income — the owners bore the tax responsibility on their individual Ohio income tax returns,” says Matt McKinnon, Tax Director, Brady Ware & Co. “Ohio State Bill 246 helps taxpayers by moving the tax burden to the company.
“This works around the individual state and local tax deduction limit of $10,000 instituted by the Tax Cuts and Jobs Act of 2017. The bill levies a tax on a pass-through entity’s income apportioned to Ohio and authorizes a refundable income tax credit for an owner of such tax that was paid.”
Smart Business spoke with McKinnon about how businesses and owners can reduce their tax burden by transferring the tax responsibility for some of their income off themselves and back to the company. If your business has substantial income, the federal tax savings related to this technique can be up to 37 percent of the tax paid by the company.
What types of businesses can benefit?
Any business that operates as a pass-through entity and has operations in Ohio, should be aware of this change and how it could potentially impact them in a positive way. The bill allows owners of qualifying passthrough entities (partnerships and S corporations) to work around the federal limitation for individuals on state and local tax deductions.
It does this by giving the entity the option to elect to be subject to an entity-level state tax, effective for tax years beginning on or after Jan. 1, 2022. Having an in-depth discussion with your CPA can help you determine the best way to proceed.
What is the Ohio elective pass-through entity tax rate?
The entity will be subject to 5 percent as the tax rate for tax year 2022. For tax years 2023 and after, the rate decreases to 3 percent. If your business is a qualifying pass-through entity and it elects to pay tax at the entity level, it will reduce the amount of income flowing to your individual tax return, providing a direct benefit. Talk to your CPA to see what advantages you can gain to see now what can be done to reduce your individual tax burden.
Most businesses are still working through this to determine how it will impact them and what steps they should take to ensure they are getting the maximum possible benefit.
There are no IRS regulations on this yet as they work through the nuances, so it’s critical to enlist your CPA for help. There are a lot of moving pieces, and experts are working within limited guidance in terms of the timing of deductions.
How important is it to consult with your financial expert?
Ohio isn’t the only state that has enacted a pass-through entity tax regime, so it’s critical to understand the mechanisms of each state and what you have to do to elect in. Generally, all owners of the entity must consent to the election and it is binding for the tax year elected, so make sure you have a full understanding of the impact before deciding.
Businesses have until the due date, including extensions, of filing new Form IT-4738 to elect into the Ohio Pass-Through Entity Tax regime. For 2022, this can be as late as Sept. 15, 2023.
As these nuances continue to develop, businesses, owners and partners need to regularly meet and discuss with their CPA what they should be doing, rather than just meeting once a year at tax time. Don’t be shy about reaching out to your financial experts. Don’t hide, and share as much information as you can to gain the biggest benefit. ●
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