Ohio Elective Pass-Through Entity Tax

Ohio Senate Bill 246 was recently passed by the General Assembly and signed by Ohio Governor Mike DeWine. This bill allows owners of a qualifying pass-through entity that is not a disregarded entity to “work around” the Federal limitation for individuals on state and local tax deductions by allowing the entity to elect to be subject to a state entity-level tax, effective for tax years beginning on or after January 1, 2022.

The election by the entity to be subject to the new state entity-level tax is made known to the Ohio Department of Taxation by filing Form IT 4738.

Once the election is made by the entity, it is binding on all owners of the entity, is irrevocable, and is only applicable for the tax year for which the election is made. For tax years ending on December 31st, 2022, the election must be made by April 18, 2023, subject to extension.

Ohio Elective Pass-Through Entity Tax Rate

The tax rate that the entity will be subject to is 5% for the taxable year beginning on or after January 1, 2022, and equal to the tax rate imposed on taxable income for taxable years beginning on or after January 1, 2023, which is currently 3%. The electing entity can claim a credit carryforward from the prior year Composite or Withholding return on Form 4738 if the entity wishes to file Form 4738 for the taxable year beginning on or after January 1, 2022.

There are no estimated payment coupons currently available for Form IT 4738. If the entity has made 2022 estimated payments using the IT 1140 UPC, the entity can notify the Ohio Department of Taxation on Form 4738 to transfer the payments previously made to Form IT 4738. Going forward, estimated payments are due on the 15th day of the month after the end of each quarter.

The entity filing Form IT 4738 satisfies the Ohio filing requirements for the entity’s non-resident and trust owners unless they have other Ohio sourced income. Owners of the entity who file an Ohio income tax return must add back their proportionate share of taxes paid on Form 4738 on the Ohio Schedule of Adjustments. A refundable credit equal to the owner’s proportionate share of tax paid on Form IT 4738 will be available on the Ohio Schedule of Credits.