I've Been Everywhere, Man - Non-Ohio Passthrough Entity Tax

If you’re a business in Ohio that is organized as a partnership or S corporation, you have probably had the phrase “passthrough entity tax” added to your vocabulary within the last year or so. In 2022, Ohio joined the list of states that allow a passthrough entity to pay the tax on income sourced to the state at the entity level rather than just making withholding or composite payments on behalf of their owners. This allows companies (and, therefore, the owners of the passthrough entities) to realize a federal deduction for those taxes, whereas those deductions would be limited if claimed by the individual owners due to the $10,000 threshold imposed as part of the Tax Cuts and Jobs Act.

We have been working with our clients to decide if making the passthrough entity tax (PTET) election in Ohio made sense for them for 2022. However, unlike the vast majority of other states that have implemented PTET regimes, Ohio did not allow residents of the state to claim a credit against their Ohio tax for taxes paid to other states by passthrough entities rather than the individuals themselves. Therefore, it did not make sense for companies with Ohio owners to pursue the PTET election in other states. Trading a credit for a deduction of the same amount is not good tax planning.

As part of Ohio’s new 2024-2025 budget (HB 33) that was just passed, the state will now allow those credits, and they made it retroactive to the 2022 tax year. This means that you should consider making those elections in other states in which your company files. There are 35 states plus the District of Columbia that have these elections available, so it could generate substantial savings if your company has a lot of activity outside of Ohio. But there are several things to consider:

• Some states require advance election and/or payment. It may be too late to make the election for 2022, or perhaps even 2023.
• Not all states award a credit equal to the amount of tax paid. There is usually still a benefit, but it may be reduced.
• If your company has owners who live in states other than Ohio, you will want to make sure that their resident state allows the credit for PTET payments.
• Unless the state allows withholding and/or composite payments to be applied against the PTET, you may owe late filing and late payment penalties if you file the PTET form for 2022 at this point.
• Some states calculate the PTET including not just the income sourced to the state, but also the entire income allocated to residents of that state, even if the income is sourced to other states.
• Fiscal year taxpayers may face some complexity in the timing of the PTET filings.

If you find yourself trying to evaluate whether you should make the PTET election for additional states, we would be happy to help. Please contact us.