SALT Cap Workaround Law Could Save Ohio Business Owners Over $100 Million

A new law that takes effect for tax year 2022 will enable some Ohio business owners to reduce their federal tax bills by avoiding the cap on state and local tax deductions imposed as part of the 2017 Tax Cut & Jobs Act.

The provision, signed into law this summer by Governor Mike DeWine, allows owners in pass-through entities, including partnerships, S-corporations and some LLCs to reduce their federal taxable income with uncapped deductions for state and local taxes paid. The Tax Cut & Jobs Act established a $10,000 cap for such deductions.

The bill’s primary sponsor, State Senator George Lang (R-West Chester), characterized the measure as part of a mission to make Ohio the country’s “most business friendly” state. The measure will save Ohio small businesses more than $100 million, according to a press release on Lang’s website.

Reducing the Effect of SALT Cap on Federal Taxes

The SALT deduction cap can be costly for filers who itemize deductions and can’t claim more than $10,000 for combined property taxes and state income taxes.

The workaround is part of a trend among state lawmakers across the country to adopt elective pass-through entity taxes as a way to lessen the impact of the SALT cap on business owners.

The new elective tax allows a qualified pass-through entity to directly pay income tax at the entity level in lieu of business owners individually paying Ohio tax on their share of pass-through business income. Business owners will then receive a refundable credit to apply on their individual state income tax return.

SALT Cap Workaround for Pass-Through Entities for Tax Year 2022

To take advantage of this workaround, eligible pass-through entities will need to file a new PTE tax form, IT 4738 annually by April 15th of the year following the taxable year end – for example: by April 15, 2023 for the 2022 tax year. The entity level tax is 5% for the 2022 tax year and will fall to 3% for tax years beginning on or after January 1, 2023. Quarterly estimated tax payments may be required.

To learn more about how you may be able to take advantage of this entity-level tax to avoid the SALT cap, speak to one of the tax experts at Kirsch CPA Group, where our commitment to the growth and success of small and mid-sized businesses is built around a holistic understanding of your business.

Contact us to learn more about strategic tax planning