Ohio Tax Benefit for S-Corp and Partnership Owners
For the last 5 years, federal tax deductions for state and local taxes were limited to $10,000 for individuals. For owners of Ohio pass-through entities that limitation ended, on June 14, 2022, when Ohio Governor DeWine signed into law S.B. 246 establishing an elective tax regime for S-Corporations and partnerships. These entities are commonly referred to as “pass-through” entities because taxable income from the business is “passed-through” to the owners who then pay the taxes on their individual tax returns.
Pass-through entities can now elect to file a new Form IT 4738 and have the business pay the Ohio tax due. This election allows the business to deduct the state income tax paid, and pass that deduction through to the owners when they file their federal income tax return, effectively bypassing the $10,000 cap.
The election is available for tax years beginning on or after January 1, 2022. For 2022, the entity pays a tax of 5%, and the owners then claim the tax paid as a credit on their Ohio Individual Tax Return. The tax rate drops to 3% for tax years beginning on or after January 1, 2023.
What do business owners need to do now?
Cash basis taxpayers need to pay an estimated payment to the State of Ohio using 1140 UPC by December 31, 2022, to be able to deduct the taxes paid on their 2022 income tax return.
Those who are accrual basis taxpayers can be assessed after year end.
For tax years beginning on or after January 1, 2023, quarterly estimated payments are required and penalties will apply. For 2022, all penalties are waived.
Does this impact you?
Generally, companies with significant amount of taxable income sourced almost exclusively to Ohio will be the biggest beneficiaries of this election. Companies experiencing a loss in 2022 or are sourced to multiple states may not benefit as much. This election is not advantageous for all businesses as there are several factors to be reviewed.
With 2022 quickly wrapping up, there may be other tax related items to consider for your next tax filing. Check out 8 End-of-Year Tax Planning Strategies for 2022.
Do you need help filing Form IT 4738 or determining if you need this form? Kirsch CPA Group is here to help with your tax planning and preparation to decide if it’s the right decision for you.