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Ohio Enacts SALT Cap Workaround

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On June 14, Governor DeWine signed Amended Senate Bill 246 (“SB 246”) into law. With the enactment of this legislation, Ohio joins 22 other states that have enacted a “SALT cap workaround,” allowing businesses structured as pass-through entities (“PTE”) to elect to be taxed at the entity level on their income.[1] ZHF is proud to have assisted with the drafting of the new law contained in SB 246 that will help many Ohio taxpayers reduce their federal tax liabilities.

The general framework of such SALT cap workarounds in the states that have enacted similar laws is as follows: Since the state tax is paid by the business, the income that passes through to the individual owners from the business is lowered, reducing each owner’s federal adjusted gross income (“FAGI”) reported on their federal income tax return. This lowers the owner’s federal tax liability without the owner having to deduct state and local taxes as an itemized deduction on their return. Because the decrease to FAGI is not an itemized deduction, it is not impacted by the $10,000 cap on state and local tax deductions imposed by the Tax Cut and Jobs Act of 2017.[2]

Ohio’s New Direct PTE Tax

PTEs—which include S corporations, partnerships, and limited liability companies taxed as partnerships—electing to pay Ohio’s newly enacted direct Ohio PTE tax will pay an entity-level tax on their Ohio income at a rate of 5% in a tax year beginning in 2022, and 3% in later tax years. The 3% rate is equal to the rate Ohio imposes on business income earned by an individual. The election will be made annually, and is irrevocable for the year made. The Ohio Department of Taxation is required to promulgate rules to implement the new direct Ohio PTE tax, and will presumably have a new paper or electronic means of electing into the tax, as well as reporting and paying the tax.

The existing Ohio PTE withholding tax imposed by R.C. 5747.41 with respect to income flowing to non-residents of Ohio will not apply to an entity that has elected to pay the newly enacted direct Ohio PTE tax for a given tax year. The Ohio tax being paid at the entity level will cover the tax that would be due from the owner with respect to income from the business making the election to pay the newly enacted direct Ohio PTE tax. The new direct Ohio PTE tax presents opportunities for both Ohio residents and non-Ohio residents to decrease their federal income tax liabilities, without affecting the amount of Ohio tax that is ultimately paid. Those individuals that previously participated in a composite return using Ohio Form IT-4708 will most likely not have their business file that composite form. They would choose instead to have their business file the form promulgated by the Tax Commissioner for the new direct Ohio PTE tax (and potentially follow that up with the filing of an individual income tax return to claim the $250,000 business income deduction). Furthermore, beginning with Ohio taxes relating to tax year 2023 when the tax rate is adjusted to 3%, there should be fewer tax dollars initially “overpaid” to Ohio (at 5% under Ohio’s existing PTE withholding structure) for which non-residents formerly were required to file refund claims (using the 3% rate).


While Ohio is not one of the “high tax” states whose residents were hit hardest by the federal SALT cap, the limit on the SALT deduction can still bite. By enacting the workaround found in SB 246, Ohio retains its competitiveness with other states that have enacted similar laws, allowing taxpayers with significant taxable income from PTEs in a given year to have that income taxed at the entity level. As such, it can reduce the owner’s income subject to federal tax without being impacted by the SALT cap.

If you have any questions about the PTE tax or any other tax matters, please contact Derek Heyman or any of our professionals.



[1] All states that have enacted a similar workaround have created an elective PTE tax, with the exception of Connecticut, which made the PTE tax mandatory. See Conn. Gen. Stat. § 12-699.

[2] The I.R.S. acknowledged that such workarounds legitimately avoid the deduction limitation. Referring to payments made by a PTE to a U.S. state or local jurisdiction (not including U.S. territories), IRS Notice 2020-75 states, “Any Specified Income Tax Payment made by a partnership or an S corporation is not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership or a shareholder of the S corporation.”

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