What Is the Ohio Pass-Through Entity Tax?

The Ohio Pass-Through Entity (PTE) tax is an elective tax available to certain businesses. It serves as a workaround to the federal limitation on state and local tax (SALT) deductions, which caps the amount individuals can deduct on their federal income tax returns at $10,000 annually. By making this election, the business itself pays Ohio income tax at the entity level on behalf of its owners.

The owners then receive a credit on their personal Ohio tax returns for their share of the tax paid by the entity. This mechanism is effective for tax years beginning on or after January 1, 2022.

Eligibility for the PTE Tax Election

The option to pay income tax at the entity level is available to certain business structures. Qualifying pass-through entities include S corporations, partnerships, and limited liability companies (LLCs) that are taxed as either a partnership or an S corporation.

C corporations are ineligible because they are already taxed at the entity level under a different corporate tax structure. Sole proprietorships and single-member LLCs that are treated as disregarded entities for tax purposes also cannot make this election. A trust is not considered a qualifying PTE for this purpose.

The decision to opt into the PTE tax is made annually by the entity itself and, once made for a given tax year, is irrevocable for that year. The election is binding on all owners of the entity for the year it is made, meaning every partner, member, or shareholder is included in the calculation and subsequent credit process.

Calculating the Ohio PTE Tax

The Ohio PTE tax is based on the entity’s “qualifying taxable income.” This figure is the sum of the owners’ distributive shares of the entity’s income, gains, expenses, and losses as reported for federal income tax purposes. For entities with multi-state activities, Ohio uses an apportionment factor to determine the share of income attributable to the state. This factor generally incorporates the percentage of the entity’s total sales, property, and payroll that are located within Ohio.

The resulting apportioned business income, along with any nonbusiness income specifically allocated to Ohio, forms the tax base for the PTE tax. Once the qualifying taxable income is determined, a specific tax rate is applied. For the 2022 tax year, the rate was 5%, and for taxable years beginning in 2023 and thereafter, the rate was adjusted to 3%. The resulting amount is the total PTE tax liability for the entity.

The Ohio Department of Taxation requires electing entities to make quarterly estimated tax payments throughout the year. These payments are typically due on the 15th day of the month following the end of each quarter. The required cumulative payment schedule is as follows:

• 22.5% due after the first quarter
• 45% due after the second quarter
• 67.5% due after the third quarter
• 90% due by the end of the fourth quarter

Information and Forms Needed to File

To make the PTE tax election, businesses must file the Ohio Form IT 4738, the Electing Pass-Through Entity Income Tax Return. This form is used for making the annual election and reporting the tax.

Completing the IT 4738 requires gathering specific information about the entity and its owners. The filer will need the entity’s legal name and Federal Employer Identification Number (FEIN). For each owner, the form requires their full name, current address, and their Social Security Number (SSN) or Taxpayer Identification Number (TIN). This information allows the state to track the tax paid and credits allocated.

In addition to identifying information, the form requires the inclusion of each owner’s percentage of ownership in the entity. This percentage determines each owner’s share of the tax paid. The filer must also report the key financial figures, including the calculated qualifying taxable income, the apportioned income subject to Ohio tax, and the final tax due for the year.

Making the Election and Submitting Payment

The Ohio Department of Taxation encourages electronic filing, but paper returns are also an accepted method. Payment of the calculated PTE tax can be made electronically or by mail.

The deadline for both filing the IT 4738 and paying any tax due is April 15th following the close of the entity’s taxable year. An extension to file the return can be obtained, but the extension does not grant more time to pay the tax. The tax liability must be paid by the original April 15th deadline to avoid potential penalties and interest.

Claiming the Credit on Personal Returns

Each owner is entitled to a refundable tax credit on their personal Ohio income tax return. This credit is equal to their proportionate share of the total tax paid by the entity. The entity is responsible for providing each owner with documentation, similar to a federal Schedule K-1, that specifies the amount of the credit they are eligible to claim.

Owners claim this credit when they file their Ohio Individual Income Tax Return, Form IT 1040. The form includes a specific line where taxpayers can report the PTE tax credit. The amount entered here directly reduces the owner’s Ohio income tax liability for the year, which ensures that the income is not taxed twice.

A significant feature of this credit is its refundable nature. If an owner’s share of the PTE tax credit is greater than their total Ohio income tax liability, the state will refund the difference to the taxpayer. For nonresident owners whose only source of Ohio income is from the electing PTE, they may not be required to file an Ohio individual income tax return at all.