OHIO LEGISLATIVE SERVICE COMMISSION
Office of Research Legislative Budget
www.lsc.ohio.gov and Drafting Office
S.B. 246 Final Analysis
134th General Assembly
Click here for S.B. 246’s Fiscal Note
Primary Sponsors: Sens. Rulli and Lang
Effective date: June 14, 2022
Effective Date:
Zachary P. Bowerman, Attorney
SUMMARY
 Levies a tax on a pass-through entity’s (PTE’s) income apportioned to Ohio at a rate of
5% for taxable years beginning in 2022 and 3% for taxable years thereafter, but only if
the PTE elects to become subject to the tax.
 Authorizes a PTE owner to claim a refundable credit against the owner’s Ohio income
tax liability equal to the owner’s proportionate share of the tax paid by the PTE.
 Credits all tax revenue to the GRF.
DETAILED ANALYSIS
Pass-through entity income tax
Under continuing law, the Ohio income tax applies to income received by an owner or
investor in a pass-through entity (PTE) from the PTE’s business activities in the state. (PTEs
include partnerships, limited liability companies, and S corporations.1)
In certain circumstances, PTEs may pay Ohio income tax on behalf of an investor. Under
continuing law, a PTE is required to withhold the income tax due from its nonresident investors.
Aside from their ownership of the PTE, nonresident investors are not required to file individual
tax returns. This withholding tax is imposed directly on the PTE, even though the underlying tax
liability belongs to the investors.2
1 R.C. 5733.04(O).
2 R.C. 5733.41 and 5747.41 to 5747.453.
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Also under continuing law, a PTE may, but is not required to, file a composite return
(Form 4708) covering any or all of its owners and paying tax for them at the highest of the
graduated tax rates for nonbusiness income (3.99% currently).3
The act authorizes a third option for a PTE to pay income tax by directly imposing an
income tax on the PTE, but only if the PTE elects to be subject to the tax. 4 The PTE’s owners
would then be able to claim a refundable credit on their individual income tax returns equal to
their proportionate share of the income taxes levied on and paid by the PTE.5
A PTE may elect to be subject to the tax primarily to reduce the federal income tax
liability of its owners. Federal law allows a taxpayer, in calculating the taxpayer’s federal income
tax liability, to deduct up to $10,000 in property taxes plus either state and local income taxes
or sales taxes paid by the taxpayer. This deduction is known as the state and local tax (SALT)
deduction.6 (The SALT deduction is a “below the line” deduction, meaning it is applied after
federal adjusted gross income (FAGI) is calculated and is only available if the taxpayer itemizes
deductions, rather than taking the standard deduction.) Recent guidance published by the
Internal Revenue Service confirms that taxes paid at the PTE level are an “above the line”
deduction that do not count towards a PTE owner’s $10,000 SALT limitation. In other words,
taxes paid by a PTE reduce the FAGI of its owners without being subject to the SALT limitation.7
For example, if an owner’s Ohio income tax liability due to income arising from a PTE’s
business activities in Ohio equals $15,000, the owner may only deduct $10,000 in calculating
the owner’s federal income tax liability. If the PTE, however, elects to become subject to the tax
authorized by the act, all Ohio income taxes would instead be paid by the PTE, and would, as a
result, reduce the owner’s federal adjusted gross income (FAGI) by an amount equivalent to
deducting the full $15,000 in Ohio income taxes.
Election
A PTE may elect to be subject to the tax (referred to in the act as an “electing PTE”) by
filing a form making the election with the Tax Commissioner by the deadline to file its return for
the taxable year, which is April 15 of the year beginning after the end of its taxable year. (An
electing PTE’s taxable year for Ohio income tax purposes is the same year for federal income
3 R.C. 5747.08(D).
4 R.C. 5747.38.
5 R.C. 5747.39.
6 26 United States Code 164.
7R.C. 5747.38(E); See Internal Revenue Service (IRS) Notice 2020-75 (PDF), which may be accessed by
conducting a keyword “Notice 2020-75” search on the IRS’s website: www.irs.gov.
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tax purposes and may not necessarily be a calendar year.8) The election applies only to the
taxable year for which it is made and, once made, is irrevocable for that year.9
An electing PTE is not required to withhold the income tax due from its nonresident
investors for the taxable year that the PTE makes the election.10 If the electing PTE already paid
all or a portion of the withholding tax, the amounts paid may be applied to the electing PTE’s
income tax liability.11
Rate of tax
An electing PTE’s tax liability equals all income sitused to Ohio, less a few adjustments,
multiplied by one of the following tax rates:
 For 2022, 5%;
 For each year thereafter, the income tax rate applicable to business income, i.e., 3%.12
This is the same rate structure that applies to certain nonresident PTE investor withholding
taxes.13
Returns and payments
Similar to the withholding tax for nonresident PTE investors, an electing PTE must file an
estimated tax return and an annual tax return and make estimated payments each quarter.
Estimated taxes must be paid by the 15th day of the month after the end of each quarter.14 As
mentioned above, the deadline to file the annual return and pay any additional tax shown due
on the return is April 15 following the electing PTE’s taxable year that ends in the preceding
calendar year.15 Electing PTEs are entitled to refunds for overpayments and are subject to
penalties and interest under continuing law for failure to file returns or pay the tax. 16
Revenue from the income tax levied on electing PTEs is credited to the GRF.17
The act permits a nonresident investor or trust to forgo filing an individual income tax
return for the investor’s or trust’s taxable year if the investor or trust does not have any income
8 R.C. 5747.45.
9 R.C. 5747.38(C).
10 R.C. 5733.41 and 5747.41.
11 R.C. 5747.43(G).
12 R.C. 5747.38(A)(4) and (B).
13 R.C. 5747.41 and Section 7 of S.B. 18 of the 134th General Assembly.
14 R.C. 5747.43.
15 R.C. 5747.42 and 5747.44.
16 R.C. 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.451, and 5747.453.
17 R.C. 5747.03.
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other than income from one or more electing PTEs. To claim the refundable income tax credit,
though, the nonresident investor or trust must file an annual return.18
Refundable income tax credit
To claim the refundable income tax credit, an owner must first add back to its Ohio
taxable income its proportionate share of the income taxes levied on and paid by the electing
PTE. As noted above, the tax paid by the electing PTE reduces the owner’s FAGI, which is the
starting point for calculating a taxpayer’s Ohio income tax liability.19
Then, the owner may claim a refundable income tax credit equal to the amount of PTE
taxes added back. The credit must be claimed for the owner’s taxable year that includes the last
day of the electing PTE’s taxable year for which the tax was paid.20
Rules
The act requires the Tax Commissioner to adopt rules to administer the income tax on
electing PTEs, which must include guidance for owners to claim the income tax credit based on
different ownership structures. Adoption of these rules are exempt from continuing law’s
requirement for the Commissioner to simultaneously repeal at least two other rules. 21
HISTORY
Action Date
Introduced 10-05-21
Reported, S. Ways & Means 03-15-22
Passed Senate (30-0) 03-16-22
Reported, H. Ways & Means 06-01-22
Passed House (88-2) 06-01-22
22-ANSB246EN-134/ks
18 R.C. 5747.08.
19 R.C. 5747.01(A)(36) and (S)(15).
20 R.C. 5747.39 and 5747.98.
21 R.C. 5747.38(F).
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Statutes affected:
As Introduced: 5733.04, 5733.41, 5747.01, 5747.03, 5747.08, 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.41, 5747.42, 5747.43, 5747.44, 5747.45, 5747.451, 5747.453, 5747.98
As Reported By Senate Committee: 5733.04, 5733.41, 5747.01, 5747.03, 5747.08, 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.41, 5747.42, 5747.43, 5747.44, 5747.45, 5747.451, 5747.453, 5747.98
As Passed By Senate: 5733.04, 5733.41, 5747.01, 5747.03, 5747.08, 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.41, 5747.42, 5747.43, 5747.44, 5747.45, 5747.451, 5747.453, 5747.98
As Reported By House Committee: 5733.04, 5733.41, 5747.01, 5747.03, 5747.08, 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.41, 5747.42, 5747.43, 5747.44, 5747.45, 5747.451, 5747.453, 5747.98
As Passed By House: 5733.04, 5733.41, 5747.01, 5747.03, 5747.08, 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.41, 5747.42, 5747.43, 5747.44, 5747.45, 5747.451, 5747.453, 5747.98
As Enrolled: 5733.04, 5733.41, 5747.01, 5747.03, 5747.08, 5747.11, 5747.13, 5747.132, 5747.14, 5747.15, 5747.41, 5747.42, 5747.43, 5747.44, 5747.45, 5747.451, 5747.453, 5747.98