Let’s face it, taxes can be confusing, but it’s important for business owners to stay informed. Why? Tax laws change. In this case, there are recent changes regarding the SALT tax cap deduction that you are going to want to know about if you are a business owner.
What is the SALT Tax?
SALT stands for State and Local Taxes. In simple terms, it’s the amount you pay to your state and local governments. For a long time, people could deduct these taxes from their federal tax returns. But a few years ago, the federal government said, “Hold on! You can only deduct up to $10,000 of these taxes.” This cap became a big deal for many, especially those in high-tax states.
What Changed for Ohio Businesses?
Last year, Senate Bill 246 was introduced. This bill allowed certain business owners, specifically those of pass-through entities (PTEs), to choose a new way to file their taxes. This was mainly because of the $10,000 SALT deduction cap. But there was a catch. Ohio was unique because, unlike other states, it didn’t allow these business owners to get a dollar-for-dollar credit for taxes they paid to other states. Only a partial credit was allowed.
Imagine you’re a business owner of a business in Ohio, but you also do some work in Indiana. You pay taxes in both states. But because of the way things were, you ended up paying more than you should. This has changed.
The Ohio Society of CPAs saw this problem and worked to find a solution. Enter House Bill 33. This new bill lets Ohioans who are business owners avoid this “double taxation.” Now, they can include taxes paid to other states as part of the resident credit for PTE taxes. But they also must add back taxes to the extent it was deducted or excluded from their federal adjusted gross income.
Any portion of the taxes added back that qualify as business income should be included as business income on the Ohio return subject to preferential business income tax treatment.
What does this tax credit mean for you as an Ohio business owner?
These changes started for taxable years ending on or after January 1, 2023. But here’s some good news: taxpayers can choose to apply these rules for tax year 2022, with an amended or original return.
The Ohio Department of Taxation added some helpful FAQs on their website to guide business owners. One key point is that if you’re an investor in a PTE, and that PTE pays SALT taxes in another state, you can include these taxes as part of resident credit on your Ohio tax return. There are specific steps to follow, so it’s essential to check the details or consult with a CPA.
Ohio has made some significant changes to help business owners navigate the SALT tax cap. If you’re an Ohio business owner, it’s a good idea to understand these changes and work with a tax planning professional to ensure you’re leveraging the credit correctly to reduce your tax liability.