State Tax Updates for Pass-Through Entities

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Latest legislative and rule updates impacting state taxes for pass-through entities. Understand the implications of the PTE SALT cap legislation and new entity-level tax options effective for tax year 2022. Stay informed on Ohio's tax credits, rate changes, and filing season forms updates.

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Pass-Through Entity Tax Updates Presented By: Sara Caldwell and Michelle Smith November 17, 2022

The information presented in this presentation is accurate as of the date of the presentation. Any legislative or legal changes that take place after the date of this presentation may change the accuracy of this content. Additionally, changes to facts and circumstances may impact any answer provided herein. Please contact the Department directly with any questions (Individual Income Tax - (800) 282-1780 or Business Tax - (888) 405-4039). 2

Overview Legislative and Rule Updates Ohio s SALT legislation OAC 5703-7-05 Tax Credits Upcoming Rate Changes IT 1140 Tax Year 2022 Filing Season Forms Updates PTE and Fiduciary Guidance 3

Legislative and Rule Updates 4

PTE SALT Cap Legislation Tax Cuts and Jobs Act (2017) limited the itemized deduction for state and local taxes to $10,000 the SALT Cap IRS Notice 2020-75 laid out which partnership/S-corp payments are deductible in computing federal AGI and which are itemized Taxes imposed on an entity are deductible in computing federal AGI and thus are not limited by the SALT cap Taxes paid by an entity on behalf of shareholders are itemized deductions and thus are subject to the SALT cap 5

PTE SALT Cap Legislation Historically, Ohio has a PTE Withholding tax (form IT 1140) and a PTE Composite tax (form IT 4708) Both taxes are filed and paid by the entity on behalf of the entity s shareholders/partners/members Neither tax is imposed directly on the entity Thus, these taxes are deducted as federal itemized deductions and are subject to the SALT cap If/when investors file an Ohio IT 1040, they get credit for their share of the taxes paid by the PTE 6

PTE SALT Cap Legislation Effective for tax year 2022, Am. S.B. No. 246 enacted a new, third PTE tax Any qualifying PTE may elect to be subject to this new entity- level tax Election is made by the entity and is binding on all owners IT 4708 and IT 1140 cannot be filed Election is irrevocable for the tax year A disregarded entity may not make this election 7

PTE SALT Cap Legislation Election will be made by filing the new tax form the IT 4738 Draft form and frequently asked questions are available on Department s website Department is working with software vendors to carry the form as soon as possible Am. S.B. No. 246 states the tax is meant to comply with IRS Notice 2020-75 in which such tax paid is deductible to the entity for federal income tax purposes 8

PTE SALT Cap Legislation IT 4738 PTE Tax Tax is levied on qualifying taxable income Adjustments listed in R.C. 5733.40(A)(2)-(A)(7) apply PTE may not take any individual income tax deductions or credits allowed to the investors on the IT 1040 Tax rate is 5% for 2022 and 3% for 2023 and forward 9

PTE SALT Cap Legislation IT 4738 PTE Tax (cont.) Return is due April 15th of the calendar year after the year in which the entity s fiscal year ends Estimated payment schedule follows the IT 1140 due dates April, July, October, January (for calendar year filers) Use the IT 1140 payment coupon to make estimated payments for the IT 4738 until the Department publishes an IT 4738 payment coupon The Department will not charge the IT 2210 interest penalty for underpayment of IT 4738 estimated tax for tax year 2022 10

PTE SALT Cap Legislation OAC 5703-7-05 Rule pertains to income tax filing extensions Currently provides an extension for taxpayers and qualifying pass-through entities Automatic Ohio filing extension applies when taxpayers or qualifying entities have received a federal filing extension 11

PTE SALT Cap Legislation OAC 5703-7-05 Changes proposed by the Department would apply the same automatic extensions to electing pass-through entities filing the IT 4738 Proposed rule was submitted to JCARR (Joint Committee on Agency Rule Review) in September 12

PTE SALT Cap Legislation For updates, please visit https://tax.ohio.gov/business/ohio-business- taxes/pass-through-entities/it-4738-electing-pass- through-entity Sign up for Tax Alerts at https://tax.ohio.gov/help- center/email-us/tax-alert 13

Tax Credit Updates Vocational Jobs Credit Sub. S.B. No. 166 New credit for tax year 2022 Available on the IT 1041 and IT 4708 2022 Schedule E, Nonrefundable Business Credits, line 3 IT 1041, Schedule III, Line 49 Opportunity Zone & Historic Preservation Credits Existing credits available on the IT 4708 and IT 1041 Sub. S.B. No. 225 changes 14

Tax Credit Updates Beginning Farmers Credit Am. Sub. H.B. No. 95 New credit for sale or lease of agricultural assets to a beginning farmer available beginning in tax year 2023 Will be applicable to the IT 4708 and IT 1041 15

IT 1140 Rate Change All non-exempt entities (e.g., individuals, PTEs, trusts) will be taxed at a 3% rate Effective for tax years beginning on or after 1/1/2023 16

Tax Year 2022 Filing Season Forms Updates 17

Forms Updates: IT 4708 Line 15 Ohio IT 1140 and IT 4738 estimated payments and prior year IT 1140 overpayments claimed on this return Updated to include IT 4738 estimated payments Updated to include prior year IT 1140 overpayments (credit carryforward) Additional style updates IRC (Internal Revenue Code section), check box, etc. 18

Forms Updates: IT 1140 Line 3a Ohio IT 4708 and IT 4738 estimated payments and prior year IT 4708 overpayments claimed on this return Updated to include IT 4738 estimated payments Updated to include prior year IT 4708 overpayments (credit carryforward) Additional style updates IRC (Internal Revenue Code section), check box, etc. 19

Forms Updates: IT 1041 Line 24 Pass-through entity taxes paid/electing pass-through entity taxes paid Line 49 Vocational job credit and/or Ohio adoption credit Schedule XII, Line 83 is used to claim any credit from the IT 4738 Additional style updates IRC (Internal Revenue Code section), check box, etc. 20

PTE and Fiduciary Guidance Unrequested Overpayments & Balance Due Notice 21

Unrequested Overpayments Unrequested Overpayment Notice: Issued when a credit balance identified Common Causes Payments remitted and not claimed on the return filed Payments remitted using an incorrect Universal Payment Coupon (UPC) Credit carryforward amounts not claimed on the return Math errors made when completing the return 22

Unrequested Overpayments Resolving an Unrequested Overpayment Notice Review the return filed and all supporting documentation used to complete the return A PTE or fiduciary can file an amended return electronically, provided software is from approved vendor for form and tax year AMEND the return and include: Copy of the notice received Letter of explanation, AND Supporting documentation 23

Balance Due Billing Notice Balance Due Notice: Issued when an outstanding balance is identified Common Causes Payments claimed on the return overstated Payments remitted with an incorrect Universal Payment Coupon (UPC) Credits claimed on IT 4708 or IT 1041 could not be verified Credits reported on the IT 1140 or IT 4738 (all credits are disallowed) Math errors made on return upon filing Incorrect form or tax rate used 24

Balance Due Billing Notice Resolutions for Balance Due Notices Review all notices received from the Department Review the return filed and all supporting documents used to file the return AMEND the return, if applicable Submit missing information for review Remit the balance due 25

Expedite Refunds & Minimize Notices 26

Expedite Refunds & Minimize Notices First-Time Filers Submit the Pass-Through Entity & Fiduciary Income Tax Registration form (PTE REG) before remitting the first estimated payment 27

Expedite Refunds & Minimize Notices Which Return Should a PTE File? When deciding whether to file an IT 1140, IT 4708, or IT 4738 keep in mind: IT 4738 must include all owners Credits cannot be claimed on the IT 1140 or IT 4738 PTE credits can be claimed on the IT 4708 Credits are in proportion to the investor income included on the return 28

Expedite Refunds & Minimize Notices Provide Current Address Correspondence, billings, assessments, and refunds are sent to the most recent address on file To update an address: Check the box above the address line on the return filed, OR Visit the Resources for Business tab, How Do I sectionat tax.ohio.gov 29

Expedite Refunds & Minimize Notices When PTE or Fiduciary Receives a Refund Deposit refund checks upon receipt Refund amount may include interest Refund checks are valid for only 90 days Department cannot change the name on a refund check PTEs, trusts, and estates must maintain a checking account to ensure they can cash the refund 30

Expedite Refunds & Minimize Notices Billing Notices Received May include several pages of explanation sent together Billing notice, detailed correction sheet, written explanation of adjustments For tax preparers, ensure the client has provided you with all notices received Reminder, multiple related notices may have been sent Review all notices to determine the correct course of action Submit Response to the Department Via Online Notice Response Service (ONRS), email, fax, or mail Include a good contact email address with the response 31

Online Notice Response Service (ONRS) Secure Option for Responding to Notices Available at tax.ohio.gov/ONRS in Help Center PTE & Fiduciary taxes located in Business Tax category Registration is required tax.ohio.gov/response 32

Important Reminders All credits must be supported with documentation Ohio IT K-1, certificates from the Ohio Department of Development, other state agencies PTE credits are not estimated/return payments PTE credits are reported in the Refundable Business Credits schedule If Department cannot verify the claimed PTE credit, the credit will be denied PTE credits cannot be claimed on the IT 1140 or IT 4738 A filing extension does not extend the time for payment of the tax due 33