Ohio Code 5747.38 – Pass-through entity income tax
(A) As used in this section and section 5747.39 of the Revised Code and in other sections of Chapter 5747 of the Revised Code in the context of the tax imposed under this section:
Terms Used In Ohio Code 5747.38
- Business income: includes income, including gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill or the sale of an equity or ownership interest in a business. See Ohio Code 5747.01
- Nonbusiness income: means all income other than business income and may include, but is not limited to, compensation, rents and royalties from real or tangible personal property, capital gains, interest, dividends and distributions, patent or copyright royalties, or lottery winnings, prizes, and awards. See Ohio Code 5747.01
- Person: includes an individual, corporation, business trust, estate, trust, partnership, and association. See Ohio Code 1.59
- Return: means the notifications and reports required to be filed pursuant to this chapter for the purpose of reporting the tax due and includes declarations of estimated tax when so required. See Ohio Code 5747.01
- Rule: includes regulation. See Ohio Code 1.59
- state: means the state of Ohio. See Ohio Code 1.59
- Taxable business income: means the amount by which an individual's business income that is included in federal adjusted gross income exceeds the amount of business income the individual is authorized to deduct under division (A)(28) of this section for the taxable year. See Ohio Code 5747.01
- Taxable year: means the calendar year or the taxpayer's fiscal year ending during the calendar year, or fractional part thereof, upon which the adjusted gross income is calculated pursuant to this chapter. See Ohio Code 5747.01
(1) “Electing pass-through entity” means a qualifying pass-through entity that elects to be subject to the tax levied under this section for a taxable year pursuant to division (C) of this section.
(2) “Owner” means a person that is a partner, member, shareholder, or investor in an electing pass-through entity for any portion of the taxable year.
(3) “Income” means the sum of owners’ distributive shares of the income, gain, expense, or loss of an electing pass-through entity for the taxable year, as reported for federal income tax purposes.
(4) “Qualifying taxable income” means the sum of the following:
(a) The portion of an electing pass-through entity’s income that is business income, subject to the applicable adjustments in divisions (A)(2) to (7) of section 5733.40 of the Revised Code, multiplied by the fraction described in division (B)(1) of that section;
(b) The portion of the electing pass-through entity’s income that is nonbusiness income allocated to this state under section 5747.20 of the Revised Code.
(B) For the same purposes for which the tax is levied under section 5747.02 of the Revised Code, a tax is hereby levied on each electing pass-through entity on the entity’s qualifying taxable income for the taxable year, at the following rates:
(1) For an electing pass-through entity’s taxable year that begins in 2022, five per cent;
(2) For an electing pass-through entity’s taxable year that begins in 2023 and in any year thereafter, the rate equal to the tax rate imposed on taxable business income under division (A)(4)(a) of section 5747.02 of the Revised Code applicable to that taxable year.
(C) A pass-through entity that is not a disregarded entity, as defined in section 5733.01 of the Revised Code, may elect to be subject to the tax levied under this section by filing with the tax commissioner a form prescribed by the commissioner making such election on or before the deadline to file the return under section 5747.42 of the Revised Code for the taxable year. Such election applies only to the taxable year for which the election is made and is, once made, irrevocable for that year.
(D) The tax levied under this section shall be calculated without regard to any deductions or credits otherwise permitted to be claimed by an owner of the electing pass-through entity in computing the owner’s aggregate tax liability under section 5747.02 of the Revised Code.
(E) The tax levied under this section is intended to comply with the provisions of internal revenue service notice 2020-75 in which such tax paid by an electing pass-through entity is deductible to the entity for federal income tax purposes.
(F) The tax commissioner shall adopt rules to administer the tax levied under this section. Such rules shall include a description of how the adjustments to income under divisions (A)(36) and (S)(15) of section 5747.01 of the Revised Code and the credit under section 5747.39 of the Revised Code apply to direct or indirect owners of an electing pass-through entity based on various ownership structures. Any rule adopted under this section is not a regulatory restriction for the purpose of section 121.95 of the Revised Code.
Last updated October 6, 2022 at 4:01 PM