The Ohio pass-through entity tax gives owners of S corporations, partnerships, and LLCs a practical way to reduce their overall tax burden. Since Ohio introduced this elective tax starting with the 2022 tax year, business owners who lose deductions to the federal SALT cap now have a legitimate path to reclaim them. The key question this guide answers is simple: should your business make the Ohio PTET election, and how do you do it correctly?
What is the Ohio pass-through entity tax?
The Ohio pass-through entity tax, commonly called Ohio PTET, is an entity-level income tax that eligible pass-through businesses may elect to pay. Normally, a pass-through entity such as an S corporation, partnership, or LLC does not pay income tax at the business level. Instead, the business income flows through to each owner’s personal Form 1040, where it is taxed at individual rates.
The PTET changes that structure by giving the entity itself the option to pay Ohio income tax directly. When the entity pays this tax, the amount qualifies as a business expense rather than a personal state tax payment. That distinction is critical because it allows the deduction to bypass the personal SALT cap that limits state and local tax deductions on federal returns.
Ohio created this tax through Senate Bill 246, enacted by the 134th General Assembly, and it is codified at Ohio Revised Code section 5747.38. Ohio is one of many states that introduced a pass-through entity tax after the Tax Cuts and Jobs Act of 2017 imposed the SALT cap. The goal is straightforward: help business owners recover deductions they would otherwise lose.
The federal foundation for this strategy is IRS Notice 2020-75, which confirmed that state income taxes paid at the entity level by partnerships and S corporations are deductible in computing the entity’s non-separately stated income. That guidance gave states the green light to design these elective taxes, and Ohio followed suit.
How the Ohio PTET rate works
Ohio’s pass-through entity tax is applied to the entity’s qualifying taxable income sourced to Ohio. The rate was 5 percent for tax years beginning in 2022. For tax years beginning in 2023 and after, the rate tracks the state’s top business income tax rate under Ohio Revised Code section 5747.02, which has been 3 percent. Confirm the current year’s rate with the Ohio Department of Taxation before you calculate the liability. At the 3 percent rate, a partnership with $500,000 in qualifying Ohio income would owe roughly $15,000 in PTET.
That payment is then deductible at the federal level as a business expense, not subject to the personal SALT limitation. The tax is reported and paid on Ohio Form IT 4738, officially titled the Electing Pass-Through Entity Income Tax Return. Owners receive a corresponding refundable credit on their personal Ohio return to offset what the entity already paid, which prevents the income from being taxed twice at the state level.
This refundable credit mechanism is what makes the strategy work without raising the owner’s Ohio liability. The state collects the same tax dollars, but the federal deduction shifts from the capped personal Schedule A to the uncapped entity return.
Who qualifies for the Ohio pass-through entity tax election?
The Ohio PTET election is available to partnerships, S corporations, and LLCs that are treated as pass-through entities for federal income tax purposes. The election applies at the entity level, meaning the business itself, not the individual owners, makes the choice to opt in.
Key eligibility points include the following:
- The entity must be organized in or doing business in Ohio.
- The entity must have qualifying taxable income subject to Ohio tax.
- The election is made annually and is binding for the entire tax year once submitted.
- All owners are bound by the election once it is made; individual owners cannot opt out separately.
Single-member LLCs that are disregarded for federal tax purposes generally do not qualify, since there is no separate entity-level return to file. Entities weighing the election should review the analysis with a tax professional to confirm eligibility and evaluate whether the tax savings outweigh the added compliance costs. Pease Bell’s tax advisory services team can model the result before any election is locked in.
How Ohio PTET helps business owners avoid the SALT cap
The SALT cap, enacted as part of the Tax Cuts and Jobs Act, limits the amount of state and local taxes an individual can deduct on a federal return. The cap was $10,000 from 2018 through 2024. Under the 2025 federal tax law often called the One Big Beautiful Bill, the cap rises to $40,000 for most filers for tax years 2025 through 2029, with a phase-down for taxpayers whose modified adjusted gross income exceeds $500,000 and a scheduled return to $10,000 in 2030. Even at the higher cap, owners with substantial state tax bills, or with income above the phase-out range, can still lose meaningful deductions each year.
The Ohio pass-through entity tax functions as a SALT cap workaround because the tax is paid by the business entity rather than the individual. The IRS treats entity-level state taxes as a deductible business expense, which means the personal cap does not apply. Owners effectively shift their state tax liability from the personal return, where it is capped, to the entity return, where it is fully deductible.
Consider a business owner whose share of Ohio income is $300,000. Without the PTET election, the state taxes on that income would be part of the owner’s personal SALT deduction, which may already be exhausted by the cap. With the election, the entity pays the Ohio PTET on that income, and the full amount is deductible as a business expense on the federal return. The owner then receives a credit on the personal Ohio return for the taxes the entity already paid.
The net effect is a lower federal tax bill without increasing Ohio state tax liability, a clear benefit for many qualifying business owners.
Filing requirements and deadlines for Ohio Form IT 4738
Entities that elect the Ohio pass-through entity tax must file Form IT 4738 with the Ohio Department of Taxation. The election can be made by timely filing Form IT 4738 itself, or in advance on the EPTE-ELEC election form, and a new election is required each tax year because the choice does not carry forward automatically. The return is generally due on April 15 following the close of the tax year, consistent with most federal filing deadlines, and that date moves to the next business day when it falls on a weekend or holiday.
Key filing details include the following:
- Form IT 4738 is the designated return for the Ohio Electing Pass-Through Entity Income Tax.
- The EPTE-ELEC form can be used to make the election in advance, and may be filed before the tax year ends.
- Estimated payments may be required during the tax year, generally due quarterly on the 15th of the month following the close of each quarter.
- One return per year. An entity that files Form IT 4738 cannot also file Form IT 4708 (composite return) or Form IT 1140 (withholding return) for the same year.
Because the PTET replaces, rather than stacks on top of, the IT 4708 and IT 1140 filings, the decision affects how all owners report their Ohio income. Coordinated planning across the entity and its owners is essential, and Pease Bell’s broader accounting services can keep the entity and owner filings aligned.
When the Ohio PTET election makes sense, and when it may not
The Ohio pass-through entity tax is not automatically the right choice for every pass-through business. The benefit depends on several factors.
The election likely makes sense when:
- Owners are already exceeding the SALT cap on their personal returns.
- The entity has substantial Ohio-sourced income.
- Owners are in higher federal income tax brackets, making the additional federal deduction more valuable.
The election may not be worthwhile when:
- Owners do not itemize, or already lose no SALT deduction to the cap.
- The entity has minimal Ohio income, making the savings negligible relative to compliance costs.
- The entity has owners in multiple states, which can create complexity around credits and apportionment.
A qualified tax professional can model the specific impact for your business, comparing your federal tax liability with and without the PTET election to determine the net benefit. This analysis matters most for owners with significant income across several states or those in industries with complex apportionment, such as real estate and manufacturing.
Steps to elect the Ohio pass-through entity tax
Making the Ohio PTET election is a deliberate process with specific steps:
1. Evaluate eligibility. Confirm the entity is a qualifying pass-through entity with Ohio-sourced income.
2. Consult a tax advisor. Model the tax impact to ensure the election produces a net benefit for all owners.
3. Make the election. File Form IT 4738 by the deadline, or submit the EPTE-ELEC form in advance; the election is binding for the entire tax year.
4. Pay estimated taxes. Make required estimated payments during the year to avoid underpayment penalties.
5. File the return. Submit Form IT 4738 by the due date for the tax year.
6. Adjust owner returns. Each owner claims the corresponding refundable credit on the Ohio individual return for the tax the entity paid.
Because the election is irrevocable once made for the year, the analysis and timing must be settled before the deadline rather than after.
Frequently Asked Questions
What is the Ohio pass-through entity tax?
The Ohio pass-through entity tax is an elective entity-level income tax available to S corporations, partnerships, and LLCs. It allows the business to pay Ohio income tax directly at the entity level rather than passing the full tax liability through to individual owners on their personal returns.
How is the Ohio PTET calculated?
The tax applies to the entity’s qualifying taxable income sourced to Ohio. The rate was 5 percent for 2022 and tracks the state’s top business income tax rate, which has been 3 percent, for tax years beginning in 2023 and after. Confirm the current rate with the Ohio Department of Taxation, then apply it to Ohio-sourced qualifying income.
How does the Ohio PTET help with the SALT cap?
The PTET shifts state income tax payments from the individual owner’s return to the entity’s return. Because entity-level taxes are treated as deductible business expenses rather than personal state tax payments, they are not subject to the personal SALT deduction cap on federal returns.
Who is eligible to make the Ohio PTET election?
Partnerships, S corporations, and LLCs treated as pass-through entities for federal tax purposes are eligible. The election is made at the entity level and applies to all owners for the full tax year. Single-member disregarded LLCs generally do not qualify.
How and when is the Ohio PTET election made?
The election can be made by timely filing Form IT 4738, generally by April 15 following the close of the year, or in advance on the EPTE-ELEC form. The election must be made annually and does not carry over automatically.
Is the Ohio pass-through entity tax election mandatory?
No, the election is entirely optional. Owners should evaluate whether the SALT cap savings on their federal return outweigh the added compliance requirements before opting in. Once made for a tax year, the election is binding and cannot be reversed.
