Tax alert

Missouri and Ohio join dozens of states with SALT cap workarounds

Jul 06, 2022
State & local tax Business tax

Recently, Missouri and Ohio enacted legislation becoming the latest jurisdictions to adopt a pass-through entity (PTE) tax election intended as a workaround to the federal SALT deduction limitation. A high-level summary of that legislation follows below.

Missouri pass-through entity tax election and qualified research expense credit

On June 30, 2022, Missouri Gov. Mike Parson signed into law House Bill 2400, making several significant changes to the state’s income tax laws. Among other changes, the legislation provides for the creation of an elective PTE tax and reinstates the Missouri research and development tax credit. 

For tax years ending on or after Dec. 31, 2022, PTE taxpayers may elect to pay tax at the entity level for Missouri purposes. All entities classified as S corporations or partnerships for tax purposes are eligible to make the election, and the election must be made on an annual basis. The tax is imposed at the highest marginal rate applicable to individual taxpayers. Owners will be allowed a nonrefundable credit for their share of Missouri tax paid at the entity level by an electing PTE. Nonresident members whose only income is through the PTE are not required to file a Missouri income tax return. 

Missouri House Bill 2400 also provides for a return of the state’s research expense tax credit for tax years beginning on or after Jan. 1, 2023. The Missouri Department of Economic Development (DED) will be authorized to approve tax credits for 15% of a taxpayer’s qualified research expenses, defined in the same manner as is applicable for federal tax purposes. To the extent that the qualified research expenses relate to research conducted in partnership with an in-state university or private college, the credit amount is increased to 20% of qualifying expenses. 

There is an annual cap of $10 million related to the credit, with half of this total amount reserved for small businesses and businesses that are at least 50% owned by women or minorities. No taxpayer may be awarded more than $300K of credit in any single year. Credits approved by the DED in excess of current year tax liabilities may be carried forward for 12 years. The credit program is currently scheduled to sunset on Dec. 31, 2028. 

Ohio pass-through entity tax election

On June 14, 2022, Ohio Gov. Mike DeWine signed into law Senate Bill 246, creating an elective PTE level tax regime for the state. 

Under the new law, all entities classified as S corporations or partnerships for federal tax purposes are eligible to elect to pay tax at the entity level at a rate of 5% for tax years beginning in 2022 and a rate of 3% for tax years beginning in 2023 or later. The election to pay tax at the entity level must be made on an annual basis and is binding for the year of the election. Additionally, owners are allowed a refundable credit against their Ohio tax liability for their proportionate share of the tax paid by the electing PTE. Note that owners must also add back their proportionate share of Ohio tax paid under the new PTE level tax regime in the computation of Ohio taxable income, to the extent deducted for federal purposes. 

It is important to note that the provisions of Ohio section 5747.05(B)(4)(a) do not allow a taxpayer to claim a credit for taxes paid to another state to the extent those taxes are deducted, directly or indirectly, in the computation of adjusted gross income. These provisions appear to prohibit taxpayers from claiming a credit for taxes paid to another jurisdiction where an election has been made to pay tax at the PTE level, as those taxes would be deductible in the computation of the owner’s share of income from the electing PTE. Owners of PTEs considering Ohio’s new PTE level tax regime or making elections in other states should carefully consider the potential implications on the owner’s credit for taxes paid to other states. 


Missouri and Ohio have joined the growing list of states to enact an elective tax at the PTE level as a workaround for the federal SALT deduction limitation. Though these regimes may have significant benefits for taxpayers in certain situations, not all PTEs and owners will benefit from these elections. As of the date of this article, the 30 jurisdictions that enacted workarounds (with the first effective year in parentheses) include Alabama (2021), Arizona (2022), Arkansas (2022), California (2021), Colorado (2022), Connecticut (2018 and mandatory), Georgia (2022), Idaho (2021), Illinois (2021), Kansas (2022), Louisiana (2019), Maryland (2020), Massachusetts (2021), Michigan (2021), Minnesota (2021), Mississippi (2022), Missouri (2022) New Jersey (2020), New Mexico (2022), New York (2021), New York City (2023), North Carolina (2022), Ohio (2022), Oklahoma (2019), Oregon (2022), Rhode Island (2019), South Carolina (2021), Utah (2022), Virginia (2021) and Wisconsin (2018). For additional insight on this topic, please see our article Not a panacea: State pass-through SALT deduction workarounds.

Taxpayers with questions related to the Missouri or Ohio elective PTE tax regimes or the Missouri qualified research expense credit should contact their state and local tax adviser for additional information.

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