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OSCPA supports reducing PTE withholding rates

Written on May 1, 2020

OSCPA staff report

OSCPA Tax Policy Director Greg Saul, Esq., CAE, told members of the Ohio House Ways & Means Committee this week that House Bill 467 will “more closely unify the Ohio income tax rates with the PTE withholding provisions.

Ohio in 2015 amended Sub. H.B. 64, making the highest tax rate to be applied to an individual’s share of PTE business income 3%. Because individuals’ first $250,000 of business income is excluded, the 3% tax rate is only applied to their share of income above $250,000.“One intention of the 3% flat rate is that it put PTEs on a more equitable playing field as other forms of business entities such as C corporations, who only pay the Commercial Activity Tax (CAT),” said Saul.

However, the current statute states that nonresident investors in Ohio-operating PTEs must withhold 5% for individuals and 8.5% for nonindividuals, a rate that dates back more than 10 years. This rate has led to an unnecessary tax burden, Saul said. For example, PTEs need to withhold a rate higher than that at which the individual is ultimately taxed, and then they need to file with Ohio to be refunded months later.

Saul also said S.B. 288 from the 131st General Assembly proposed to lower the withholding rates of 5% and 8.5% to 3%, and at the time the Legislative Service Commission said the “rate reduction paid by PTEs on their income appears likely to be revenue neutral.” He also noted that H.B. 166 included this 3% withholding rate but was later removed.

Saul

“During H.B. 166, the LSC noted the fiscal effect does not actually change any taxpayer’s tax liability, but merely reduces the amount of withholding taxes collected,” Saul said.

While 3% would be the most ideal rate, the proposal of a 4% withholding rate is meant to “strike a balance” between the two top state income tax rates for business and nonbusiness income (respectively 3% and 4.797%) he said.

View Saul’s testimony in its entirety.

Read Saul’s testimony in its entirety.