FAQs - Pass Through Entity

On Ohio forms IT 1140 (Sch. B, line 4) and IT 4708 (Sch. II, line 28), PTEs must add back the qualifying investors' shares of expenses and losses from transactions between the PTE and its related members. Please explain the reason for the add-back.

The add-back is required only for those related members for which there is at least a 40% relationship. For the purposes of this add-back, the definition of related member has the same meaning as in division (A) (6) of section 5733.042 except “forty percent” is substituted for “twenty percent”. The law requires this adjustment since we are concerned that PTE’s having nexus with Ohio would pay large fees to related members having no nexus with Ohio. Without the add-back, the PTE having Ohio nexus would have no profit and thus no tax.

An example of an inter-company transaction would be PTE Y having an Ohio apportionment factor of 1.00000 and owning 75% of PTE X having no Ohio nexus. PTE X receives a $100,000 “management fee” from PTE Y. Without the add-back, PTE Y's Ohio taxable income would be inappropriately reduced by $100,000.