Since its rollout in 2013, the Ohio Business Income Deduction, formerly known as the Ohio Small Business Investor Deduction, has resulted in significant tax savings for business owners of passthrough entities who file Ohio tax returns. For married filing joint taxpayers, the deduction allows up to $250,000 of business income to be completely excluded from Ohio tax, with the excess business income being taxed at 3% instead of Ohio's maximum tax rate 4.997%.
The deduction has also been a source of frustration for CPAs filing Ohio tax returns. Its rollout was confusing. The rules were unclear and inconsistently applied. Capital gains from the sale of a business were considered business income at first, but then, due to the Corrigan decision, considered ineligible for the deduction. Just when we thought the dust had settled, we're now finding out Ohio may make significant, retroactive changes to the Business Income Deduction.
The new law would limit the Ohio Business Income Deduction to $100,000 of business income. There would be no special 3% tax rate for the excess business income ineligible for the deduction. Rather interestingly, this new law would be applied retroactively to January of 2019. Even the best planners couldn't have seen this coming.
For taxpayers with significant Ohio business income, this law change, if passed, means your tax bill may increase for tax year 2019. Fortunately, depending on your specific situation, you may be able to defer paying for this increase in tax until April 15, 2020.
In the meantime, there's still important work to do.
It's important to look at your prior year returns to make sure changes in the Ohio Business Income Deduction over the years were not missed.
For example - in late 2017, Ohio passed Senate Bill 8, which retroactively considers wages paid to a 20% or greater owner of a passthrough entity from a Professional Employer Organization (PEO) as business income. We've consistently treated these wages as business income, but realize those CPAs applying a strict interpretation of the law may not have considered the wages as eligible for the business income deduction.
This law change is an excellent example of a catalyst for errors. Some CPAs are so focused on the current year, they fail to fix problems from prior years. They may have caught the change in tax year 2018, but they're too busy to remember to amend prior year returns to retroactively apply the changes. Fortunately, our complementary second-review process can identify and correct these issues, to ensure you pay the least tax legally possible.
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