Ohio Business Income Deduction Remains - Probably! - Unscathed
For tax year 2018, the Ohio Business Income Deduction allowed Ohio business owners to exclude the first $250,000 of "Business Income" from Ohio taxation. Any business income in excess of $250,000 was taxed at a flat rate of 3%. Business income could be interest, dividend, rental, or ordinary (e.g. from the sale of products or consulting, among many other sources) income, without regard for the business type that generated the income.
For taxpayers in the highest income tax brackets, the Business Income Deduction alone, without the special flat tax rates, saved married taxpayers up to $12,493 of Ohio tax in 2018. This deduction and tax rate structure was a powerful incentive for business owners to grow their businesses in the State of Ohio.
Then, the politicians got involved.
On May 28th, I wrote a post entitled "Your Ohio Tax May Increase This Year". At the time, Ohio's House of Representatives had just released their draft of House Bill 166, their 2019-2020 budget bill which would have caused the Business Income Deduction to decrease to $100,000, removed the special 3% flat tax rate, and would have removed certain professionals' - namely attorneys and lobbyists - eligibility for claiming the deduction. Worse yet, the House's version would have changed the deduction limit retroactively to tax year 2019.
Fortunately, the final tax law didn't decrease the deduction to $100,000 or remove the special 3% flat tax rate retroactively. Unfortunately, the eligibility provision for attorneys and lobbyists remained in the law.
On October 25th, the Senate voted to agree with the House's changes to the Tax Omnibus Bill (SB26). These changes included striking the eligibility provision for attorneys and lobbyists, a significant win for both professions. The bill is now on Governor DeWine's desk, where he has ten days to sign or veto it. The Ohio Society of CPAs reports the governor is likely to sign the bill.
The State of Ohio will now require taxpayers to report the NAICS, or business classification code, for each business claiming the Ohio Business Income Deduction. They say this is intended to "better track exactly which professions are benefiting from the Business Income Deduction". We can assume this means they may introduce additional eligibility provisions - when politically appropriate, of course - in the future.
For now, however, it's almost time to rejoice, because it looks like taxpayers may have won this round.
Chris Sieber is an Ohio Certified Public Accountant and tax consultant at Pitcher, Enders & Drohan. If you have questions about your tax situation or just need a second opinion, please contact him at email@example.com or 513-686-8972.