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Small Business Tax Deduction in Crosshairs of Ohio Legislators

Ohio’s Business Income Deduction (BID) may be a victim of its own success. While 2017 figures have not been calculated, $1.1 billion in 2016 tax reductions were claimed by business owners through use of the Business Income Deduction. A centerpiece of Gov. John Kasich’s tax reform package in 2013, the deduction was intended to spur business development and boost job and economic growth in OH. With the July 2017 budget suffering a significant shortfall, the future of the BID may be in jeopardy when Gov. Kasich leaves the governorship in December 2018.

Representatives from both parties and all areas of the states have raised questions regarding the impact of the tax reduction. Sen. Jay Hottinger, R-Newark told the Columbus Dispatch, “I’m not sure the desired impact of them investing back into the business and hiring additional people has materialized.” According to Ohio Democrats, the BID has not produced jobs as promised and is responsible for Ohio revenues falling behind the annual estimates.

In contrast, a spokesperson for the Ohio Office of Budget and Management disagreed and said last summer that the cost of the deduction was lower than estimates. Senate President Larry Obhof (R-Medina) also disagreed and stated in June that Ohio does not have a revenue problem although he agreed tax revenues are below expectations. He said, “I don’t think we need to raise taxes or spend more money. The revenues are what they are and the state needs to live within its means.” Democratic Senate Minority Leader Kenny Yuko, in contrast stated at a news conference last June, “Some people will tell you there’s not enough money to go around, but our real problem right now is irresponsible tax policy.” Both Republican and Democrat legislators have questioned the tax break but did retain it at the full 100% deduction in the biennial budget signed in July 2017.

Owners of Ohio pass-through businesses claiming the BID currently receive a 100% reduction on their Ohio business taxable income and may deduct the federally taxable wages paid to the owner and family members of the owner up to the $250,000 threshold. Also, any qualifying income above the $250,000 threshold is taxed at a 3% rate on the personal return of owners. Owners of pass-through entities such as s-corps, sole proprietorships, limited liability companies, and partnerships all qualify for the Ohio BID based on the income reported on their federal 1040 returns.

According to an analysis done by the non-partisan Legislative Services Commission, repealing the BID would bring in $2.2 billion over the next two years. Legislators have suggested possible changes such as rolling the BID back to a 50-75% deduction of income from the current 100% or limit it to certain types of businesses might be possible in the future.

Ohio is one of the few states to offer businesses an income tax deduction of this size. Kansas, another state that had a similar tax break, discarded it last year after being faced with significant shortfalls in their budget. Missouri reduced corporate income tax and for 2017 allowed a 25% business reduction, and is also facing a major budget shortage. Oregon limits their business deduction to businesses with at least one non-owner employee and the owner must be active in the business.

Richard Warfield of accounting firm DKC-Warfield & Company of Hudson expresses his concern, “While not immediately threatened, the Business Income Deduction will receive closer attention from the General Assembly in the future. The Ohio Department of Taxation is now required to compute and report to the Office of Budget and Management (OBM) specific data on the deduction.”

The OBM will then report actual and estimated revenues, the amount of revenue taxed at 3% (the income over the $250,000 limit) and the amount of revenue from non-business income tax that is taxed under the graduated rates. This information should provide sound data to the General Assembly and allow them to closely track the impact of the BID and its impact on Ohio’s tax collections, according to Warfield.

Warfield and Ted Klimczak, also with DKC, both urge all pass-through business owners to check their Ohio IT-1040 tax returns to make sure they received the Business Income Deduction. “Where business owners did not receive the deduction or it was improperly calculated, amended returns can be filed within 4 years of the original due date of the return to correct the situation. Ohio 2013 tax returns, the first year of the BID, can only be amended through April 15, 2018. While the Business Income Deduction may not completely disappear in the future, it is likely to change and be reduced. It is important for all business owners to file for it and amend returns when needed, while they can,” stated Warfield.

DKC-Warfield & Company (www.dkc-warfieldandcompany.com and phone 330-655-1395) specializes in small businesses and provides business owners with accurate and timely advice on tax matters. Contact our firm for a no-cost analysis of whether your small business is eligible for the Ohio Business Income Deduction.

 

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2/28/2018
Business Entities: File information returns: Forms 1098 and 1099 with information in all boxes other than Box 7. If electronically filed, the date is extended to 3/31/18.

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