The deduction will impact many Ohio small businesses and their owners. Here’s what you need to know:
As part of House Bill 59 signed into law last summer, Ohio ushered in a number of legislative tax cuts, including the Ohio Small Business Deduction. This deduction applies to owners and investors in pass-through entities (PTEs) doing business in Ohio.
Specifically, the deduction reduces taxable income by 50% on the first $250,000 of income for businesses organized as PTEs. For a filing status of married filing joint or single filer, $250,000 is the maximum income subject to the 50% deduction. For a filing status of married filing separately, the maximum income subject to the deduction is $125,000.
The deduction is computed on the Ohio SBD Form and carries to the Ohio IT1040 Individual Income Tax Form. The deduction is available for tax periods beginning on or after January 1, 2013.
The deduction only applies to individual Ohio income taxpayers who are investors in PTE’s doing business in Ohio. Eligible PTEs include sole proprietorships, partnerships, S corps, and LLCs taxed as partnerships.
Eligible income includes income derived from federal schedule C, schedule E, and schedule F. Also included in the deduction base is compensation or guaranteed payments received from an S-corp or partnership with Ohio nexus as paid to an investor holding a 20% or greater direct or indirect interest (attribution rules apply), as these are considered distributive shares of business income.
Computing the deduction
Deductible income is determined on a post apportioned basis for PTEs that do business in Ohio and other states. If the PTE does business solely in Ohio, the apportionment provisions do not apply. Note that the deduction is limited to income that flows from the federal return and becomes a component of the Ohio adjusted gross income base starting point, as Ohio starts with Federal adjusted gross income.
The deduction applies to net income, meaning business losses must be netted with business income; net post apportioned business income comprises the deductible base. Also note that the deduction will not impact the calculation of a taxpayer’s school district income tax liability. Instead, it will be added back to Ohio Taxable Income for school district income tax purposes. Computing on a post-apportioned basis means the deduction only applies to Ohio- sourced income where a PTE does business in multiple states. That’s why it’s important for multi-state PTEs to derive the property, payroll, and sales associated with the PTE’s Ohio presence.
The apportionment information for the PTE is provided to the individual investor based on the investor’s ownership interest to enable the investor to compute the post apportioned base subject to the deduction. The recently released instructions elaborate on the apportionment computation needed to properly source Ohio income subject to the deduction.
We can help
If you have any questions concerning the Ohio Small Business Deduction and how it applies to your situation please contact your CSH advisor. Clark Schaefer Hackett has a team that specializes in state and local tax planning. They stand ready to guide you through the complexities of this deduction.