Ohio's Small Business Deduction
This week we wanted to discuss Ohio’s Small Business Deduction. This deduction allows for a portion of an individual’s net business income to be deducted on his or her Ohio return, and began in its earliest form in 2013. This law was enacted to give Ohio businesses a more competitive advantage with other states. The deduction was originally calculated on Form IT SBD – Small Business Investor Income Deduction Schedule. The Ohio website’s definition was “the portion of a taxpayer's adjusted gross income that is business income reduced by deductions from business income and apportioned or allocated to Ohio . . .” So, it sounds fairly simple right? Take a look at the very first item on the form:
1. Self-employment income (federal Schedule C, C-EZ or F), guaranteed payments and/or compensation received from each pass-through entity in which you have at least a 20% direct or indirect ownership interest. Note: Reciprocity agreements do not apply (see line instructions)………………………..
Wow! So it would seem not to be so simple after all, and it didn’t get much better from there. First, one had to decide what constitutes “business income”. Did it include rental activities? Did it include all pass-through K-1 income, whether passive or active? Then there were numerous adjustments to “business income” including some at the state level such as Ohio depreciation adjustments, and additional adjustments for federal deductions such as retirement plan contributions, the self-employment tax and the self-employed health insurance deductions, and the domestic production activities deduction. There were also apportionments that had to be made if not all of the income was earned in Ohio. The small business deduction was then calculated at 50% of the first $250,000 of adjusted “net business income”, for a maximum deduction of $125,000 on a joint return.
Very little changed in 2014 with one exception: the deduction increased to 75% of $250,000, or $187,500 on a joint return.
In 2015, the deduction and the form were completely revised and the form’s new name became the Ohio IT BUS – Business Income Schedule. Ohio must have decided the old form was just too complicated (as did all of us in the tax preparation community) because the calculations for the small business deduction actually became simpler. There were no longer depreciation adjustments to include on the form, nor any adjustments for federal deductions. There were also no longer apportionments to deal with, just a requirement that the income be included in Ohio adjusted gross income. The deduction remained at 75% of net adjusted business income of $250,000, or $187,500 on a joint return.
For 2016, 2017 and 2018, the deduction has been increased to 100% of $250,000. In addition, for business income above $250,000, a 3% tax rate was established. For example, if your net business income for any year after 2015 is $500,000, the first $250,000 is exempted, and the next $250,000 is taxed at 3%. Any remaining taxable Ohio income is taxed at ordinary rates.
The deduction can still be fairly complicated to calculate, but is much better than it was in its earlier years. Some of the issues we have seen include the deduction being ignored completely, or business interest, dividends and / or capital gains being left out of the calculation, or similar non-business items being included when they shouldn’t be.
If you have any questions concerning this deduction or any others, please give us a call.
Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.