Attention all Ohioans, if you are a small business owner then you are probably already familiar with Ohio’s Small Business Deduction. This deduction enacted in 2013, provides tax breaks to Ohio’s small business owners. For the 2014 tax year, this deduction allowed small business owners an exclusion from their Ohio taxable income of up to 75% on the first $250,000 of their qualified small business income. However, this calculation was subject to apportioning rules for income earned outside of the state of Ohio. For example, in 2014, if a married couple owned a small business and collectively earned $200,000 then they qualified for a deduction from their Ohio taxable income base of $150,000 ($200,000 x 75%). However, if only 80% of this income is attributable to Ohio then their deduction is reduced to $120,000 ($200,000 x 80% x 75%).
Conversely, for the 2015 tax year, Ohio has elected to keep the original deduction, but no longer require the calculation to be limited to Ohio apportioned income. Meaning, the taxpayer in the example above will now be able to take the full $150,000— regardless of how much of the income is sourced outside of Ohio. In addition, any business income beyond the deduction will now be taxed at a graduated rate capped at 3%, which is much lower than residents have paid in the past.
The good news is this new twist in the legislation may now provide for a larger deduction! Even better, this deduction is scheduled to increase for the 2016 tax year (and onwards) to 100% of the first $250,000 of a taxpayer’s eligible small business income! This allows you to keep your money working for you.
Courtney Elgin, CPA