Ohio's Small Business Income Tax Deduction Increases
Larry Gearhardt, OSU Extension Asst. Professor, Taxation
Ohio Governor John Kasich recently signed a bill that, among other things, increases the small business income deduction from 50 percent to 75 percent of the first $250,000 in net business income.
In an effort to grow Ohio’s economy, last year the Ohio budget bill included significant tax law changes to deliver a $2.7 billion tax cut to individuals and businesses, over the course of three years. The changes included:
- A small business tax cut that enables owners/investors to deduct from taxable income 50 percent of the first $250,000 in net business income.
- A 10 percent personal income tax cut to be phased in over three years. In 2013, Ohio tax rates were reduced by 8.5 percent.
- New assistance for lower-income Ohioans in the form of an Earned Income Tax Credit (EITC) equal to five percent of the amount claimed for the federal EITC.
An improving economy is generating stronger than expected state revenue, resulting in additional tax cuts. The Governor’s Mid-Biennium Review (HB 483) included the following additional tax relief:
- ADDITIONAL SMALL BUSINESS TAX CUTS – For tax year 2014, the personal income tax deduction on small business income will be increased to 75 percent of the first $250,000 in net business income. (Under current law, the deduction does not affect the school district income tax base).
- ACCELERATING THE INCOME TAX CUT – Next year’s scheduled one percent cut in income tax rates is moving up to be effective retroactive to January 1, 2014. This change will give taxpayers the full 10 percent income tax cut that was not scheduled to go into effect until January 2015.
- NEW TAX RELIEF FOR LOW-AND MIDDLE-INCOME OHIOANS – Ohio is doubling the EITC from 5 to 10 percent of the federal credit. In addition, the state is increasing the personal exemption for Ohioans earning less than $40,000 a year from $1700 to $2200, and for those with incomes between $40,000 and $80,000 a year from $1700 to $1950.
Business income is defined as income from the regular conduct of a trade or business, including gains and losses. It also includes gains and losses from liquidating a business or selling goodwill. The deduction applies only to the business income apportioned to Ohio under existing law.
The business deduction percentage reverts back to 50 percent for taxable years after 2014.