Ohio Governor John Kasich recently signed a bill that, among other things, increases the small business income deduction from 50% to 75% 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% of the first $250,000 in net business income.
• A 10% personal income tax cut to be phased in over three years. In 2013, Ohio tax rates were reduced by 8.5%.
• New assistance for lower-income Ohioans in the form of an Earned Income Tax Credit (EITC) equal to 5% 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% 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 1% cut in income tax rates is moving up to be effective retroactive to January 1, 2014. This change will give taxpayers the full 10% 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% 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% for taxable years after 2014.