Senate tries to equalize deduction

More businesses would qualify for the state’s business income tax deduction under a bill that passed the Senate Wednesday.

Ohio pass-through business owners, including sole proprietorships, partnerships and LLCs, where profits are passed to owners as income, do not pay income tax on the first $250,000 of income.

But groups including the National Federation of Independent Business/Ohio and the Ohio Society of CPAs say it’s not fair that the Ohio Department of Taxation says businesses contracting with professional employer organizations for payroll and human resources cannot fully qualify for the deduction.

The Senate looked to fix that, voting 30-2 for Senate Bill 186, which ensures that payments made by a professional employer organization on behalf of a company also qualify for the tax break. The bill now goes to the House, which has been holding hearings on a similar bill.

Crystal Faulkner, a Cincinnati-area CPA, said the state was auditing hundreds of small businesses using employer organization services and was sending them bills for past taxes owed. Those audits were suspended in early September, she said, as the legislature debated changes to the law.

Sen. Bob Peterson, R-Sabina, called it a “simple, little tax bill” to alter an interpretation by the Ohio Department of Taxation that created confusion. “It offers a clarification that is critical for small businesses.”

Multiple Senate Democrats spoke in broad opposition to the business tax deduction, arguing it has not created the jobs that were promised. Sen. Charleta Tavares, D-Columbus, was among them, though she voted for the bill, arguing it makes the tax code fairer by not treating businesses differently.

Zach Schiller, research director for Policy Matters Ohio, a liberal policy group, has argued the bill expands an ineffective business income tax deduction that, when added to a tax break for business owners earning over $250,000, costs the state $1.1 billion per year in revenue.

The Legislative Service Commission estimates the bill would cost the state up to $2 million per year, plus $10 million for retroactive refunds.

Schiller argues that lawmakers instead should make clear that only profits, not compensation, are covered by the deduction.