Are you covered by Ohio Business Income Deduction?

There are a number of tax benefits built into both the federal and

Ohio tax rules designed to favor business owners. The rules associated with these tax savings opportunities are often quite complex and misunderstood. The business income tax deduction is a very substantial tax savings in Ohio that I often find is miscalculated by both individuals and tax preparers alike.

The State of Ohio taxes income from business sources and non-business sources differently on individual income tax returns.

For tax years of 2016 going forward, the first $250,000 of business income for taxpayers with a filing status of single or married filing jointly that is included in the federal adjusted gross income is 100% deductible for Ohio tax purposes. If the taxpayer files as married filing separately, this exemption limit is reduced to $125,000. This is referred to as the Ohio Business Income Deduction. Any income above those exemption thresholds is then taxed at a flat rate of 3%.

Business income earned as a sole proprietor and reported on a federal Schedule C as well as pass through business income from S corporations or partnerships that are reported on federal Schedule E are included in this provision. In other words, all independent contractor work that is properly reported would be covered through these provisions.

One of the most often overlooked provisions of this rule is that taxpayers who own 20% or more of the business and that receive guaranteed payments from a partnership or receive W2 wages from an S corporation can also include this income in the exemption and reduced rate calculations. As long as the investor owned directly or indirectly at least 20% of the business at any point during the year, this tax deduction for the wages and guaranteed payments is available.

I am in the processing of amending returns of two new clients who did not take advantage of this substantial tax savings opportunity. The first taxpayer filed their own returns and was not aware of this exemption and the second taxpayer used an out of state CPA that did not factor the W-2 wages into the calculation. We are amending back as far up to four years in both cases and recovering thousands of dollars in overpaid taxes in each case.

To claim this deduction, the taxpayer must file and include form IT BUS along with their individual IT-1040 each year. The taxpayer will list the business employer identification number or social security number in the case of a schedule C sole proprietorship. Interest, dividends and capital gains are not considered business income and would not be included in these exemption calculations. In addition, rents or royalties are generally considered non-business income and therefore would not be covered as well.

This savings opportunity also offers tax planning opportunities that are often overlooked. For instance, if a taxpayer owns an S corporation and their spouse also works at that business it would be a worthwhile exercise to consider the tax savings opportunities if the working spouse also became a 20% or more owner of the business. This ownership change could potentially exempt those wages from Ohio income taxes, or at a minimum reduce the tax rate on those wages to 3%.

Another unique factor to consider when evaluating this potential Ohio Business Income Deduction is that there is no rule that the business must operate in Ohio. So, if you are an investor in an outof-state business that generates business income that is reported on the federal return, then this income could be exempt because of the Ohio Business Income Deduction.

Having a solid understanding of the many tax laws that are in place that could potentially impact a given taxpayer and situation is a challenge. All taxpayers have a desire to minimize their tax obligation, and it is only through a solid understanding of the myriad of laws that exist that a taxpayer can truly minimize their tax obligation.

If a taxpayer owns a business, regardless of how small it might seem, they would be well advised to see if they are covered by the Ohio Business Income Deduction.