Legislation is making its way through the Ohio Statehouse which would make significant changes to Ohio’s generous business income deduction.  After a rare unanimous bipartisan vote in the House Finance Committee, Ohio H.B. 166 passed the full Ohio House on May 9th and is currently under consideration in the state Senate, where it is expected to face tighter scrutiny.

Under current law, any individual Ohio taxpayer with $250,000 or less of business or pass-through income pays no state tax on that income at all.  Business income for purposes of this deduction includes self-employment, K-1 income from S-corporations, partnerships and even trusts (generally not interest, dividends or capital gains, with some exceptions), rents and royalties.  One type of income includable in the deduction which we frequently see missed, is any wages paid to an S-corporation shareholder who owns 20% or more of the company, as well as guaranteed payments to partners owning 20% or more of their partnership.

Under HB 166, the $250,000 cap would go down to $100,000.  Any income above the cap is currently taxed at a flat 3% (ie, business income above $250,000), but would be taxed at normal rates after $100,000 if the change is enacted.  Currently, Ohio’s top income tax bracket is just under 5% (4.997), and would be reduced slightly to 4.667% under the bill.  However, it would also eliminate Ohio’s bottom two income tax brackets, doubling the amount of income not subject to tax no matter what its source (about $10,800 under current law, raised to roughly $22,000 under the bill’s provisions).

The bill also addresses collection of sales tax in the wake of last year’s Supreme Court Wayfair decision.  Out of state vendors would be required to collect Ohio sales tax if they have $100,000 or more in gross sales to Ohio customers, or 200 or more sales transactions, even if they don’t have a physical presence in Ohio, which was the normal standard before Wayfair.  “Sharing economy” companies like Uber or Lyft would also be required to collect sales tax on behalf of drivers.

If enacted, these changes would be effective for tax years starting on or after January 1, 2019.  A final budget must be signed by Governor Mike DeWine by June 30th.