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Ohio Small Business Investor Income Deduction: A Tax Cut for the Taking!

As the calendar turns to tax filing season, it is important for taxpayers to consider how the recently passed Ohio tax reform legislation will affect their personal Ohio income tax returns for the 2013 tax year.  During June of 2013, Ohio Governor Kasich signed into law House Bill 59, which introduced multiple legislative provisions that cut taxes for Ohio individual taxpayers.  Among the cuts was the new Ohio Small Business Investor Income Deduction, which provides a substantial tax benefit to owners of pass-through entities doing business in the state of Ohio.

The Small Business Investor Income Deduction allows individual taxpayers who invest in businesses structured as “pass-through entities” (PTE’s) to exclude from their Ohio adjusted gross income 50 percent of Ohio net business income earned from all PTE’s.  The exclusion is available for the first $250,000 of Ohio-sourced business income from PTE’s.  As such, the deduction is capped at $125,000 per taxpayer ($62,500 if married filing separately).  For the purpose of this deduction, PTE’s include: sole proprietorships, partnerships, S-corporations, and limited liability companies (LLC’s).

Only individual income taxpayers are eligible for the small business deduction, which is claimed on line 41 of the Ohio Individual Income Tax Return (Form IT 1040).  The deduction is supported by calculations completed on Schedule IT SBD, which was recently released by the Ohio Department of Taxation.  Schedule IT SBD must be completed for each PTE owned by the taxpayer, and it is required to be attached to Form IT 1040 for a valid filing.

As the deduction is available for tax periods beginning on or after January 1, 2013 (2013 tax year), business owners should immediately begin to identify whether all of the proper information needed to claim the deduction has been compiled.  For example, if one of the PTE’s owned by the taxpayer operates in multiple states, property, payroll, and sales apportionment data will be required in order to calculate the Ohio-sourced income to be included in the deduction calculation.

In addition to introducing the Ohio Small Business Investor Income Deduction, House Bill 59 also cut personal income tax rates by 8.5 percent for the 2013 tax year, with further rate reductions in 2014 and 2015.  Though total tax reform is far from complete, it is at least clear that small business owners are set to receive a significant benefit from these coinciding tax cuts, immediately available for the taking.

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