A Closer Look at Ohio's Tax Law Changes

Tax Tip of the Week | October 23, 2013 | No. 221 | A Closer Look at Ohio's Tax Law ChangesAdditional guidance on Ohio's income tax and pass-through entity tax cuts

A couple of weeks ago we looked at a summary of Ohio’s tax law changes for 2013 (TTW# 214).  This week we will take a closer look at the tax deductions available to individuals with “Ohio small business investor income”.Those with “investor income" may now exclude 50% of that income from the adjusted gross income they report on their Ohio personal income tax return. If the business has multiple owners, each owner is eligible to claim the deduction. However, each investor or owner can only exclude 50% of the first $250,000 of qualifying income from all sources, meaning the deduction is capped at $125,000 ($62,500 Married Filing Separate) for each taxpayer, regardless of the number of small businesses they invest in.Who Qualifies:Owners and investors in Ohio businesses structured as pass-through entities (PTEs) that receive business income.   PTEs are not taxed as a business by the federal or state government; instead those owners/investors receiving income from the business pay federal and state income taxes on that income on their individual tax returns.  PTEs include:Sole proprietorships (Schedule Cs)-Partnerships• Subchapter S corporations (S-corps)• Limited Liability Companies (LLCs)Who Doesn't Qualify:C Corporations.In addition to income reported on the federal 1040 Schedule C, net business income as reported on the taxpayer's federal1040 Schedules E and F will also be used in calculating the deduction.  The deduction will be available on Schedule A of the Ohio IT1040.Current guidance is that all income included on federal Schedule E will be subject to the deduction, regardless of passive vs. material participation considerations.Additional guidance should be coming in the next few months from the Ohio Department of Taxation on these issues.  We will keep you posted.For those who qualify, these changes may lead to significant Ohio tax savings. Give us a call before you make any fourth quarter estimated tax payments to Ohio.Give us a call if you have any additional questions.

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Rick Prewitt - the guy behind TTW...until next week.