Due to the COVID-19 pandemic, Ohio’s estimated state budget will have a $2 billion shortfall for the current fiscal year, according to House Majority Floor Leader Bill Seitz. Seitz suggested dipping into Ohio’s $2.7 billion rainy-day fund and scaling back the small business income tax deduction (SBID).
For background, in 2013, the Kasich administration enacted a new small business income tax deduction (SBID) as part of a series of tax reforms. The SBID allows sole proprietors and members/shareholders in a pass-through entity or S corporation to deduct up to $250,000 individually or $125,000 if married filing separately of business income from their Ohio individual income tax return. The SBID also provides a 3% flat income tax rate on business income above $250,000 or $125,000 if married filing separately instead of being taxed at the normal graduated Ohio rates.
The SBID was enacted to serve as an economic development tool; however, the SBID has since received criticism and was one of the legislative items that caused delay in passing the 2020-2021 biennium budget. Testimony in the Ohio House proposed reducing the deduction to $100,000 as well as eliminating the 3% flat rate, citing that the deduction was merely an avoidance of tax responsibility rather than an effective economic development tool. The Ohio Senate proposed keeping the SBID without changes. Final legislation enacted on July 18, 2019 reflected a compromise to retain both the $250,000 cap and 3% flat tax rate but to exclude law firms and lobbyists from participating in the deduction. The law firm and lobbyist exclusion was short-lived, as Governor DeWine exacted substitute legislation on Nov. 6, 2019, restoring the ability of law firms and lobbyists to participate in the deduction. The substitute legislation also requires businesses to now include their NAICS codes as a component of claiming the deduction, presumably so the state can monitor and track the types of businesses claiming the credit in order to evaluate the effectiveness of the deduction at some time in the future.
With a projected $2 billion budget shortfall due to the pandemic, members of the Ohio House have publicly commented on reducing the SBID from $250,000 to $100,000, amongst other restrictions, as one means of addressing the shortfall. When originally enacted, the state estimated that deduction resulted in more than $253 million in tax savings to Ohioans, while more recent policy publications have estimated the value of tax savings to Ohioans to be more than $1 billion. House Majority Floor Leader Bill Seitz, a Cincinnati Republican, recently commented on the budget shortfall, including several measures to address the same, including dipping into the State’s $2.7 billion rainy-day fund and reducing funding to schools. Representative Seitz also suggested reducing the SBID to $100,000 as well as reinstating the law firm exclusion from participating in the SBID.
KJK will continue to monitor protentional legislative changes to the Small Business Income Tax Deduction, as well as other important changes in tax policy related to the pandemic. If you have any questions or would like to discuss further, please reach out to Stephanie Mercado at firstname.lastname@example.org or 216.736.7272.