Maximizing the Ohio small business deduction: changes enhance benefit to individual taxpayers.

• Author: Raghanti, Karen

Effective in 2015, Ohio enhanced its already favorable small business deduction (SBD) available to individual business owners. The deduction can be very beneficial, yet many taxpayers are failing to take advantage of the tax savings opportunity offered by Ohio to small business owners. This is primarily because the deduction sounds too good to be true and many taxpayers do not realize that, while it is termed a "small business" deduction, larger business owners may avail themselves of it as well.

The changes made to the law in 2015 are aimed at simplifying the calculation and increasing the deduction available to taxpayers. An individual business owner can deduct 75% of his or her first $250,000 of business income (up to $187,500) reported on the Ohio individual income tax return and then apply a graduated tax rate capped at 3% on business income over the SBD amount. Nonbusiness income is taxed at the standard Ohio graduated rates capped at 4.997%. For tax years 2016 and thereafter, the Ohio SBD is available for 100% of the first $250,000 of business income for single taxpayers and married taxpayers filing jointly. Amounts over $250,000 are taxed at a flat 3% rate. For taxpayers whose fifing status is married fifing separately, the $250,000 is reduced to $125,000.

The History of the Ohio Small Business Deduction

Ohio first enacted the SBD for tax year 2013. In tax years 2013 and 2014, the SBD was applied to a taxpayer's apportioned Ohio business net income (business income is defined below). For 2013, the deduction was 50% of the first $250,000 of apportioned business income (up to $125,000). For 2014, the deduction was 75% of the first $250,000 of apportioned business income (up to $187,500). Similar to current law, these amounts were halved for taxpayers whose fifing status was married fifing separately.

Historically, each source of business income needed to be apportioned on a business-by-business basis and reported on a separate SBD form to take the SBD on the Ohio individual income tax return. This was time-consuming and required Ohio taxpayers to request information on the three-factor apportionment amounts for each eligible business interest. Business income (remaining after applying the SBD) and all nonbusiness income were taxed at the standard Ohio graduated rate.

The SBD also required that the Ohio bonus and Sec. 179 depreciation add-backs and subtractions as well as federal deductions to adjusted gross income (AGI) attributable...