Ohio Income Tax Changes Resulting from Budget Agreement
by: James Komos, CPA, CFP and Matt Laubscher
Ohio’s substantial, $69.8 billion biennial budget bill was recently signed into law. The final impact is favorable to almost all Ohio taxpayers. This differs from some of the initial proposals, where there was a broader mix of winners and losers.
One of the most noteworthy changes was a comprehensive personal income tax cut of 4%. Although favorable, this is lower than the 6.6% in the House version and 8% in the Senate version. Individuals that earn less than $21,750 a year will not have to pay state income taxes.
Business owners operating as sole-proprietors, S corporations, partnerships or limited liability companies should be pleased as the bill continues the business income deduction (BID) for nearly all businesses. Initial proposals meant to severely curtail this deduction. This deduction excludes the first $250,000 of business income from taxation ($125,000 for married taxpayers filing separately). It is important to understand that the business income must be included in the taxpayer’s federal adjusted gross income to be deductible. The bill also kept the 3% flat tax rate cap on the remaining business income above these thresholds. The final bill excludes proposals that would have tied the business income deduction to the complex federal Section 199A laws created in late 2017. This is a major win for most service businesses operating outside of the C corporation structure.
Another important takeaway
There is an exemption for supplemental executive retirement plans (SERPs) from municipal income tax beginning January 1, 2020.
Finally, the bill includes a new tax credit for investments made into one of Ohio’s many opportunity zones. The credit is equal to 10% of the taxpayer’s investment into a certified fund during the prior calendar year. To qualify, the fund must hold 100% of its invested assets in a qualified opportunity zone property located in Ohio. Note that the law imposes both taxpayer limits and total statewide credit limits. The Director of Ohio Development Services Agency (ODSA) will be issuing certificates to qualify for the credit on a first come first served basis.
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