New Ohio Small Business Tax Deduction Changes

Last month, the Ohio General Assembly voted on the final 2016-2017 state budget, which includes a major tax reform of the Ohio Small Business Deduction (SBD) that Governor Kasich recently signed into law.

Beginning in 2016, business owners will be able to deduct 100% on the first $250,000 of taxable income for those who are single or are married filing jointly. For those who are married but filing separately, this deduction is limited to $125,000.

The Ohio Small Business Tax Deduction, or SBD, was introduced in 2013 as an incentive for small business owners to start or keep their businesses in Ohio. The SBD originally excluded 50%, or up to $125,000, of the first $250,000 of taxable income earned by a taxpayer’s business that was domiciled in Ohio.  With Ohio’s top tax rate of 5.421%, this deduction equated to a possible tax savings of up to $6,776 on a business owner’s Ohio income tax return.  In 2014, the 50% exclusion was adjusted to 75%, or up to $187,500 of taxable income, which resulted in a maximum savings of $10,000 in Ohio tax.  The 75% exclusion is expected to remain for 2015. And any small business income in excess of $250,000 will continue to be taxed at a graduated rate up to 3%, instead of following the traditional individual income tax rate tables.

The 2016-2017 Ohio state budget also includes a reduction of personal income tax rates.  Rates will be cut for all Ohio taxpayers by 6.3%.  Ohio’s top marginal tax rate will be 4.997% in 2016, down from 5.333% in 2014.  The 4.997% tax rate will be the lowest rate it’s been since 1982 for top income earners.

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