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Before filing a 2015 individual, trust, or pass-through entity Ohio income tax return by this April 15, (FN 1 ) please keep in mind that there are several new laws and policies that will impact those tax returns. Below is a “Top 10” list of the more important changes and other issues to consider before sending in that Ohio income tax return.
1. Business Income Deduction applies for up to 75% of $250,000 of Business Income for Married Filing Jointly Filers ($125,000 for Married Filing Separately or Single Filers).
The “Small Business Deduction” (SBD) is now called the “Business Income Deduction” (BID) and applies to reduce the Ohio tax base for individuals with an ownership interest in a pass-through entity. In a number of ways, the BID is fundamentally different from the SBD and should be looked at with a fresh set of eyes. Under the BID, up to 75% of the taxpayer’s “business income” may be deducted, up to the threshold amounts indicated above. Also, the BID will apply to wages paid to 20% or more owners of the pass-through entity (see below).
2. The Business Income Deduction is not apportioned (unlike the prior Small Business Deduction)
The BID is a deduction based upon total small business income, whereas the SBD that applied to 2014 taxable years was an apportioned deduction. This change should now benefit Ohio residents that receive business income from non-Ohio sources. For example, an Ohio resident with business income solely from California sources would not receive an SBD benefit for 2014. However, that same Ohio resident could obtain the BID benefit for California-sourced business income in 2015.
3. The Business Income Deduction can apply to income to other than K-1 income
The BID also applies to compensation paid to 20% or more owners of a pass-through entity, such as S corporation owners. As a result, W-2 compensation may be eligible to be treated as business income, thereby reducing personal income tax for certain owners of pass-through entities.
4. The Business Income Deduction cannot be claimed on the Composite Return for non-residents of Ohio (Form IT-4708)
The BID is a personal income tax benefit. If an individual participates in the filing of an IT-4708 Composite Income Tax Return, the individual will not be eligible to claim the BID, unless the individual files an IT-1040 as well. Accordingly, the use of a composite tax return may now be obsolete and inappropriate for business owners.
5. Business Income above the BID amount ($250,000) is now taxed at a flat 3% Ohio rate for individuals
Enough said. This is a tremendous tax cut, and should be self-explanatory. Make sure you take advantage of this new and significant tax cut. For instance, have you properly characterized all income as possible as "business income," including wages of certain owners (see above)?
6. The BID and flat tax of 3% on business income does not apply to the Ohio Trust income tax
The BID and 3% flat tax on business income applies to individuals, but does not apply to trusts. Therefore, a trust earning or receiving business income will be subject to the normal graduated brackets, including a highest marginal rate of 4.997%. However, business income of a grantor trust is reported on an individual's income tax return and such income may be eligible for the BID and the 3% flat tax on business income.
7. The non-resident credit computation and its interaction with the BID is complex
The non-resident credit computation on the Ohio Form IT-1140 compares the “Ohio adjusted gross income” that was not earned or received in Ohio to the “Ohio adjusted gross income” from all sources when computing the non-resident credit. Note, however, that “Ohio adjusted gross income” is a technical term of art that is computed subsequent to the reduction of the amount attributable to the BID. For those with business income from both within and without Ohio, the form can provide some interesting tax results, so be careful.
8. A non-resident who files the Affidavit of Non-Ohio Residency/Domicile should review the Cunningham v. Testa decision from the Ohio Supreme Court
As a result of the Court’s decision in this case, the Bright-Line test is no longer "bright." Along with timely filing the Affidavit with ODT (which is due on or before May 31, 2016 for the 2015 tax year even if an extension request to file the 2015 tax return is filed), an individual must also be domiciled outside of Ohio under common law standards. Look for another Salt Buzz regarding the Cunningham v. Testa decision soon.
9. The School District Income tax law does not permit the BID
The BID is only used to reduce taxable business income on the Ohio personal income tax return, Form IT-1040, and cannot be used to reduce school district taxable income. Therefore, taxpayers who claim the BID on their Ohio income tax return and reside in a traditional tax base school district must add back the deduction for School District Income tax purposes.
10. R.C. 5747.212 will shock many tax practitioners
If you sold your business in 2015 or plan to sell it in 2016, you must understand the potential impact of R.C. 5747.212. This unique Ohio tax law seeks to tax certain non-residents who sell the debt or equity of certain “closely-held businesses.” Under this law, the resulting capital gain on the sale is apportioned based on the entity's apportionment factors, not the individual's. A current Ohio Supreme Court case (Corrigan v. Testa) may address the constitutionality of the law. In the meantime, practitioners and individuals should be aware of this law which may apply to any former 20% or more owner of a business whose debt or equity was sold or will be sold.
(FN 1 ) Because Emancipation Day falls on a Saturday this year, the District of Columbia observes that holiday on April 15, 2016. Under I.R.C. rules, if April 15 falls on a Saturday, Sunday, or legal holiday, a return is considered timely filed if it is filed on the next succeeding day that is not a Saturday, Sunday, or legal holiday. Ohio follows the same rule. Accordingly, a 2015 Ohio income tax return is not due until April 18, 2016.
The above list is merely a sample of the changes and developments that will impact this year’s April 15th tax filing. The above summary is designed to highlight these issues, but how they impact each taxpayer will depend on the facts and circumstances. You should contact your tax preparer or us to further discuss these issues if you think you may be impacted. Zaino Hall & Farrin LLC professionals have advised many individuals regarding Ohio personal income tax issues. We would be happy to further discuss your particular facts and circumstances and how these developments may impact your Ohio personal income tax situation.
If you would like to discuss Ohio tax issues, please contact any of our professionals.