Recently Signed Ohio Budget Bill Keeps Ohio Business Income Deduction Intact for Most Taxpayers – Attorneys and Lobbyist Aren’t So Lucky
By Keith Papa, CPA
On July 18, 2019, Governor Mike DeWine signed Am. House Bill 166, Ohio’s biennial budget bill, into law. In a win for most Ohio small business owner’s, the bill retains current law’s business income deduction up to $250,000 and maintains the 3% flat rate cap on income above that threshold for most taxpayers. However, beginning in 2020, the bill disallows the business income deduction and the 3% tax rate on business income greater than $250,000 if the business income arises from either (1) the practice of law by an attorney or (2) lobbying by a person required to register with the joint legislative ethics committee.
Individuals claim the business income deduction on their individual income tax returns. Business income earned by a sole proprietorship or a pass-through entity generally qualifies for the deduction. For tax year 2016 and forward, the first $250,000 of business income earned by taxpayers filing “Single” or “Married Filing Jointly,” and included in federal adjusted gross income is 100% deductible. For taxpayers who file “Married Filing Separately,” the first $125,000 of business income included in federal adjusted gross income is 100% deductible. This is referred to as Ohio’s Business Income Deduction (BID). Any remaining business income above these thresholds is then taxed at a flat 3%. As noted above, Am. House Bill 166 kept these thresholds and rates intact, so most taxpayers will not see a change in the Ohio Business Income Deduction.
However, the bill included the following language:
"Eligible business income" means business income excluding income from a trade or business that performs either or both of the following:
- Legal services provided by an active attorney admitted to the practice of law in this state or by an attorney registered for corporate counsel status under section 6 of rule VI of the Ohio supreme court rules for the government of the bar of Ohio:
- Executive agency lobbying activity, retirement system lobbying activity, or actively advocating by a person required to register with the joint legislative ethics committee.
The disallowance of the business income deduction and the 3% flat rate for business income above the threshold amount for business income arising from (1) the practice of law by an attorney or (2) lobbying by a person required to register with the joint legislative ethics committee is effective beginning in 2020.
Am. House Bill 166 also reduces the Ohio tax rates on nonbusiness income and on the income of estates and trusts by 4% compared to current law rates beginning in 2019. The lowest two income brackets (below $21,750) were also eliminated under the bill.