How Will Business Owners Apply the Small Business Deduction Program on Their Tax Calculations?

With the Ohio Small Business Deduction, 75 percent of an individual business owner's first $250,000 (about $187,000) of business income is deductible on the reported Ohio personal income tax return, after which a graduated tax rate with a maximum limit of 3 percent can be applied on the business income over the Small Business Deduction, or SBD amount.

What Is the Nonbusiness Income Tax Rate?

The tax rate applied to nonbusiness income is the standard Ohio graduated rates which have a maximum limit of 4.997 percent.

What Is the Base Amount for the Ohio SBD Program?

Starting from the 2016 tax year and subsequently, every single taxpayer and married taxpayers filing jointly can enjoy the Ohio SBD for the first $250,000 of business income.

What Amount Is Taxed at A 3 Percent Flat Rate?

A 3 percent flat tax rate applies to amounts over $250,000.

What Happens to the Base Amount for Taxpayers Whose Filing Status Is Married Filing Separately?

If married taxpayers are filing their tax returns separately, the base amount for each of them will be reduced to $125,000.

When Did Ohio First Enact the SBD?

The first time Ohio passed the SBD into law was in the 2013 tax year.

How Are Remaining Business Income and Nonbusiness Income Taxed Under the SBD?

Standard Ohio graduated tax rate is applied to business income (what's left after applying the SBD) and all nonbusiness income.

What Constitutes Business Income and Nonbusiness Income?

Business Income

According to the Ohio Revenue Code Section 5747.01(B), business income can be defined as "[I]ncome, including gain or loss, arising from transactions, activities, and sources in the regular course of a trade or business and . . . [that] includes income, gain, or loss from real property, tangible property, and intangible property if the acquisition, rental, management, and disposition of the property constitute integral parts of the regular course of a trade or business operation."

The Ohio Revenue Code continues in the same section to add that business income "includes income, including gain or loss, from a partial or complete liquidation of a business, including, but not limited to, gain or loss from the sale or other disposition of goodwill."

Nonbusiness Income

Section 5747.01(C) of the Ohio Revenue Code defines nonbusiness income as: "[A]ll income other than business income and may include, but is not limited to, compensation, rents and royalties from real or tangible personal property, capital gains, interest, dividends and distributions, patent or copyright royalties, or lottery winnings, prizes, and awards."

Where Is the SBD Based?

Currently, the SBD is based on all business income, unlike before, when it was based solely on income apportioned to Ohio.

What Is the Effect of Basing SBD on All Business Income?

With the basing of the SBD on all business incomes, Ohio residents don't need to apportion their business income in their deduction calculations. This will encourage more taxpayers to use the deduction to their advantage, and the deduction may increase for taxpayers whose businesses are active within Ohio and beyond. Any net business income which is calculated with the SBD will be taxed at standard Ohio graduated business income tax rate, which is capped at 3 percent and which cannot go beyond the Ohio income tax base.

What Is the Most Difficult Piece of Calculation in the SBD Program?

The most tasking calculation in the SBD program involves how to distinguish a source of income as either a business or nonbusiness income.

What Did Ohio Eliminate Under the SBD Program?

Some of the things Ohio deleted from the SBD program include the following:

  • The Ohio bonus
  • Section 179 depreciation add-backs and subtractions
  • Federal deductions for AGI, such as self-employment taxes and self-employment health insurance, as well as deductions for retirement packages which fall under business income based on the Ohio SBD calculation.

All these items are treated as nonbusiness income or loss, and the standard graduated tax rate capped at 4.997 percent for the tax year 2015 is applied to them.

Are Future Add-Backs Taxed at a Higher Rate?

Higher tax rates are applied to future add-backs, as they are usually derived from business income sources.

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