Ohio Senate Bill 208 has been introduced to repair a flaw in the taxation of taxable business income contained in Am. Sub. H.B. 64, the budget bill for the 2016-2017 biennium. As we noted earlier, a flaw in the bill resulted in a possible one-year income tax increase for some taxpayers. This bill attempts to remedy that flaw and makes minor revisions to a number of credit provisions to ensure the credits may be taken against a taxpayer’s aggregate tax bill.
Under the budget bill, Ohio’s income tax is a graduated tax ranging from 0.495 percent for persons with taxable income of $5,000 or less to 4.997 percent for persons with taxable income in excess of $200,000. For taxable years beginning in 2014, taxpayers with “Ohio small business investor income” and filing joint returns were able to deduct three-fourths of the first $250,000. “Ohio small business investor income” is business income of an individual (typically from a sole proprietor or from a pass-through entity) apportioned or allocated to Ohio.
For taxable years beginning in 2015, however, taxpayers may exclude three-fourths of the first $250,000 of their taxable business income, and the excess is taxed at a flat rate of three percent. For taxable years beginning in 2016, taxpayers may exclude the entire first $250,000 of taxable business income from taxation. Taxable business income in excess of $250,000 is subject to the flat three percent tax rate.
What appeared to have been overlooked in the budget bill is that for taxable years beginning in 2015, some taxpayers with taxable business income in excess of the excluded amount, but less than $250,000, would actually pay more income tax in 2015 at the flat three percent rate than they would have had the law not been changed. This is caused by the graduated nature of Ohio’s income tax rate structure; for some taxpayers, that income would have been taxed at a rate below three percent.
Under S.B. 208, taxable business income of married taxpayers filing joint returns that exceed $187,500, but are less than $250,000, will be taxed at the applicable graduated rate. For single taxpayers and for married taxpayers filing separately, the relevant amounts are $93,750 and $125,000. Married taxpayers filing jointly with taxable business income in excess of $250,000 ($125,000 in the case of all other taxpayers) will pay tax on such income at the flat rate of three percent.
Also, because a taxpayer’s tax liability is now the sum of the tax computed under the graduate rate structure and the flat rate structure, the bill revises a number of income tax credits to make clear that the credit applies against the aggregate income tax liability of a taxpayer.