As part of his budget proposal for the next two years, Governor Kasich proposes two significant changes to the personal income tax law. In H.B. 59, one proposal reduces all tax rates by 20 percent over three years; the other provides a deduction of up to $375,000 to the owners of a pass-through entity. Other minor changes are also proposed. Here’s how those proposals work.

Reduction in Income Tax Rates

Beginning with tax year 2013, the bill proposes to reduce all personal income tax rates by a total of 20 percent over three years. For taxable years beginning in 2013, tax rates will be reduced 7.5 percent. For taxable years beginning in 2014, rates will be reduced an additional 7.5 percent. For taxable years beginning in 2015 and later, rates would be reduced another 5 percent. The reductions apply to all tax brackets. When implemented, the top marginal rate on incomes above $200,000 would be reduced from 5.925 percent to 4.74 percent.

Deduction for Income from Pass-Through Entity

The bill also provides a deduction of one-half of a taxpayer’s “Ohio small business investor income,” which is the portion of a taxpayer’s adjusted gross income that is reduced by deductions from business income and allocated and apportioned to Ohio. This deduction applies to the business income of the owners of pass-through entities and sole proprietors. The deduction is capped at $375,000 per owner; if the individual owner is married and the spouses file separate returns, each spouse is entitled to a deduction for one-half of the income, up to $187,500 each.

For example, if a pass-through entity has net income of $1,500,000 for the year and has three equal owners, each owner would be entitled to a deduction of one-half of their share of the net income, or $250,000. If the same entity had only two equal owners, each owner would be entitled to the maximum deduction of $375,000.

This deduction is made in computing Ohio taxable income. This means the deduction is taken before the tax is calculated and is in addition to the 20 percent reduction in rates discussed in the previous section.

Other Revisions

Several other revisions are proposed. Under current law, an individual may be claimed as a dependent of another for purposes of the dependent exemption and credit, and may also claim him or herself as a dependent for both purposes on the individual’s own tax return. The bill eliminates that by specifying that if the individual is claimed on the return of another person, the individual may not claim the exemption or the credit on the individual’s own return.

Under existing law, a pass-through entity may elect to file a tax return on behalf of all investors and to pay the tax on behalf of the investors. However, the tax commissioner has the authority to require such an investor to file individual returns and to pay the tax indicated on that return. Currently, taxpayers do not have a similar option to file a separate return. The bill proposes to expressly permit taxpayers to make that same election.

Under current law, interest is allowed on refunds that result from an illegal or erroneous assessment from the date of the illegal or erroneous payment; however, with respect to refunds resulting from the filing of a return or report, interest begins to accrue 90 days after the final due date of the report or return. This difference is eliminated and, in all cases, interest runs from the date of the over-payment.

The bill proposes to require that a request to deviate from the statutory allocation and apportionment provisions must be made in writing with a timely-filed return or timely-filed amended return. Under current law, there is no requirement that either the return or the amended return be filed in a timely fashion.