On November 6, 2019, Ohio Governor Mike DeWine signed Substitute Senate Bill 26 (SB 26), which restores the business income deduction to individual owners of a law or lobbying firm.

Business income deduction

In 2015, Ohio, modifying legislation enacted in 2013, adopted what became known as the business income deduction (BID). The BID allows individuals who are sole proprietors or investors in a pass-through entity or S corporation to deduct up to $250,000 ($125,000 if married filing separately) of business income otherwise included in their Ohio individual income tax return. Business income above $250,000 (or $125,000 if married filing separately) is taxed at a flat rate of 3% instead of being subject to the normal graduated Ohio marginal rates that cap at 4.997%.

The BID came under scrutiny in the last biennial legislative cycle with a proposal to lower the deductible amount to $100,000 of business income and repeal the 3% flat rate on income above that threshold, subjecting such income to the normal marginal tax rates. The final version of the budget legislation, Amended Substitute House Bill 166 (HB 166, see Tax Alert 2019-1338), retained the BID for most taxpayers; however, it excluded business income from legal and lobbying services from business income eligible for the BID. There were concerns that this language could operate to deny the BID not only to lawyers or lobbyists, but to individuals or pass-through entities that employed, or even hired, lawyers or lobbyists.

In the wake of this uncertainty and concerns that the BID, as amended by HB 166, discriminated against Ohio businesses (and specifically against lawyers and lobbyists), SB 26 restores the BID to its pre-HB 166 form for tax years beginning on or after January 1, 2019. Accordingly, legal and lobbying businesses are again eligible for the BID. However, SB 26 requires taxpayers claiming the deduction to provide North American Industry Classification System codes to identify the type of business for which the BID is being claimed. Presumably, this information is being gathered to allow Ohio to revisit modifications or limitations to the BID at a later date.

Other tax changes

SB 26 adopted the following other income tax changes:

• Teachers may claim an income tax deduction of up to $200 for amounts paid out-of-pocket for professional development and classroom supplies for tax years beginning in or after 2020.
• The repeal of the income tax credit for contributions to campaigns for state offices is delayed until tax years beginning in or after 2020.
• The repeal of the income tax credit for a pass-through entity investor's share of the entity's financial institutions tax (FIT) is delayed until tax years beginning in or after 2020.

In addition, SB 26 exempts the sale of feminine hygiene products and prescription diapers or incontinence pads covered by Medicaid from sales/use tax. The sales/use tax provisions are effective beginning on the first day of the first month that begins at least 30 days after the effective date of this Act. Under Ohio law, an Act is effective 90 days after it is filed with the Secretary of State. As such, it appears that these new sales/use tax provisions will be effective April 1, 2020.

Implications

Taxpayers claiming the BID must be cognizant of the informational reporting requirements required by SB 26. EY will continue to monitor and report on developments in this area.

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