Sometimes in the last-minute rush to make the host of changes that normally accompany passage of a budget bill, conflicting language or other drafting errors occur that must be subsequently corrected by the legislature. This is unquestionably the case
with House Bill 64, the state’s FY 2016-17 budget bill, and the so-called small business tax deduction.
The small business deduction was originally enacted in 2013 and allows a shareholder or partner of a pass-through entity (sole proprietorship, partnership, limited liability company or S corporation) to exclude a percentage of the first $250,000 of his/her business income from Ohio personal income tax. In 2013, that percentage was 50 percent of the first $250,000 of business income and, for tax year 2014 only, was raised to 75 percent.
The Senate version of HB 64 upped the percentage of the first $250,000 of business income excluded from taxation from 75 percent to 100 percent, but added a provision that would impose a flat 3% tax on any amount of business income exceeding $250,000. In the final version of HB 64, the conference committee retained the Senate version’s 3% flat tax on business income above $250,000, but went back to the 75 percent income tax exclusion on the first $250,000. However, there was language (Section 5747.02 (A)(4)) in the conference committee report that said beginning in tax year 2015, the tax on business income shall equal three percent of the taxpayer’s taxable business income.
The legislature did not intend that all of a pass-through business owner, partner or shareholder’s business income be subject to the three percent flat tax, just the amount above $250,000. The General Assembly will likely have this issue at or near the top of its list of to-do items for the fall session beginning in September. The fix should not be particularly complicated or complex, but there is always the concern that if a bill moving through the legislature adds one tax-related amendment, many other tax-related amendments may be put forward for inclusion in the bill, thus causing budget-balancing problems for lawmakers. Consequently, legislative leaders will likely limit including any tax-related amendments in a bill to only this specific issue, and no others.