Identical bills seeking to prevent a potential but unintended tax increase on some small business owners are moving through the House and Senate during the next two weeks. Passing either House Bill 326 or Senate Bill 208 by September 30th is very important, so that the bills’ changes become effective by the end of the calendar year and so tax forms and computer programs can be adjusted by tax time next year.
The bills address how the income of owners of pass-through entity (PTE) businesses, such as sole proprietorships, partnerships, limited liability companies and S corporations, is taxed. In House Bill 64, the recently-enacted biennial budget, 75 percent of the first $250,000 of business income earned in tax year 2015 by any owner, partner or shareholder of the PTE is exempt from state personal income tax. Under the language of HB 64, the remaining 25 percent of the first $250,000 of PTE business income is taxable and therefore subject to a 3 percent flat tax.
However, HB 64’s imposition of the three percent flat tax in 2015 could result in a number of taxpayers paying more tax than they otherwise would have absent HB 64. This is because there are some taxpayers whose existing tax bracket is lower than three percent. To avoid this result, both SB 208 and HB 326 provide that the 25 percent of the taxpayer’s PTE income under $250,000 that is not exempt from taxation under the business income deduction will be subject to the existing income tax brackets, not the three percent flat tax. Any business income in excess of $250,000 remains subject to the three percent flat rate.
Not wanting to see a tax increase on small business owners, the Ohio Chamber supports both bills and will be testifying to that effect next week. A tax increase was not intended by either the Kasich administration or the General Assembly in HB 64, which is why one of these bills is expected to be enacted quickly. Yet to be determined is which bill will ultimately be the agreed-upon version for this tax fix. The Senate Ways and Means Committee has scheduled for Wed., Sept. 23 proponent, opponent and interested party testimony, consideration of amendments and a possible committee vote on SB 208. The House Ways and Means Committee has scheduled for Thurs., Sept. 24 proponent testimony on HB 326.