Small Business Tax Fix No Longer On Fast Track

Legislation initially thought of as a simple tweak of a previously-enacted tax cut for small business owners has become more complicated and thus held up in order to resolve new issues that have been raised. This means that neither Senate Bill 208 nor House Bill 326, identical bills intended to ensure pass-through entity (PTE) business owners would not incur a tax increase in tax year 2015, will pass before the end of September as originally hoped. Therefore, whichever bill ultimately becomes the vehicle for the fix must include an emergency clause that requires a two-thirds vote of both the House and Senate in order to become effective in time for the 2015 tax filing season.

The Ohio Chamber testified in support of both bills and also supports the efforts to further refine and revise the legislation so that small business owners are protected from any risk of paying more tax.

The chief contention raised about the proposed fix is that the language leaves open the possibility that PTE business owners having taxable business income between $40,001 and $62,500 will pay more tax than intended in 2015. This is because “taxable business income” is defined as the remaining 25 percent of the first $250,000 in PTE business income that is not exempt from personal income tax, which cannot exceed $62,500. Any amount of PTE business income above $250,000 is subject to a three percent flat tax.

However, according to the existing marginal tax brackets, the tax rate on income between $40,001 and $62,500 is 3.465%, a higher rate than the three percent flat tax. Consequently, a solution to preclude taxpayers in this situation from having to pay this higher tax rate must be found before either bill passes.

Another reason for the delay in passing either bill was an issue raised primarily by representatives of shareholders in Ohio PTE businesses who are not residents of Ohio. In a nutshell, under Ohio’s pass-through entity withholding law, a PTE business must withhold five percent of an investor’s distributive share of income. In tax year 2016 and thereafter, the first $250,000 of each investor’s PTE business income is exempt from Ohio personal income tax. This means that potentially up to $250,000 of PTE income is subject to PTE withholding even though Ohio does not tax such income.

Ohio Chamber Staff Contact: Daniel Navin, [email protected].