OSCPA staff report
The Senate Ways & Means Committee on Oct. 19 heard sponsor testimony on a bill that creates a state-level solution for Ohio taxpayers to the current $10,000 state and local tax limitation at the federal level; and another bill that addresses the Business Income Deduction and sales of businesses’ ownership interests.
Both Senate Bill 246 and Senate Bill 247 are OSCPA legislative priorities that were introduced earlier this month in the Ohio Senate. The Society plans to testify in support of both bills at the upcoming Senate Ways & Means Committee hearing on Tuesday, October 26.
SALT deduction parity: Sens. George Lang, R-West Chester, and Michael Rulli, R-Salem, presented sponsor testimony.
"In 2017, the Tax Cuts and Jobs Act imposed a $10,000 cap on the amount of state and local taxes (or SALT) that Ohio taxpayers can deduct off their federal returns," Lang said. “This cap also applies to the income earned by Ohio pass-thru businesses set-up as S corporations, partnerships and LLCs.”
He said because of this cap, Ohio small businesses are subject to higher tax rates, which could hurt their bottom line and put them at a disadvantage to businesses organized as C corporations and those operating in states without an income tax.
SB246 levies a tax on a pass-through entities' income at a rate of 5% for taxable years beginning in 2022 and 3% for taxable years thereafter, but only if that entity elects to become subject to the tax. All tax revenue would enter the GRF. Furthermore, the sponsors said the bill authorizes an owner to claim a refundable credit against the owner's Ohio income tax liability equal to the owner's proportionate share of the tax paid by the PTE.
Similar bills have passed in 19 other states. Lang said a technical amendment on the bill is forthcoming.
No questions were asked.
BID and business sales: Sen. Lang and Vice Chair Kristina Roegner, R-Hudson, gave sponsor testimony on the bill, which clarifies the applicability of the Business Income Deduction to the sale of a business.
They said while the definition of the term “business income” has remained unchanged since 2002 in the Ohio Revised Code, the Ohio Department of Taxation in 2018 changed its interpretation of the term. After decades of applying the definition of “business income” as broadly as possible to ensure nonresidents pay Ohio personal income tax upon the sale of businesses with Ohio operations, an Ohio Supreme Court decision led ODT to change its approach as to what constitutes business income in certain circumstance, Lang and Roegner said.
Roegner said that ODT’s new approach disadvantages Ohio resident business owners because its position may result in many sales being excluded from the BID. She said ODT’s approach has also provided nonresidents with a tool to assert that some gains are not taxable in Ohio at all. As a result, many Ohio business owners planning to sell their businesses are now being advised to become nonresidents, thereby potentially eliminating all tax on the sale of the business.
SB247 provides clarifying guidance to ODT and taxpayers, the sponsors said. It says that BID treatment applies to both (1) a sale by a person who was actively involved in managing a business during the year of sale or previous five years, and (2) a sale that is treated as an asset sale for federal tax purposes.
Hannah News Service contributed to this report.