Ohio Budget Impacts Private Companies and Owners– July 02, 2013 by Tracy Monroe

Governor Kasich recently signed the biennial budget bill, House Bill 59, which creates significant tax ramifications for individuals and businesses. The most noteworthy provisions of the FY 2013-2014 budget for privately held businesses and their owners include personal income tax cuts, a small business deduction and changes to Ohio’s Commercial Activity Tax (CAT).

Personal Income Tax Cut

The new budget reduces personal income tax rates by 10% across all brackets. This is a permanent cut that will be phased in over three years. Rates are retroactive from January 1, 2013. The chart below illustrates the change realized in the highest tax bracket through 2015.

Calendar Year Previous Top Rate New Top Rate
2013 5.913% 5.41%
2014 5.41% 5.38%
2015 5.38% 5.33%

Small Business Income Deduction

An opportunity for small business owners is the small business income deduction, retroactive as of January 1, 2013. While not as significant as in the governor’s original proposal, the deduction applies to owners in partnerships, sole proprietorships, limited liability companies and S Corporations. Single or joint filers are able to deduct up to $125,000 for every $250,000 of Ohio business income. Married filing separate filers can deduct $62,500 (each) up to $125,000 (each) of Ohio business income. This deduction helps to ease the disparity between C Corporations that don’t pay Ohio income tax and flow-through entities that do.

CAT Changes

Beginning on or after January 1, 2014, Ohio will introduce a variable minimum CAT structure. The $150 minimum tax due on annual taxable gross receipts between $150,000 and $1 million will remain unchanged, but larger companies will pay more according to the new tiered structure:

Annual Taxable Gross Receipts Minimum CAT Tax Due*
$1 million-plus to $2 million $800
$2 million-plus to $4 million $2,100
$4 million-plus $2,600

* CAT amounts listed are in addition to the 0.26% assessed on receipts over $1 million.

This new structure will phase out the benefit of the first $1 million only being subject to a minimum tax. Also, all annual filers, e.g., those with $1 million in Ohio gross receipts or less, must now pay their CAT online through the Ohio Business Gateway.

Miscellaneous Items

Among other niche provisions that did or did not make their way into the final budget, individuals will be glad to hear the proposal to impose sales tax on a variety of services did not become a reality. There are, however, other sale and use tax changes, such as increasing the statewide sales and use tax from 5.5% to 5.75% beginning September 1, 2013. Sales and use tax will also now be applied to videos, music and ebooks transferred electronically as well as to certain magazine subscriptions.

The overall theme of Ohio’s new budget seems to focus on shifting the tax burden away from individuals and onto businesses. Measures that will impact businesses the most, such as raising the sales tax rate and increasing CAT minimums, will result in more state income from businesses and will support the new individual tax cuts.

For more information on the budget’s impact on you or your organization, contact Tracy Monroe at tmonroe@cohencpa.com or a member of your service team.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.