Over the last few months Ohio has been sending targeted assessment notices to investors who: 

• Own 20% or more of a pass-through entity,

• Receive their wages from a professional employer organization (PEO) AND

• Claim Ohio’s small business income deduction (SBD) for a reduction in tax rates on these wages.

Ohio’s position has been that the wages were not paid by the entity the investor owns and, therefore, do not qualify as Ohio business income eligible for the deduction. House Bill 334 and Senate Bill 186, recently introduced into the Ohio General Assembly to amend this issue for investors, have led the Ohio Department of Taxation’s Audit Division to suspend any audits targeting investors using PEOs and taking the small business deduction.
 
This means that no new audits will begin, for now. However, related tax audits currently underway will be placed on hold until the legislation makes its way through the system.
 
If you are an investor who received your wages from a PEO and/or previously agreed to an audit assessment, monitor this legislation closely. If the disallowance of the SBD deduction is a material tax issue and you want to proactively pursue the deduction, work with your tax team to evaluate other options for paying investor wages.
 
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.