This morning, Gov. DeWine signed the state’s two-year operating budget into law. Of importance to agents is that the language that would have resulted in a significant tax increase for many members was NOT included in final bill, as the final budget largely restored the Business Income Deduction (BID) that allows pass-through entities to deduct up to $250,000 of their business income from Ohio income tax liability. Additionally, a flat, three percent tax on all business income above the $250,000 remains intact.
The BID was a big sticking point in budget negotiations, and a 17-day extension was passed on June 30 to allow more time for negotiations on this and a number of other issues. Notably, the final budget language does eliminate BID eligibility for lawyers and lobbyists. With this change coming at the last minute, the potential ramifications of this language on agencies that employ Ohio-licensed attorneys is still being determined.
BACKGROUND ON THE BID
The business income deduction (BID) that was created a few years ago to level the playing field for pass-through entities (sole proprietors, LLPs, LLCs, S-corps) that pay both the commercial activity tax (CAT) and income tax. The BID was first established in 2013 and finalized in 2015. It has been in place in its current form just since Tax Year 2016. In 2016, the Ohio General Assembly instituted the final version of the BID allowing pass-through entities to deduct up to $250,000 of their business income from Ohio income tax liability. Additionally, a flat, three percent tax on all business income above the $250,000 was implemented.
The majority of OIA member independent insurance agencies are set up as pass-through entities. It is also important to note that more than 80% of our members employ less than 10 people, and these independent insurance agencies survive on small margins.
OHIO HOUSE PROPOSED CHANGES TO BID
The Ohio House’s version of the state budget reduced from $250,000 to $100,000 the maximum deduction and eliminated the three percent flat rate to pay for a 6.6 percent across the board income tax reduction. The House has proposed making these changes retroactive to January 1, 2019, potentially subjecting taxpayers to fines and penalties on estimated payments they have already made.
OHIO SENATE PROPOSED CHANGES TO BID
The Ohio Senate’s proposed state budget restored the BID to $250,000, but proposes the elimination of the three percent flat tax rate beginning in 2020. OIA is grateful to the Senate for their support in keeping the threshold at $250,000 and not making the elimination of the three percent flat tax rate retroactive.
OIA ADVOCATES AGAINST BID CHANGES
In June, OIA leaders and members of OIA’s Advocacy and Political Committee from around the state met with Ohio policymakers to advocate on issues like the proposed changes to the BID. OIA members shared their perspective and advocated against this tax increase that would have resulted in a negative impact on many OIA members and their clients.
OIA also engaged in a number of meetings on this issue with a coalition of associations that also opposed these tax changes. In late June, OIA signed onto a letter that was sent to Ohio’s leaders urging them to keep Ohio business taxes stable and to continue to support small business owners in their efforts to reinvest in their business by preserving the BID.
OIA greatly appreciates all the time that members took to educate legislators on the importance of the preservation of the BID. Ultimately, the removal of the BID language is a huge win for Ohio agencies.
Stay tuned for further details on the state budget in the coming days.
Interim State Budget Passed; BID Tax Issue Still Undecided
Ohio House Passes State Budget With Significant Tax Increase For Small Businesses