Ohio Governor Signs HB 166, Eliminating the Small Business Deduction for Some; Cutting Tax Rates for All

On Thursday July 18, 2019, Ohio Governor Mike DeWine signed into law House Bill 166. This is a 2-year state budget bill that includes many, significant tax changes for Ohioans. This bill has undergone many changes since its introduction in the state House, but one constant has remained: big changes for Ohio taxes.

Overall, the bill represents a substantial tax cut for Ohioans. The bill, as passed, includes the following highlights:

  • Elimination of the bottom two income tax brackets, meaning there is no personal income tax on income up to $21,750;
  • Across-the-board tax cut of 4% on each of the five remaining marginal tax brackets;
  • Elimination of the physical presence standard for sales tax and adoption of an economic nexus standard with thresholds of $100,000 in sales or 200 transactions; and
  • Preservation of the small business tax deduction for most pass-through entity owners (S Corporations, Partnerships, etc.), exempting the first $250,000 of business income from tax;

That last item is a huge relief for most Ohio business owners because its survival was in grave doubt at times during this Bill’s journey through the state House and Senate. In order to afford the overall tax rate reduction, the state House initially wanted to slash the small business deduction to $100,000 for all taxpayers, in effect “shifting” taxes to Ohio business owners to afford the broad rate reduction. However, that effort did not survive committee negotiations.

While the small business deduction is largely preserved, it did not escape the legislative process completely unscathed. Bill 166 removes lawyers’ and lobbyists’ ability to claim the $250,000 deduction. Rather than reducing all Ohio business owners’ deductions, the Ohio legislature opted for a full elimination on only some categories of business owners, with the unlucky few being lawyers and lobbyists.

To learn more about how Ohio House Bill 166 affects you and your business for income and sales tax purposes, please contact us to speak with a Barnes Dennig representative.