06/03/2020

ODT Seeks Feedback on the Business Income Deduction

It seeks determination of NAICS codes for the Ohio BID

Ohio’s Business Income Deduction is entirely separate and distinct from the federal Qualified Business Income Deduction (QBID). The federal QBID has no impact on the Ohio income tax return. It is taken after the computation of federal adjusted gross income (FAGI). Since the Ohio return starts with the federal adjusted gross income, the federal QBID does not factor into Ohio’s income tax calculation.

Ohio taxes income from business sources and non-business sources differently on its individual income tax return (the Ohio IT 1040). For tax years 2016 and forward, the first $250,000 of business income earned by taxpayers filing “Single” or “Married filing jointly,” and included in federal adjusted gross income, is 100 percent deductible. For taxpayers who file “Married filing separately,” the first $125,000 of business income included in federal adjusted gross income is 100 percent deductible. This is commonly referred to as Ohio’s Business Income Deduction (BID). Any remaining business income above these thresholds is then taxed at a flat 3 percent rate.

For tax year 2015, 75 percent of the first $250,000 of business income earned by taxpayers who filed “Single” or “Married filing jointly,” and included in their federal adjusted gross income, was deductible. For taxpayers who filed “Married filing separately,” 75 percent of the first $125,000 of business income included in their federal adjusted gross income was deductible.

Only business income earned by a sole proprietorship or a pass-through entity generally qualifies for the deduction. A pass-through entity includes partnerships, S corporations and LLCs (limited liability companies).

Non-business income for all taxpayers is taxed separately using progressive tax brackets and rates.

To review the proposed changes to the BID, please select this link.