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Beginning in 2013, the state of Ohio created a new deduction for individuals owning a business, including interests in pass-through entities, such as partnerships, S corporations and limited liability companies. The Small Business Investor Income Deduction allows an individual to deduct 50% of the taxpayer's small business income subject to certain limitations and increases to 75% in 2014.

 

In 2013, for taxpayers filing as single or married filing separately, the maximum deduction available is 50% of up to $125,000 of the taxpayer's Ohio source business or $62,500, for all other taxpayers the maximum deduction is 50% of up to $250,000 or $125,000. In 2014, this increases to a maximum deduction of $93,750 and $187,500, respectively.

 

The deduction is available for only individuals, who are residents, part-year residents and non-residents and who have business income from Ohio sources. The deduction is not available to business entities; however, if an individual receives income from a pass-thru entity that filed a composite return, the individual's ability to take the deduction is not impacted.

 

The deduction is calculated on business income sourced to the state of Ohio. Therefore, business income is defined as income, including gain/loss:

  • Arising from transactions, activities, and sources in the regular course of a trade or business operation.
  • From real, tangible, and intangible property if the acquisition, rental, management, and disposition of the property constitute integral parts of the regular course of a trade or business operation.
  • From a partial or complete liquidation of a business, including gain or loss from the sale or other disposition of goodwill.

Therefore, if received in the ordinary course of business, income may include interest, capital gains, dividends, rents, royalties, etc. In addition, compensation paid to a 20% or more shareholder is considered to be a distributive share of income from the entity and should be treated as business income rather than wages. In instances where the business is reported on Schedule C or E, the income is reduced by the business deductions and apportioned to Ohio, accordingly.

 

The deduction is computed on Schedule IT-SBD and included with the filing of Form IT-1040. The net business income sourced to Ohio is adjusted for items such as related member expenses, depreciation and other federal tax adjustments, apportioned to Ohio using a calculated ratio reported from the entity and then subjected to the limitations.

 

It's not too late to take the deduction if you qualify, but the 2013 filing season is quickly coming to a close on October 15th. However, if you have already filed your return and believe you may have missed it, you may go back and amend your return to take advantage of the deduction.

 

For more information or questions on this topic, please contact your local UHY LLP professional.