As you can probably guess if you have seen any courtroom dramas lately, semantics is very important when it comes to the law. One word can totally change the meaning of something, and hence change the thinking or behavior of someone. Or in the case of tax law, one word can be a “gotcha!” or really change just how useful a provision might be to your business. Let’s take a look at the small business tax break that is part of the recently passed Ohio budget as an example.
Ohio Small Business Tax Credit or Tax Deduction?
You may have heard of this referred to as a “tax credit” or rate cut, which would make you think that it either reduces dollar for dollar the tax you would otherwise pay or that the actual tax rate was lowered. But that is not what is in the law – it’s actually a deduction on the first $250,000 of income that is earned.
So the tax rates on small businesses will remain the same as they have been, but now small businesses will be taxed on only 50 percent on their income.
To give you an example, if your small business makes $250,000, Ohio will only tax you on $125,000 of that income. You can take a deduction of the other $125,000. If you and your spouse file taxes separately, each of you cannot deduct more than $62,500.
Is It Possible The Tax Deduction Could Be Lost?
One issue is whether deductions will be lost if a married couple files their taxes separately, and one person actually owns 100 percent of the business. Does that mean that the business owner is only allowed to deduct up to $62,500 since they are filing separately? It appears at this point that the other $62,500 deduction would be lost. The Department of Taxation has indicated that information is still to come as it relates to calculating this deduction. For spouses that file separately in the situation above, the disconnect between how this provision was advertised in the media and how it’s actually written may turn out to be one of those hidden “gotchas!”
Ohio Tax Help
Unpacking everything that is laid out in Ohio’s new biennial budget can be difficult and overwhelming at times. If you need some clarification and guidance on specific areas, including the new 50 percent small business deduction, contact Rea & Associates. Our team of Ohio tax professionals can help you understand what parts of the Ohio budget will affect you in the coming years.