MARCH 11 -17, 2013
CRAIN’S CLEVELAND BUSINESS 13
Plan contains dramatic relief for some owners
he recently unveiled two-year budget proposal for the state of Ohio contains some bold tax relief specifically targeting small business. When Gov. John Kasich proposed the 2014-2015 budget for Ohio, he included some significant tax breaks for small business owners — especially pass-through entities such as S corporations, limited liability companies, partnerships and sole proprietorships — intended to free up resources that would enable them to do some new hiring or investing. Taking note that Ohio ranks higher than most states in its marginal income tax rates, especially compared to its immediate neighboring states, Gov. Kasich has proposed a reduction in rates that is intended to help Ohio compete in jobs and investments. In fact, the governor calls his proposal for tax relief directly to small business the “centerpiece” of his tax reform proposal because academic research suggests small businesses account for the majority of new job growth over the past 20 years. Remarkably, Gov. Kasich proposes slashing in half the amount of business income to owners or investors in pass-through entities that would be subject to Ohio Kasich income tax. That would mean an owner or investor in such an entity would pay Ohio income tax on only half of their reportable income. If an owner’s normal taxable income is $100,000, under the governor’s proposal it would drop to $50,000. Recognizing that some pass-through entities actually are quite large, the governor proposes capping the income that would be eligible for the deduction at $750,000 annually. That means the maximum amount that would be excludable from taxable income for any given taxpayer would be $375,000. Gov. Kasich estimates the proposed reduction will exempt $14 billion in Ohio income from taxation, resulting in savings to those small business taxpayers of $600 million to $650 million annually. He’s banking on business owners using that money to increase their payroll, thus putting other Ohioans to work earning other taxable income. The proposed budget also would reduce state marginal tax rates in all nine tax brackets over a threeyear period, effectively reducing tax rates by some 20% by tax year 2015. The objective is to reduce Ohio’s top margin tax rate to below 5%, ranking it in the bottom half of all top state tax rates, assuming all other states held constant. For small business owners, the effect of the proposed reduction in marginal tax rates combined with the proposed relief specifically for pass-through entities is substantial. The budget proposal even provides an illustration to demonstrate.
TAX TIPS The governor imagines an Ohio LLC with three partners or owners in the business. The business is profitable and earns $1.5 million in
tax year 2015. It is divided evenly among the three partners, resulting in each owner receiving $500,000. For the sake of simplicity, the example assumes each owner is married and has a total of four exemptions. Based on the reduced marginal tax rate, each taxpayer would realize a tax savings of about $5,000 a year. Based on the 50% deduction of taxable income resulting from the LLC, the taxable income for each partner would be reduced from $500,000 to $250,000, resulting in tax savings of $12,000. That combines for a tax savings to the
business of $17,000 for each partner, or a total of $51,000 for the year — perhaps enough, Gov. Kasich surmises, for the business to consider expanding the payroll or investing in capital. It remains to be seen how Gov. Kasich’s proposal ultimately will be accepted by the Ohio Legislature, but the governor’s office makes a strong case for tax relief to spur economic growth in Ohio. The proposal notes Ohio policymakers have recognized for at least a decade that Ohio’s margin tax rates inhibit interstate compe-
tition for jobs and investment, especially when Ohio’s rates are higher than Pennsylvania, Michigan and Indiana. This is a proposal Ohio’s small business owners will want to watch closely. The impact on small business owners and their ability to plan their growth strategies could be significant. ■ Peter A. DeMarco is vice president and director of tax services for the regional accounting and business consulting firm of Meaden & Moore, headquartered in Cleveland.
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March 11 -17, 2013 issue