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Ohio Tax Commissioner Joe Testa issued an alert to all Ohio small businesses this past Tuesday – do not forget to exclude up to half of your Ohio net business income from your adjusted gross income.

Most Ohio businesses structured as pass-through entities are eligible for this deduction, known as the small business investor deduction. This deduction allows individuals to deduct 50 percent of business income included in the taxpayer’s federal adjusted gross income and not otherwise deducted in calculating Ohio taxable income, to the extent such income is apportioned to Ohio. There is a $125,000 cap on this deduction per taxpayer per year ($62,500 for spouses who file separately and each report business income). The law gives a 50 percent tax cut for certain small businesses structured as pass-through entities, such as S-corporations and partnerships, on the first $250,000 in net small business income. Note that sole proprietorships also qualify.

Commissioner Testa hopes that this tax break is a great boon to Ohio’s economy. “The sooner these businesses have extra money in their pockets, the faster they can begin to grow their business by using the savings to increase advertising, buy new equipment or hire help,” Commissioner Testa said.

To be eligible for this deduction, the taxpayer must have business income from Ohio sources that may include:  i.) a distributive share of income or gain from only one pass-through entity, or (ii) distributive shares of income or gain from more than one pass-through entity that are unitary with each other. However, one cannot take the small business investor deduction from ordinary wages the taxpayer earned during 2013.

Note: This is part of Ohio Governor Kasich’s budget bill that was previously covered in the Multistate Tax Update. The budget bill also cut state income taxes by 8.5 percent in 2013.