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Ohio: Reminder -- Your pass-through entity may be eligible for up to a 50 percent income tax cut

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. 

Michigan: Bill exempts vehicle trade-in value from use tax on vehicle purchases

In October 2013, Michigan Governor Rick Snyder signed a bill (S.B. 89), which provided a phased-in exemption from sales tax on the agreed-upon value of a motor vehicle or recreational vehicle when the trade-in is used as partial payment for the purchase of a new or used motor vehicle or recreational vehicle. On Dec. 21, 2013, the governor signed S.B. 90 which provides a similar exemption from use taxes.

In general, businesses and individuals that purchase tangible personal property or certain services for use, storage or consumption in their state of residence are supposed to pay use taxes if they purchase such property or services without paying sales tax. Without S.B. 90, a business or individual who is eligible to receive this exemption from sales tax on the agreed-upon value of a motor vehicle or recreational vehicle may instead need to pay use tax on the value of such trade-in. S.B. 90 makes it clear that the value of such trade-in is also exempt from use taxes.

Similar to S.B. 89, S.B. 90 provides for a phased-in exemption up to the full agreed-upon value of the trade-in motor or recreational vehicle. Beginning on Dec.15, 2013, up to $2,000 of the agreed-upon value of the trade-in vehicle is exempted from use tax when used as partial payment for the purchase of a new or used vehicle purchased from a new vehicle dealer or a used or secondhand vehicle dealer licensed in the state if such agreed-upon value is separately stated in the invoice, bill of sale or similar document given to the purchaser.

Beginning Jan. 1, 2015, and each Jan. 1 thereafter, the amount of such exemption will be increased by $500 each year until the exemption amount equals $14,000. Once the exemption amount exceeds $14,000, there will no longer be a limit on the amount of the exemption. However, such annual increases will stop if the recently enacted Medicaid expansion legislation is repealed.

Similar to S.B. 89, S.B. 90 provides that beginning Nov.15, 2013, the full agreed-upon value of a titled watercraft will be exempted from use tax when used as partial payment for the purchase of a new or used titled watercraft purchased from a watercraft dealer if such agreed-upon value is separately stated in the invoice, bill of sale or similar document given to the purchaser.

Click here to read the prior Multistate Tax Update about S.B. 89.

Click here to read the full text of S.B. 90.

Utah:  Tax commission will allow joint filing status for same-sex married couples, replacing prior guidance

On Oct. 9, 2013, the Utah Tax Commission issued guidance to Utah taxpayers denying joint filing status for same-sex married couples because Utah’s constitution did not recognize same-sex marriages. However, in light of the ruling in Kitchen v. Herbert (D. Utah, Dec. 20, 2013), in which a federal judge enjoined Utah from enforcing its constitutional ban on same-sex marriage, the Tax Commission has issued new guidance replacing its prior guidance regarding the issue of joint filing status for same-sex married couples.

The Tax Commission’s new guidance, which was issued on Jan. 15, 2014, provides that same-sex couples who are eligible to file a joint federal income tax return and who elect to file jointly may also file a joint 2013 Utah Individual Income Tax return. The filing guidance is limited only to the 2013 tax year. Filing information for future tax years will be provided as court rulings and other information become available. The notice explains that if taxpayers are required to file amended 2013 tax returns as a result of any future court rulings, they will not be subject to penalties for any deficiencies resulting solely from following this guidance.

Kitchen v. Herbert has been appealed to the Tenth Circuit Court of Appeals. For 17 days, Utah was the 18th state in the nation to permit same-sex couples to marry. On Jan. 6, 2014, the U.S. Supreme Court stayed the injunction of the Utah District Court pending final disposition of the appeal to the Tenth Circuit. Due to the stay of the injunction, on Jan. 8, 2013, the Governor of Utah directed his cabinet that the state would not recognize same-sex marriages pending final determination by the courts. Interestingly, this directive apparently does not apply to the Tax Commission as the Tax Commission’s new guidance permitting same-sex married couples to file Utah income tax returns jointly was issued about a week later. American Civil Liberties Union of Utah filed a lawsuit on Jan. 21, 2013 regarding Utah’s refusal to recognize same-sex marriages entered into under Utah law before the injunction was stayed.

The Multistate Tax Update will continue to follow developments in state tax law in the wake of the Court’s ruling in United States v. Windsor (striking down Section 3 of the Defense of Marriage Act (DOMA) on grounds that the federal interpretation of "marriage" and "spouse" to apply only to heterosexual unions is unconstitutional under the Due Process Clause of the Fifth Amendment), as well as Revenue Ruling 2013-17 (holding, in part, that: (1) “husband” and “wife” include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term “marriage” includes such a marriage; and (2) a marriage of same-sex individuals that was validly entered into in a state whose law authorizes the marriage of two individuals of the same sex even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages). The Multistate Tax Update has seen and expects to continue to see a multitude of state legislation, rulings, guidance, and litigation ensuing as a result. If you have questions on how these holdings or other developments may affect you or your business, please contact us.

Click here to read the full text of the Utah Tax Commission guidance. 
For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.