Do you live in the United States? Do you live in any state other than Ohio? Are you an owner of a partnership, S Corporation or Limited Liability Company (LLC)? If so, you may be entitled to a refund of taxes paid to Ohio.
This is because of Ohio’s Business Income Deduction (BID). For Ohio 1040 filers, income from business activities is taxed differently than income from personal sources. For individuals filing single or married filing jointly, the first $250,000 of business income included in federal adjusted gross income (AGI) is 100% deductible. (For taxpayers who file “Married filing separately,” the first $125,000 of business income included in federal AGI is 100% deductible.)
Income in excess of these limits is taxed at a flat 3% rate. This is compared to the variable tax rates for nonbusiness income that ranges from 0% to 4.797% within the state.
Only business income earned by a sole proprietorship (which includes Schedule C income) or a pass-through entity generally qualifies for the deduction. A pass-through entity includes partnerships, S corporations and LLCs. If you are a 20% or greater owner of a pass-through entity, W-2 wages earned from your flow-through in Ohio also qualify for the deduction.
There is a catch. A flow-through entity, even if owners are included in a composite return, cannot claim the exemption on behalf of its owners. To claim the exemption, an owner will have to file an Ohio Individual Tax Return, Form IT 1040.
Here is an example:
Partner A, a married individual, lives in New York. Partner A is a 50% owner in an LLC. Partner A’s share of Ohio taxable income from this LLC is $250,000. The LLC files a composite return and includes Partner A in this filing. The Ohio composite tax rate is 4.797%. Therefore, the LLC will pay $11,993 on behalf of Partner A. Assuming Partner A has no other OH income, the partner can file an Ohio IT 1040 (as a non-resident) and apply for the $11,993 paid through the composite filing to be refunded because the $250,000 of LLC income will be exempt.
For those who have had Ohio income tax withheld on Form IT 1140, or if personal income has been included in an Ohio composite return, Form IT 4708, you may be eligible for a refund of taxes paid on your behalf for up to four years.
Contact your Marcum tax advisor for questions or further assistance.
