Close that loophole, says Policy Matters Ohio
Posted October 04, 2017 in Press Releases
Legislators should end special treatment for some business owners
The Ohio General Assembly should close a loophole in the tax law that allows many business owners to avoid state income tax on compensation they receive from their companies, Policy Matters Ohio said today.
“The General Assembly should repeal the business income deduction,” said Research Director Zach Schiller, noting that this tax break, created in 2013, is costing the state $1 billion a year without creating new jobs. “But short of that, it should make clear that the deduction is indeed for business income, not compensation,” he testified to the Senate Ways & Means Committtee today.
When the deduction was approved, it was supposed to cover profits that owners received from their businesses. But as it turns out, because of an unrelated section of the law that predated the deduction, the state has allowed those who own at least 20 percent of their business to claim compensation they are paid. This came to light publicly because those business owners who had used outside companies to handle their payroll found that they weren’t allowed to get the deduction. Senate Bill 186 would allow such owners to claim it.
Schiller noted, however, that there is an alternative to expanding the deduction: “Making clear that compensation is not covered by the business income deduction,” and eliminating this loophole. While the savings from such a step aren’t immediately known, this would save up to $2 million a year SB 186 would cost, plus a one-time cost of as much as $10 million to pay business owners back retroactively, as the bill would do.
Under federal income-tax rules, owners of S Corporations (one major type of business organization covered by the bill) must pay themselves a reasonable salary to prevent payroll tax evasion. “Profits are not the same thing as compensation, and extending this deduction to compensation bends the concept of business income beyond recognition,” Schiller testified.