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Tax Tip of the Week | Ohio Small Business Deduction – TAKE IT! August 28, 2019

Posted by bradstreetblogger in : Business Consulting, Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

We work with many attorneys for a myriad of reasons. Some specialize in business dealings such as mergers, acquisitions, etc. Mr. Jeff Senney, a prominent business attorney with Pickrel, Schaeffer and Ebeling, wrote the following article which discusses a deduction that owners, or equity investors, of an Ohio business who file an Ohio individual income tax return may be eligible to take each year. The deduction is commonly known as the Ohio Small Business Deduction (SBD) and began in its earliest form in 2013. The SBD allowed the taxpayer to deduct 50% of up to $250,000 of Ohio business income, for a maximum deduction of $125,000. In 2014, the deduction increased to 75% of $250,000 for a maximum deduction of $187,500. Adjustments were required also, such as add-backs for retirement contributions, the self-employment tax deduction, and the self-employed health insurance deduction that were reported on the taxpayer’s federal return for both 2013 and 2014. The deduction remained at 75% for 2015 and the requirement to add back the above-mentioned adjustments was eliminated. In its current form, the deduction is for 100% of $250,000. We hope you enjoy Jeff’s article as reproduced below.

      – Norman S. Hicks, CPA

For 2016 (and subsequent years), each individual small business owner filing single or married filing jointly is eligible for a “small business” income tax deduction (SBD) against their state income tax liability equal to 100% of the first $250,000 of business income the owner receives or is allocated from a sole proprietorship or pass-through entity (“PTE”). Married filing separate taxpayers will be able to deduct 100% of business income in 2016 but only up to $125,000. Any remaining business income above these threshold amounts is taxed at a flat 3% rate.

For tax years 2014 and 2015, the SBD percentage for all taxpayers was only 75%.

PTEs include partnerships, “S” corporations and limited liability companies (“LLCs”). Income generated by the business and passed through to the owners/investors is subject to personal income tax. The deduction was originally applicable only for Ohio-sourced business income. But beginning in tax year 2015, the deduction was expanded to include eligible business income from all sources.

Individuals who directly or indirectly through a tiered structure own at least a 20% interest in profits or capital of a PTE may also include their wages and guaranteed payments from that PTE in the calculation of the SBD. It was not originally clear whether the direct or indirect ownership included constructive ownership from family members. But the Ohio Department of Taxation has recently made clear that stock attribution among family members (such as husband to wife) does not count in determining whether the individual owns the requisite 20% interest.

Taxpayers who failed to claim the SBD on their originally income tax returns should give serious thought to filing amended returns to claim the SBD for all open years. While the SBD is referred to as the “small business deduction,” there is no limit on gross receipts or assets that the PTE can have.

The SBD can be taken not only by Ohio residents on all their business income received, but also by Ohio nonresidents and part-year residents.

While electing to be included in a composite tax return makes financial sense in most states, taxpayers could be missing out on the SBD tax savings available in Ohio. A PTE cannot deduct the SBD on a composite tax return filed on a taxpayer’s behalf, and the SBD cannot be claimed on any other non-individual tax return, such as a trust return and even a nonresident withholding return. Accordingly, if an individual taxpayer has been included in a composite return or has had withholding performed by a PTE, the taxpayer may be paying more Ohio tax than necessary.

Many taxpayers may not have taken the SBD because they mistakenly thought they were required to own 20% or more of a PTE in order to qualify for the SBD. But that is not the case. The 20% ownership requirement only applies to deduction of compensation and guaranteed payments. Taxpayers owning less than 20% are still eligible to claim the SBD on their share of other qualifying business income.

Many taxpayers also do not realize that the 20%-or-more requirement only needs to be met once during a tax year. If an individual owner meets the 20% ownership test at any point during the calendar year, the individual’s entire year of compensation or guaranteed payments may qualify as business income. While not entirely clear, it is likely the Ohio Department of Taxation would try to deny the SBD where a husband and wife transferred ownership back and forth during a year in order to make them both 20% owners on at least one day during the year.

Credit given to Jeff Senney. He can be reached at 937-223-1130 or Jsenney@pselaw.com or https://www.pselaw.com/attorneys/jeffrey-senney. Jeff’s article can be found at: https://www.pselaw.com/ohio-small-business-deduction-take-it/ 

Thank you for all of your questions, comments and suggestions for future topics. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.  

This Week’s Author – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | No. 360 | It’s Not Personal, It’s Your Business June 22, 2016

Posted by bradstreetblogger in : Business consulting, Business Consulting, General, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

Tax Tip of the Week | June 22, 2016 | No. 360 | It’s Not Personal, It’s Your Business

You may think of your business as an extension of yourself, especially if you’re a sole proprietor or the only shareholder. But keeping the two of you separate — particularly in the area of finances — is a tax-smart move. One reason: In addition to making sure the expenses you pay are ordinary and necessary, you need adequate records to support them so you can claim a deduction on your business return. Intermingling personal and business finances may lead to disallowed deductions.

Here are three ways to separate your personal and business life:

Set up a bookkeeping system. In general, federal income tax law does not specify a particular type of recordkeeping system. Your accounting records can be as simple as a logbook with pockets to store receipts. The main requirement is to track your expenses in a manner that provides a complete and accurate account of your business activities.

Open a business bank account. Having a separate bank account can help put to rest the question of whether you are running a business or indulging in a hobby. Why? To open a business account, financial institutions usually require employer identification numbers, business licenses, certificates of incorporation, and other legal documents that signify genuine business activity.

Take a salary.  (Not an option if you are a sole proprietor) Besides providing a clear separation between your personal and business expenses, paying yourself a reasonable wage helps you maintain a budget. Establishing a distinction is especially important for corporations. In some cases, amounts you withdraw from your corporation for your personal benefit can be considered dividends instead of a deductible expense.

If you need help establishing or organizing your business records, please do not hesitate to contact our office.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW…until next week.

Tax Tip of the Week | No. 253 | An Update on ROBS June 4, 2014

Posted by bradstreetblogger in : Business consulting, Business Consulting, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Taxes , add a comment

Tax Tip of the Week | June 4, 2014 | No. 253 | An Update on ROBS

Some recent court cases have shed more light on this risky funding plan.

A couple of years ago in TTW #109 we introduced ROBS as a strategy to fund a new business. The following is a recent article in Businessweek about this risky strategy.

Baby boomers are proving more likely to launch businesses in their 50s and 60s than members of past generations, in some cases risking retirement savings on the ventures. A small but growing number have adopted a complex strategy to use their retirement nest eggs early to buy or launch businesses—while avoiding taxes and penalties for early withdrawal.

The IRS has repeatedly warned that the strategy—known by the unfortunate acronym ROBS, for Rollovers for Business Startups—lies in a murky area of the law. Two recent tax court decisions show that the federal government may be looking to go after millions of dollars in back taxes.

The ROBS strategy has been around for decades and has gained popularity in recent years, especially with entrepreneurs buying franchise businesses. Guidant Financial, a Bellevue (Wash.) company that specializes in the transactions, handled $232 million in such rollovers in 2012.

Here’s one way the maneuver typically works: A would-be entrepreneur creates a shell company and sets up a 401(k) plan for it. She transfers some or all the savings from her personal retirement account into the new company’s 401(k). She uses the new 401(k) to invest in the shell company through an employee stock ownership plan. That gives the shell company cash to buy an existing business or to cover startup costs. The entrepreneur owns the company through shares held in the new retirement plan.

The IRS cast some doubt on ROBS in a 2008 memorandum (pdf) saying the strategy needed further study. “ROBS transactions may violate law in several regards,” the agency noted. In 2010, the agency called ROBS  “questionable” but provided the basis for continued use.

Last year the IRS won decisions against entrepreneurs who were found to have misused ROBS. In Peek v. Commissioner, filed in May, the tax court said two Colorado entrepreneurs owed more than $560,000 after they used their company’s retirement plan to guarantee a loan. In Ellis v. Commissioner, filed in October, the court ruled against a Missouri man who used a ROBS transaction to rent space for his business and pay himself a salary.

Proponents of the strategy say those decisions show the importance of hiring a company that knows what it’s doing to manage the transaction. Some tax experts, however, have warned recently that the cases show the IRS is preparing a crackdown on ROBS and could soon seek back taxes from other entrepreneurs.

A bigger question: Should anyone devote retirement savings to the inherently risky act of launching a business? Michele Markey, a vice president at the Kauffman Foundation, says older entrepreneurs should be more cautious about taking the plunge. “Boomers don’t have time to recover from failure like a 20-year-old does”.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Why You Need A Year End Planning Meeting With Your Accountant | Tax Tip of the Week | No. 65 November 3, 2010

Posted by bradstreetblogger in : Business Consulting, Tax Tip , 3comments

Tax Tip of the Week | November 3, 2010 | No. 65
Why You Need A Year End Planning Meeting With Your Accountant

Importance of Year End Planning

Year End Planning(1)   TAX PLANNING

Taxes may be one of a business owner’s largest expenditures.  Therefore, they deserve the planning and monitoring that accompanies any other major expense.  A year end meeting with your accountant should always include an estimation of your taxes.  The discussion should include the projected tax amount, along with the various methods and opportunities to negate or reduce the taxes at both your company and personal levels.  However, sometimes paying the tax is cheaper than incurring the costs of reducing them.  No one wants to spend $10 on something of little or no value to save $2.  With the exception of a retirement plan contribution, tax planning must be complete by New Year’s Eve.  Trying to do tax planning for the prior year while sitting with your accountant in early April for your tax return preparation is simply a day late, a dollar short.


Too often, when the time to prepare the budget arrives, the tendency is to blow off the entire process.  Too many business owners believe the budgeting process is simply not worth the effort.  But, this task need not take days, usually a few hours is adequate.  The end result is usually enlightening and definitely something to review with your accountant.  With their fresh eye you can discuss the many hurdles that may jump up during the year as predicted by the budget, such as cash flow needs for operations to fund growth, capital asset financing, tax estimates and staffing requirements.  The budget is also a model to use for benchmarking during the year.  Is the variance just an anomoly, a coincidence or, more importantly a trend that must be reckoned with?


Your accountant has seen hundreds, maybe even thousands, of financial statements in a multitude of industries.  Use their experience to enhance your bottom line.   They can help you interpret and understand your financials by examining your trends and ratios, such as accounts receivable turnover, inventory turnover, current ratio and debt coverage.  These analytical procedures can provide you with the information to help you drive your business forward.


We are not in normal times.  Banks and businesses continue to take a beating.  As a result, meetings with your bank may take some unexpected twists.  Don’t get caught off guard by some unusual requests or demands by your banker. To be forewarned is to be forearmed.  If you are ramping up your business following a trough, additional financing may be necessary to fund the growth in accounts receivable and inventory that accompanies an increase in revenues.  The bank, who made such past funding available to you, may not be there to bat for you this time.  One may have to turn to unconventional methods that your accountant can discuss.

Your year end planning meeting with your accountant should be one of the most important meetings of your year.  It sets the stage for overall tax minimization, while maximizing your future net income and cash flow.

Mark Bradstreet, CPA…this week’s author

As always, give us a call if you have any questions.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Financial Statements – How They Can Help | Tax Tip of the Week | No. 62 October 13, 2010

Posted by bradstreetblogger in : Business consulting, Business Consulting, Tax Tip , 1 comment so far

Tax Tip of the Week | October 13, 2010 | No. 62
Financial Statements – How They Can Help

Analyzing Your Financial Statements
How financial statements can help grow your business.
You are working hard, very hard.  In fact, you have never worked so hard in your life.  Your employees are also working hard.   Therefore, your business must be doing, amazingly well.  Right?  BUT…your bank account is nearly empty, your desk drawer is full of checks that you can’t mail, and your line of credit is maxed.  So, what is wrong – where is all the cash going?  Often, the mystery may be explained by analyzing your financial statements.
You will want to use at least the following reports:

(1)  The Balance Sheet – this is a record of your business’s assets, liabilities, and equity as of a certain moment in time or a snapshot.
(2)  The Profit and Loss Statement or aka the Income Statement – this is a recap of your business’s sales, expenses, and net profit (or loss) over a specific period of time.
(3)  The Cash Flow Statement – this will show a recap of the actual increases and decreases of cash coming into and out of your checking account.

Analytical Analysis

Use your financial statements to compute your ratios or metrics.  Learn which ratios are typically used by your industry.  Compare your results to these ratios.  Some of these ratios may include – aging of accounts receivable and accounts payable, inventory turnover, gross profit margins and a percentage of net income to sales – just to name a few.   All of these and more will help you provide a scorecard on the health of your business and explain what is going on behind the scenes.  For example, is your cash funding higher accounts receivables and higher inventory levels because of double digit growth in your sales?  Or, is your cash funding an operating loss because your sales are not high enough to cover your overhead? Your financial statements will also show you why your checkbook balance has little value in determining your profits.

Flash Reports

In addition to using monthly financial statements many companies will also use the underlying data for them to create daily or weekly flash reports.  One rule for flash reports is they should not exceed one page – keep them short.  They typically include the information necessary to drive the business forward to meet your strategic plan.  For example, they may show the sales or parts produced for the preceding day as compared to a predetermined target in an effort to change direction and methodology as needed on a very short notice.

Side note:  Timely (within 10 days following month end) and accurate financial statements that use the accrual method of accounting (i.e. where accounts receivable, inventory, accounts payable and various accrued liabilities are recorded) is crucial.  One cannot expect to make great decisions from poor information or information that is outdated.   And, don’t forget the IRS expects accurate reporting as well.

This week’s author: Mark Bradstreet, CPA

Rick Prewitt – the guy behind TTW

…until next week.