The legislature’s work on the budget bill is finished, but the debate over their changes to the business income deduction (BID) is just beginning.
The House’s original version would have reduced the threshold to $100,000 and eliminated the 3% flat rate beginning in 2019. The Senate’s original version would have retained the $250,000 threshold and eliminated the 3% flat rate beginning in 2020.
The final version of House Bill 166 retained current law’s BID of up to $250,000 and the 3% flat tax rate on business income above that threshold for most taxpayers, but disallows the deduction and the 3% tax rate if the business income arises from either (1) the practice of law by an attorney or (2) lobbying by a person required to register with JLEC (i.e., legislative and executive agency lobbyists and retirement system lobbyists). The disallowance applies to taxable years beginning in 2020.
The Ohio Society of CPAs actively lobbied legislative leaders to keep the BID intact, and OSCPA also advised legislators not to adopt language modeled on the federal 199A deduction that would have negatively impacted a broad array of specified service trades and businesses (SSTBs) – including CPAs. Unfortunately, the language ultimately adopted vaguely defines “legal services,” which could apply to businesses beyond law firms that have an attorney on staff, or that have outside (of Ohio) corporate counsel registered with the Ohio Supreme Court.
In the past few weeks, the language seemingly has created more questions than answers. What is the impact on CPA firms if some CPAs are also licensed attorneys? Does the new law not prohibit the actual occupation but just the type of income generated? Would an accounting firm that employs Ohio licensed attorneys be excluded from the BID because the lawyer arguably provides legal services to the firm (i.e., his or her employer), consistent with the inclusion of registered corporate counsel?
The Ohio Department of Taxation is not expected to release guidance until the end of the year because the effective date is delayed to Jan. 1, 2020. Groups representing attorneys are prepared to file a lawsuit arguing possible violations of the Equal Protection Clause, First Amendment, and Commerce Clause. OSCPA and its tax experts are now evaluating the new law to see what, if any, changes are necessary.
The language in question:
(2) “Eligible business income” means business income excluding income from a trade or business that performs either or both of the following:
(a) Legal services provided by an active attorney admitted to the practice of law in this state or by an attorney registered for corporate counsel status under section 6 of rule VI of the Ohio supreme court rules for the government of the bar of Ohio;
(b) Executive agency lobbying activity, retirement system lobbying activity, or actively advocating by a person required to register with the joint legislative ethics committee under section 101.78, 101.92, or 121.62 of the Revised Code. Terms used in division (B)(2) of this section have the same meaning as in section 101.70, 101.92, or 121.60 of the Revised Code.