Ohio brings back business income deduction for attorneys and lobbyists

Nov 20, 2019
Nov 20, 2019
0 min. read
Income & franchise tax State & local tax

On Nov. 6, 2019, Ohio Gov. Mike Dewine signed into law Senate Bill 26, repealing several provisions from the fiscal year 2020-21 biennial budget enacted through House Bill 166. Most notably, Senate Bill 26 removes provisions that prohibited certain attorneys and lobbyists from claiming a Business Income Deduction (“BID”).

Recall that House Bill 166 enacted numerous tax provisions with far-reaching impacts. While the bill maintained both the BID on the first $250,000 of qualified income and a favorable 3% tax rate upon business income above that amount, the law sought to exclude the conduct of lawyers and lobbyists from the definition of “eligible business income.”  Under the budget bill, and originally commencing for tax years on or after Jan. 1, 2020, Ohio revised the BID to disqualify the income of owners of a firm performing one or both of the following activities:

  • Legal services provided by an active attorney admitted to the practice of law in [Ohio] or by an attorney registered for corporate counsel status, and/or
  • Executive agency lobbying activity, retirement system lobbying activities, or other performance wherein the advocate must register with the joint legislative ethics committee under Ohio law

Effectively, the budget bill established exclusions for the activities of attorneys and lobbyists. Particularly, the definition of “legal services” created uncertainty regarding whether the exclusion would apply to any organization utilizing the services of an attorney – the presence of in-house counsel, for example, may have served to disqualify the business’ owners from calming the BID or using the preferential tax rate on business income.

Additionally, absent disclosure of the taxpayer’s occupation upon filing Form IT-1040, the Ohio Department Of Taxation could not easily identify ineligible BID claims. Investigating each IT-1040 filing to locate income earned by a lobbyist or attorney would have created a substantial administrative burden for the department. There was concern that taxpayers ineligible for the deduction may creatively describe their occupation to avoid key terms (e.g. attorney, lobbyist) and circumvent scrutiny during the initial return scanning.

Furthermore, the elimination of the deduction for Ohio lawyers and lobbyists was drafted such that the language could be interpreted to allow non-Ohio residents, approved to practice or defend a motion in Ohio, to remain eligible to claim the BID. This potentially inequitable treatment – an Ohio licensed attorney or Ohio registered lobbyist could pay a higher rate of tax than an out-of-state professional practicing in the state – could result in discriminatory application against Ohio businesses. Thus, constituents of these industries possessed arguments against the constitutionality of the new exclusion.

Finally, Senate Bill 26 mandates taxpayers supply a valid NAICS code to assist the department in gathering detail and identifying BID usage by industry. The Ohio Legislature may seek to revisit potential BID exclusions to achieve their desired outcome or adjust the benefit’s allocation if the department finds that attorneys, lobbyists, or other industries represent a substantial portion of BID claims.

For more information on other state tax changes enacted through House Bill 166, please read our article titled "Ohio enacts fiscal year 2020-21 budget; adopts Wayfair threshold".

RSM contributors

  • Bill Vohsing
    Senior Director