In the ever-evolving landscape of tax policy, changes at the federal level can have profound implications for businesses—especially those operating in Ohio. While state-specific incentives like those we covered in Part 2 are crucial, it’s essential to consider how federal tax policies interact with local initiatives and influence business investment decisions. In this third installment of our series, we’ll delve into key federal tax changes, how they impact businesses in Ohio, and strategies to stay ahead of the curve.
Federal Tax Rate Changes: What Ohio Businesses Need to Know
Federal tax rates have fluctuated significantly in recent years, with changes often aimed at stimulating economic growth, creating jobs, and encouraging investment. The Tax Cuts and Jobs Act (TCJA) of 2017 introduced major changes, including a lower corporate tax rate, but the ongoing political and economic landscape means that businesses must stay informed about potential tax rate shifts.
The Corporate Tax Rate:
- Under the TCJA, the corporate tax rate was permanently reduced from 35% to 21%.
- For Ohio businesses taxed as C corporations, this change meant a significant reduction in their federal tax liability, making investments and expansions more attractive.
Potential Future Changes:
- Though the 21% corporate tax rate has remained in place, future changes could bring adjustments—either increases or decreases—in corporate tax rates, depending on federal economic policies or shifts in political leadership.
Impact on Ohio Businesses:
For Ohio businesses, a potential increase in the federal tax rate could lead to higher costs, reducing cash flow available for reinvestment or expansion. However, companies that have benefited from the lower corporate tax rate can also plan ahead by taking advantage of lower current rates to expand operations or accelerate capital investments.
Changes to Pass-Through Entities and Impact on Small Ohio Businesses
Ohio is home to many small businesses, many of which operate as pass-through entities such as S-corporations, LLCs, and partnerships. The IRS does not tax these entities directly. Instead, the owners report the business’s income on their personal tax returns, potentially facing different tax liabilities.
The Qualified Business Income (QBI) Deduction:
- The TCJA introduced the QBI deduction, which allows owners of pass-through entities to deduct up to 20% of qualified business income. This deduction was designed to level the playing field between pass-through entities and corporations following the reduction of the corporate tax rate.
- The QBI deduction has been a critical advantage for small and medium-sized businesses in Ohio. As long as enterprises qualify, overall tax liabilities can be reduced significantly.
Challenges and Opportunities:
While the QBI deduction provides substantial savings, it is subject to several limitations and complex rules, particularly for service businesses or higher-income earners. Depending on their structure and industry, these regulations can impact Ohio’s small businesses differently.
Impact on Ohio Business Owners:
For small Ohio businesses, especially those in high-growth sectors, the QBI deduction has been an essential tool for improving profitability and fostering reinvestment in the company. However, any changes or restrictions to this deduction at the federal level could impact these businesses’ ability to reinvest profits into operations, expansion, or hiring.
Depreciation Rules: Section 179 and Bonus Depreciation
Depreciation allows businesses to recover the costs of capital investments over time, but how depreciation is treated in the tax code has changed considerably in recent years.
Section 179 Expensing:
- The Section 179 deduction allows businesses to immediately expense up to a certain amount of equipment and property purchases, instead of depreciating them over time. For 2025, this limit is expected to be $1,160,000, subject to phase-out thresholds.
Bonus Depreciation:
- Bonus depreciation, which was significantly expanded under the TCJA, allowed businesses to deduct 100% of the cost of eligible capital investments in the year the investment is made until the end of 2022. Beginning in 2023, the bonus depreciation rate is reduced 20% per year such that it will be fully phased out by the end of 2027, absent changes in the law before then
Impact on Ohio Businesses:
Ohio businesses that invest in new equipment, property, or vehicles can benefit from these accelerated depreciation rules. Immediate deductions for capital expenditures allow businesses to write off large purchases in the same year, freeing up cash for further investment.
For example, a manufacturing company in Ohio purchasing machinery or technology equipment can deduct 40% cost in 2025 under bonus depreciation, significantly improving cash flow and increasing reinvestment capacity. The remaining 60% is still depreciable over a longer period of time.
As noted, absent changes to depreciation rules at the federal level, the amount of bonus depreciation available decreases each year and it will be gone in a couple of years. Any reduction in bonus depreciation or Section 179 limits could result in Ohio businesses facing higher upfront costs for capital expenditures, making it harder to make significant investments.
Tax Credits and Deductions: Staying Competitive
Businesses in Ohio need to remain vigilant about tax credits and deductions available at the federal and state levels. Credits for research and development, energy efficiency, and training programs can help reduce tax liabilities and make investments more affordable.
Examples of Federal Credits and Deductions:
- R&D Tax Credit: Encourages innovation by providing tax credits for qualified research expenses.
- Work Opportunity Tax Credit (WOTC): Offers incentives for hiring individuals from certain targeted groups.
- Energy-Efficient Commercial Building Deduction: Allows deductions for energy-efficient improvements in commercial properties.
Federal tax changes significantly impact Ohio-based businesses, affecting everything from investment decisions to cash flow management. Ohio companies can strategically navigate these shifts and remain competitive by staying informed and proactive about changes in tax rates, deductions, and credits. In the final part of this series, we’ll explore how Ohio’s local tax policies—including municipal tax codes and property taxes—further shape investment opportunities. Stay tuned!
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