On June 30, 2025, Governor DeWine signed a new biennial operating budget, which includes a sweeping overhaul of the state’s individual income tax. The biggest change is Ohio’s move to a flat income tax rate, which will impact many taxpayers but will not directly affect small businesses in the state.
Transition to a Flat Tax Rate
Starting in 2025, Ohio will phase in a flat tax rate for non-business income, consolidating the state’s current graduated income tax brackets into one flat rate of 2.75%. The new tax rate is structured as follows:
- Tax Year 2025: The top marginal rate will drop to 3.125%.
- Tax Year 2026: The full 2.75% flat rate will take effect.
This change is designed to reduce the overall tax burden, especially for higher-income earners. In fact, this reduction is expected to save Ohio taxpayers over $1 billion in the next two years.
Updates to Employer Withholding Tables
As the state implements this new flat tax rate, Ohio will also update its employer withholding tables. This means that employees could see a modest increase in their take-home pay throughout the year, before filing their tax returns.
Changes to Tax Credits and Exemptions
Along with the flat tax rate, Ohio is making changes to eligibility for tax credits and exemptions. In 2025, the state will limit eligibility for the joint filing credit and personal and dependent exemptions to taxpayers with a modified adjusted gross income (MAGI) of $750,000 or less. In 2026, this income cap will be reduced further to $500,000 MAGI, which means fewer people will be eligible for these benefits under the new law.
While these changes are significant, they will not affect the small business deduction.
How Will the Tax Changes Impact Small Businesses?
One of the most important aspects of the new tax law for Ohio small businesses is that these changes will not directly affect the small business deduction. Ohio entrepreneurs can breathe easy knowing that the state’s tax code overhaul will not impact their ability to take advantage of this critical deduction.
This deduction, along with other provisions from federal tax reforms, continues to be a crucial element for small and midsize businesses in Ohio. In fact, recent federal legislation signed into law by President Trump in 2025 ensures that tax provisions for small businesses remain intact. Notably, the Qualified Business Income (QBI) deduction under Section 199A is permanent, and its rate is set to increase from 20% to 23% in 2026. This applies to most small businesses, including service businesses, allowing them to continue taking advantage of significant tax savings.
If you’re wondering how these recent federal changes complement Ohio’s tax reforms, this legal guide from Gertsburg Licata offers an excellent breakdown of the 2025 Trump Tax Reform Bill and its implications for Ohio entrepreneurs.
For Ohio’s small businesses, this means the state’s move to a flat tax will not alter their existing tax situation in terms of deductions. In other words, business owners can continue to deduct up to 20-23% of their qualified business income without facing any reductions due to Ohio’s changes.
What Should Small Business Owners Do Next?
Although Ohio’s tax changes won’t impact the small business deduction directly, now is still a great time for business owners to review their tax strategies and ensure they’re maximizing their savings. With changes coming to both the state and federal tax landscapes, proactive planning is essential.
Here are a few steps small business owners can take:
- Review Your Entity Structure
With the federal corporate tax rate remaining at 21% and the permanent QBI deduction, it’s important to revisit your business structure. Whether you’re a sole proprietorship, LLC, or S corporation, consider how your structure impacts your tax obligations and whether any changes could be beneficial. - Prepare for Bonus Depreciation Changes
As of January 2025, businesses can once again fully expense qualifying equipment purchases under bonus depreciation. If your business is planning any major capital expenditures in the near future, this could significantly reduce your tax liability. - Evaluate the Impact of Tax Credits
While Ohio’s changes won’t directly impact small businesses, it’s still important to monitor changes to federal tax credits, such as those for health insurance premiums, which remain in place for small businesses. Be sure to explore any available credits that could lower your tax burden. - Plan for Increased IRS Enforcement
The new federal tax law also increases IRS funding, which means heightened scrutiny on tax deductions, particularly for pass-through entities. Make sure your documentation is thorough and that you’re in compliance with the updated rules to avoid any issues during an audit.
How Can Harper & Co CPAs Plus Help?
Whether it’s reviewing the impact on your projected tax liability for 2025 or determining adjustments to withholding or estimated tax payments, we are here to support you. Our team of experts can help you understand how Ohio’s tax reforms will affect your business, guide you through any necessary adjustments, and ensure that you’re making the most of available deductions.
We’re here to help you stay ahead of the curve, providing proactive planning and expert advice every step of the way.
Ready to Maximize Your Savings?
Ohio’s transition to a flat income tax rate represents a significant shift in the state’s tax structure, offering potential savings for higher-income earners. While changes to tax credits and exemptions may impact some taxpayers, small businesses in Ohio can rest assured that the small business deduction remains unaffected.With careful planning and the right guidance, small business owners can continue to maximize their tax benefits in 2025 and beyond. Reach out to Harper & Co CPAs Plus today to schedule a consultation and start preparing for the tax changes ahead.
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