OHIO LEGISLATIVE SERVICE COMMISSION
Office of Research Legislative Budget
www.lsc.ohio.gov and Drafting Office
H.B. 138 Bill Analysis
135th General Assembly
Click here for H.B. 138’s Fiscal Note
Version: As Introduced
Primary Sponsors: Reps. King and T. Young
Effective date:
Mackenzie Damon, Attorney
SUMMARY
 Classifies guaranteed payments paid to a pass-through entity (PTE) investor, regardless
of their ownership interest, as “business income” and therefore eligible for the business
income deduction and flat income tax rate.
DETAILED ANALYSIS
Taxation of guaranteed payments
The bill modifies the income tax treatment of guaranteed payments made to an investor
in a pass-through entity (PTE), such as an LLC or partnership, for services rendered to the LLC.
Guaranteed payments are payments made to an investor that, like a salary, are not based on
the PTE’s profits. Since the investor is not an employee of the PTE, the payments are considered
self-employment income for federal tax purposes.
The bill removes a limitation on when guaranteed payments are considered “business
income” and, therefore, are eligible for Ohio’s business income tax deduction and flat tax.
Under continuing law, individuals with business income may deduct the first $250,000 of such
income on their Ohio tax return. Income above that amount is taxed at a flat rate of 3%.
Under current law, any compensation paid to a PTE investor is considered business
income only if the investor owns at least a 20% interest in the business. The bill removes this
ownership limitation with respect to guaranteed payments, provided the payment is actually
reported as federal self-employment income. Consequently, any reported guaranteed
payments made to an investor, regardless of their ownership interest, will qualify for the
business income deduction and flat tax.1
1 R.C. 5747.01(B).
March 30, 2023
Office of Research and Drafting LSC Legislative Budget Office
Effect on PTE withholding tax
Under continuing law, PTEs with nonresident investors are required to withhold income
taxes on behalf of those investors, including on certain guaranteed payments made to such
investors. The bill does not change current law as it applies to this withholding tax. Under the
bill, as under current law, a PTE is only required to withhold taxes on guaranteed payments
made to an investor who owns at least a 20% interest in the PTE. Taxes will not be withheld on
guaranteed payments made to investors with a lower ownership percentage.2
Effective date
The bill states that the change in the tax treatment of guaranteed payments is intended
to clarify existing law, and that it applies to any petition for reassessment, appeal, application
for refund, or audit that is pending on the bill’s 90-day effective date.3
HISTORY
Action Date
Introduced 03-28-23
ANHB0138IN-135/ts
2 R.C. 5733.40, not in the bill.
3 Section 3.
P a g e |2 H.B. 138
As Introduced