On July 3, Ohio Governor Mike DeWine signed the Ohio Biennial Budget Bill (H.B. 33 or the Bill) into law, enacting a number of significant personal and business tax changes. Some notable provisions include:
PERSONAL INCOME TAX
Rate Reduction: One of the most important stipulations is the continued reduction of individual income tax rates, reducing the rate on non-business income to two brackets, as follows:
| 2023 Incom Brackets | 2023 Marginal Tax Rate | 2024 Income Brackets | 2024 Marginal Tax Rate |
|---|---|---|---|
| Above $26,500 – $100,000 | 2.750% | Above $26,500 – $100,000 | 2.750% |
| Above $100,000 – $115,300 | 3.688% | Above $100,000 | 3.500% |
| Above $115,300 | 3.750% |
This provision furthers Ohio’s goal of aligning its tax rates and brackets to allow the state to become more competitive. Coupled with the taxation of business income at 3% for amounts over $125,000 for single filers/$250,000 for joint filers, Ohio has made significant strides toward that objective.
Expansion of Resident Credit for Pass-Through Entity Owners: Starting with taxable years beginning on or after January 1, 2023, the Bill expands the Ohio resident credit to taxes paid by a pass-through entity (PTE) to other states and the District of Columbia either on a composite return or pursuant to a state pass-through entity election. To qualify, owners must add back to their Ohio adjusted gross income the amount of non-Ohio state and local taxes paid by the PTE that were deducted for federal tax purposes. Although the provision applies to taxable years beginning on or after January 1, 2023, taxpayers may elect to apply the provision to their 2022 tax return, either on their original Ohio return or an amended return.
This change is notable, as it allows Ohio residents to take advantage of the SALT cap limit workaround enacted by many states.
Donation Timing for Scholarship Granting Organizations: A current program grants any single taxpayer who contributes up to $750 ($1,500 for joint filers) during the taxable year to a qualifying scholarship granting organization (SGO) an equivalent income tax credit. H.B. 33 provides that a taxpayer may elect to claim an income tax credit for a taxable year for any contribution made to an SGO until the due date of the Ohio tax return for such taxable year (generally the following April 15). This change will not accelerate the deductibility of the contribution for federal income tax purposes; a taxpayer who itemizes for federal tax purposes will only be able to deduct the contribution in the year the contribution was actually made to the SGO.
SALES & USE TAX
Sales Tax Holiday Expansion: While the length of the sales tax holiday is still being determined – Governor DeWine vetoed the requirement that the holiday be 14 days – the expanded sales tax holiday will apply to purchases of any item of tangible personal property with a purchase price of $500 or less with exceptions for motor vehicles, titled watercraft and outboard motors, alcohol, tobacco, vapor products or any products containing marijuana.
Sales or Rental of Construction Material and Services for Traffic Control and Drainage Improvement to Government Agencies: The provision codifies the holding in Karvo Paving Co. v. Testa, 219 Ohio 3974. It should be noted that the language applying these changes to prior periods was not codified. As a result, taxpayers who paid tax or were assessed in prior periods may still be forced to litigate the position.
COMMERCIAL ACTIVITY TAX (CAT)
CAT Exclusion Increased: The Bill provides that the first $3 million of a business’ Ohio taxable gross receipts are excluded from the CAT calculation for calendar year 2024, increasing to $6 million in 2025 and after. The exclusion is no longer phased out, allowing taxpayers of all sizes to benefit. This expansion is expected to eliminate CAT liability for nearly 85% of previous CAT filers. Despite the increase of the exclusion threshold, taxpayers below the threshold must still file CAT returns.
Minimum Tax Eliminated: The Bill eliminates the CAT’s minimum tax.
Calendar Year Filings Eliminated: The annual CAT return, which is usually due May 10 of each year for calendar year taxpayers (those with less than $1 million of taxable gross receipts), has been eliminated.
Research & Development Credit Modifications: The Bill makes changes to the Qualified Research Expenditure (QRE) Credit, including:
- Combined or consolidated elected taxpayer groups (or a financial institution group under the Financial Institution Tax) must now calculate the credit on a member-by-member basis. The expenses of an individual member may be included in the aggregate credit only if the entity is a member of the group on December 31 of the year in which qualified expenses incur.
- Records requirement – taxpayers are now required to retain records supporting QREs used in calculating the credit for four years after the later of the return due date or actual filing date. This includes records for the year in which the credit was claimed and the three previous years (which are part of the base calculation of the credit).
- Ohio Department of Taxation (ODT) QRE sampling – the ODT may now review a representative sample of the QREs to verify the credit was calculated correctly.
MUNICIPAL INCOME TAX
Alternate Apportionment for Remote Workers: Businesses with remote employees will be permitted to choose an alternative apportionment formula for tax years ending after 2023. Instead of using the employee’s remote work location, the employer may designate a “reporting location,” which is a location owned or controlled by the employer or the employer’s customer. Under the election, the employer may situs property, payroll and sales activities of a qualifying remote employee or owner to the qualifying reporting location rather than the individual’s qualifying remote work location.
It’s important to note that this provision applies to the net profits tax and does not impact the employer’s responsibility to withhold income taxes on the wages of remote employees at their actual work location (i.e., remote location).
Late Filing Penalties Eliminated for First Time Offenders: Beginning with taxable years ending on or after January 1, 2023, municipalities will no longer be permitted to impose a late filing penalty of $25 per month, up to $150, for a first-time offense.
OUR THOUGHTS ON
The Bill contains numerous provisions that will benefit both individuals and businesses, furthering Ohio’s goal of creating a competitive and taxpayer-friendly environment.
From an individual income tax perspective, the expansion of the resident credit to included taxes paid to other states at the entity level, whether through a composite filing or under a pass-through entity election, will allow Ohio taxpayers to fully enjoy the benefit of the SALT cap workarounds enacted recently by many states. Taxpayers who did not participate in PTE elections in other states or were negatively impacted by the lack of resident credit for elections made should consider making the elections going forward or adjust their 2022 filing position to fully enjoy the new benefit.
On another front, with the significant increase to the CAT exclusion and elimination of the minimum tax, a substantial number of businesses will no longer be subject to a CAT liability. It’s important to note, however, taxpayers below the CAT threshold are still required to file returns, putting them at the disadvantage of having to expend effort or dollars to prepare returns to report no liability.
The Schneider Downs State and Local Tax practice is well equipped to help your business navigate these Ohio changes. If you have questions, please direct inquiries to Stephen Worth, State & Local Tax Practice Leader, at [email protected].
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