Ohio Tax Update: Ohio's Biennial Budget Bill Signed into Law

On July 4, 2023, Ohio Governor Mike DeWine signed the state’s biennial budget bill, Ohio Sub. House Bill 33 (HB 33) into law, which contains tax changes affecting (but not limited to) individual income tax, sales and use tax, commercial activity tax, financial institution tax. Below are a few highlights of the bill:

?Income Tax:

?Personal income tax rate reduction—two-year phase in: For tax years beginning in 2023, the number of tax brackets that impose tax on individuals' nonbusiness income is reduced from four to three. Under the new law, the first $26,050 of nonbusiness income is not subject to tax. The new tax rate on income greater than $26,050 up to $100,000 is 2.75%; the rate on income greater than $100,000 up to $115,300 is 3.688%; and the rate on income greater than $115,300 is 3.75%. The number of tax brackets is reduced by consolidating the two existing lowest tax brackets. For tax year 2024, the number of tax brackets is reduced from three to two by consolidating the top two brackets and reducing the rate for the combined new top bracket to 3.5%.

Pass-through entity (PTE) taxes—resident credit and addback: In 2022, Ohio passed legislation creating a workaround to the $10,000 state and local tax (SALT) deduction cap imposed by the Tax Cuts and Jobs Act of 2017 by enacting an elective entity-level tax on qualifying PTEs and authorizing a refundable income tax credit for owners of such entities equal to the owner's proportionate share of the entity-level tax paid. However, it did not authorize Ohio residents to take a credit for such PTE taxes paid to another state by an electing PTE in which the resident has an ownership interest.

Under the legislation, state and local PTE taxes paid on behalf of an owner are included in the calculation of the owner’s Ohio income tax resident credit. The owner is required to add back to the owner’s Ohio adjusted gross income such PTE taxes levied by another state or the District of Columbia that the owner deducts from federal adjusted gross income as a business expense. The amendments apply to taxable years ending on or after January 1, 2023. Taxpayers have the option to apply the amendments to taxable years ending on or after January 1, 2022, but before January 1, 2023, by filing an amended or original return.

Modified municipal income tax apportionment for remote employees: Under existing state law, municipal corporations are authorized to impose an income tax on the net profit of businesses operating within their boundaries. In Ohio, a business uses a 3-factor formula based on its property, payroll, and sales to determine the portion of the business’s total net profit that is taxable by a municipality. For taxable years ending on or after December 31, 2023, the legislation authorizes businesses to use a modified formula for net profits attributable to the activities of their employees or owners who work remotely.

Instead of apportioning the property used, payroll earned, or sales generated by a qualifying remote employee or owner to that individual’s remote work location, the employer may elect to apportion those amounts to a qualifying “reporting location” assigned by the employer to the employee or owner. It is a permanent or temporary location owned or controlled directly or indirectly by the business or by a customer or client of the business, where applicable.

The designated qualifying reporting location is an in-state location where the employee or owner performs services for the business on a regular or periodic basis. If no such reporting location exists, it will be designated where the employee or owner's supervisor regularly or periodically reports. If neither location exists, then any reporting location can be designated by the business, provided it is made in good faith and is recorded and maintained in the business’s records. The business can change the designated qualifying reporting location at any time.

This alternative is available both to businesses that file returns with municipal tax administrators and those that elect to file a single return covering all municipal corporations with the tax commissioner. After the business makes the initial election, the election applies to every municipal corporation in which it conducts business.

Municipal income tax exemption for minors: Beginning in 2024, municipal corporations must exempt the income of individuals under 18 years of age from municipal income taxation.

Municipal income tax technical amendment: An erroneous cross-reference in the municipal income tax law governing the net operating loss (NOL) deduction is corrected. From 2018-2022, a business could deduct 50% of its NOL from its taxable net profits. Beginning in 2023, the 50% deduction no longer applies, and a business may deduct the full amount of its NOL. Municipalities that levy an income tax must adopt an ordinance or resolution incorporating the correction and applying it to taxable years beginning on or after January 1, 2023.

Municipal income tax return one-month filing extension: Under continuing law, a taxpayer granted an automatic six-month extension for filing the federal income tax return will automatically receive an extension for the filing of a municipal income tax return. The extended due date for individuals is the 15th day of the 10th month after the last day of the taxable year to which the return relates. For tax returns required to be filed for taxable years ending on or after January 1, 2023, the legislation extends the due date for business entities by one month, i.e., the 15th day of the 11th month after the last day of the taxable year to which the return relates.

Municipal income tax related inquiries, notices, and penalties: If a taxpayer receives a filing extension for a municipal income tax return, a municipal tax administrator or the tax commissioner is prohibited from making inquiries or sending notices to the taxpayer until after the taxpayer files the return or after the extended due date to file passes, whichever occurs first. The taxpayer must be reimbursed by the municipal tax administrator for reasonable costs incurred (up to $150) in responding to any inquiries or notices.

A municipal corporation may impose a late filing penalty of $25 (previously, $25 per return for each month not filed, capped at $150), excluding taxpayers who are first time late filers. These taxpayers can receive a penalty abatement or refund once the return is filed.

These amendments apply to tax returns required to be filed for taxable years ending on or after January 1, 2023.

Municipal income tax rate decrease notification: Under existing law, a municipal corporation is required to notify the tax commissioner of an increase in the municipal corporation's income tax rate by January 31st each year. The legislation also requires such notification if there is a decrease in the rate.

Deduction and exclusion for East Palestine derailment payments: For tax years or tax periods beginning in 2023, taxpayers can deduct relief payments made to them by a government agency or any railroad company, including for lost business, due to the February 3, 2023, East Palestine train derailment. Additionally, a commercial activities tax (CAT) exclusion is authorized for receipts provided to a taxpayer by such entities to compensate for lost business resulting from the train derailment.

Employer withholding reconciliation: For filings and payments due on or after January 1, 2024, employers who withhold and remit employee income taxes on a partial weekly basis must file annual reconciliation returns. The quarterly withholding reconciliation return requirement was eliminated.

Tax-advantaged homeownership savings account: For tax years beginning in 2024, an income tax deduction is authorized for contributions to a homeownership savings account, which is a linked deposit savings account opened exclusively for the purpose of paying eligible home costs. Only the account owner or the owner’s parent, spouse, sibling, stepparent, or grandparent can take the deduction, which is limited to $10,000 annually per account for couples filing jointly and $5,000 annually per account for individuals, with a lifetime maximum of $25,000. Account owners may deduct the interest earned on the savings in their homeownership savings linked deposit accounts, including on any employer contributions to the account. Any withdrawn amounts that are not used to purchase a primary residence will be added to the account owner's taxable income.

Credit for donations to scholarship organizations: A taxpayer who makes a cash donation to a qualifying scholarship granting organization before the filing deadline for the taxpayer’s Ohio tax return, may elect to claim the credit based on that donation for the taxable year covered by the state return, but a credit may not be claimed also in the tax year that the donation is made, i.e., the credit cannot be claimed for two taxable years based on the same contribution.?

Nonchartered, nonpublic school tuition credit: The legislation modifies the nonrefundable credit that is allowed against the personal income tax for taxpayers with one or more dependents who attend a nonchartered nonpublic school by removing the eligibility requirement that the total federal adjusted gross income of the taxpayer and the taxpayer's spouse (if filing jointly) must be under $100,000. Taxpayers with income of $100,000 or more may qualify. Additionally, the value of the credit was increased from $500 to $1,000 for taxpayers with an annual federal adjusted gross income of less than $50,000 and from $1,000 to $1,500 for taxpayers with an annual federal adjusted gross income equal to or greater than $50,000.

Sales and use tax:

Baby products sales tax exemption: Beginning October 1, 2023, child diapers, creams and wipes, car seats, cribs, and strollers are exempt from the sales tax.

Commercial activity tax (CAT):

CAT exclusion: The legislation increases the CAT exclusion threshold for certain businesses. Under current law, businesses with less than $150,000 in annual gross receipts are excluded from paying the CAT. Under the legislation, taxable gross receipts of $3 million or less in 2024 and $6 million or less in 2025 are excluded from the CAT, so these “exclusion amounts” are not subject to the 0.26% CAT rate. Additionally, for taxpayers with less than $1 million in taxable gross receipts, the legislation eliminates the calendar year CAT filing requirement, and requires such taxpayers to file on a quarterly basis.

CAT exclusion for broadband funding: To provide or expand broadband service in Ohio, any federal, state, or local grants received, or debt forgiven are excluded from gross receipts for CAT purposes.

Heating companies exempt from excise tax are subject to the CAT: Heating companies are exempt from the annual public utilities excise tax, but instead are subject to the CAT. The legislation provides that a heating company that became exempt from the excise tax on May 1, 2023, will not be subject to the CAT until July 1, 2023, because that is the beginning of the next CAT quarterly period.

Consumer-grade fireworks fee exemption and exclusion: Beginning October 1, 2023, the 4% fee on the in-state retail sale of consumer-grade fireworks is exempt from sales and use tax if the fee is separately stated on the invoice or bill of sale, or similar document from the vendor to the consumer. Additionally, for tax periods ending 90-days after the effective date of the legislation, a business can exclude from its taxable gross receipts for purposes of the CAT any separately stated collections of the fee.

Corporation franchise tax amended filing requirement eliminated: The corporation franchise tax was phased out in 2010 for most businesses. Instead, most businesses are now subject to the CAT, which is imposed on gross receipts. Financial institutions continued to be subject to the corporation franchise tax through 2013. Beginning in 2014, financial institutions instead pay the financial institutions tax, which is based on total Ohio equity capital. Consequently, Ohio's corporation franchise tax has been entirely phased out.

The legislation provides that all amended corporation franchise tax reports due to a federal tax adjustment and applications for refund must be received by the Ohio Department of Taxation, i.e., postmarked, by December 31, 2023. All applications for refund received after that date will be denied and not subject to appeal. The Department will not issue any assessments related to an amended report if it is received after December 31, 2023.

Please contact Paul Valencic or your Maloney + Novotny LLC professional with any questions or concerns.