July 12, 2023
Ohio budget legislation contains tax changes affecting businesses and individuals
On July 3, 2023, Governor Mike DeWine signed HB 33, Ohio's biennial budget legislation for the fiscal period July 1, 2023 through June 30, 2025. HB 33 makes several changes to Ohio's tax laws. This Alert discusses HB 33's more significant changes.
Computation of tax
The CAT was enacted in 2005 in conjunction with phasing out the corporation franchise tax and the business tangible personal property tax. Under current law, the first $1 million in Ohio gross receipts is excluded from the CAT base. Ohio gross receipts over $1 million are taxed at a 0.26% (.0026) rate. Taxpayers that have more than $150,000 but less than $1 million in Ohio gross receipts file an annual return and are subject to a $150 minimum tax.
HB 33 phases in an increase in the exclusion amount. For tax periods beginning in 2024, the exclusion amount increases to $3 million; for tax periods beginning in 2025, the exclusion amount increases to $6 million. Taxpayers that have more than $150,000 but less than $1 million in Ohio gross receipts will continue to be required to file annual returns, as Governor DeWine exercised a line-item veto of the provision that would have enabled small businesses to avoid annual filings if they fell within the modified exclusion amounts.
Research and development credit
Ohio Rev. Code Sec. 5751.51 allows a credit against the CAT for qualified research expenses incurred in Ohio. (Qualified research expenses are defined by reference to IRC Section 41.) For CAT combined or elective consolidated filers, the credit is shared among the members of the combined or consolidated group.
HB 33 departs from the shared credit approach and now requires the credit to be calculated on a member-by-member basis. Expenses of a member may be included in the aggregate credit only if that entity is a member of the group on December 31 of the year in which the qualified research expenses are incurred.
HB 33 also requires a taxpayer claiming the credit to maintain records used in calculating the credit for four years after the later of the return due date or the actual filing date. These records include the year for which the credit was claimed and the three preceding years, which are a part of the base calculation for the credit under existing law.
HB 33 authorizes the Ohio Department of Taxation (Department) to audit a representative sample of the taxpayer's qualified research expenses. The Department must make a good-faith effort to reach agreement with the taxpayer on a representative sample but may proceed with a sample if an agreement is not reached.
Exclusion for broadband funding
Effective for tax periods ending on or after HB 33's effective date (i.e., the 91st day after HB 33 has been filed with the Secretary of State), there is an exclusion for federal, state, or local funding received, or debt forgiven, to expand Internet broadband service in Ohio, which includes video service, voice-over-internet-protocol service, and internet protocol-enabled service.
Individual income and pass-through entity taxes
Individual income tax rate and bracket reductions
HB 33 phases in, over two years, individual income tax reductions taking Ohio from four brackets to two.
For 2023, the tax will be imposed as follows:
For tax year 2024, the tax will be imposed as follows:
Ohioans making less than $26,050 pay no income tax, as under current law.
Pass-through entity tax (PTET) and resident credit for taxes paid to other states
Under current law, Ohio residents receive a credit for taxes paid to other states, but the credit does not apply to entity-level taxes. For purposes of the credit, HB 33 provides that a resident taxpayer's Ohio adjusted gross income (AGI) that is subject to an income tax in another state includes: (1) an entity-level tax imposed on a PTE through a composite return covering all PTE owners; or (2) a PTET designed to avoid the $10,000 federal cap on deductions of state and local tax. However, the tax liability against which the credit applies is first reduced because it is computed with an Ohio AGI that has been reduced by Ohio's business income deduction.1
HB 33 also requires an individual investor in a PTE to add back to federal AGI any taxes deducted on the basis of a PTET designed to comply with the requirements of IRS Notice 2020-75. In addition, any taxes added back that are business income to the individual are eligible for Ohio's business income deduction.
The foregoing changes generally apply to tax years ending on or after January 1, 2023, but HB 33 allows taxpayers to elect to apply the changes to tax years ending on or after January 1, 2022, by filing an amended or original return for that year.
Individual income tax deductions
HB 33 authorizes the following individual income tax deductions:
A notable House proposal to couple Ohio to federal bonus depreciation was removed from the final version of HB 33.
Employer income tax withholding
HB 33 requires employers that withhold and remit employee income taxes on a partial weekly basis to file annual reconciliation returns starting in 2024 instead of quarterly. Also starting in 2024, the Tax Commissioner must reduce withholding rates so that the estimated reduction in withholding tax collections for that year equals the Budget Stabilization Fund (commonly known as the "Rainy Day Fund") investment earnings credit to the General Revenue Fund in the previous fiscal year. Changes in withholding rates will take effect on September 1 of each year.
Sales and use tax changes
Currently, Ohio holds a sales tax "holiday" during the first Friday and following weekend in August for certain school supplies and clothing. As passed by the Ohio legislation, HB 33 expanded the sales tax holiday in 2024 to a minimum of 14 days and included almost all goods under $500 during the first two weeks of August. Governor DeWine, however, exercised a line-item veto of the expanded holiday.
In his veto message, Governor DeWine said he supports the longer tax holiday but the Department, the director of the Office of Budget and Management, and the Ohio County Commissioners Association should determine the length of a sales tax holiday for 2024 as the cost to the state is unknown. If held, the holiday would exempt all items of tangible personal property priced at $500 or less other than motor vehicles, watercraft, alcohol, marijuana, and tobacco and vapor products.3
Starting on October 1, 2023, a sales tax exemption for baby products will be effective. The new exemption will include child diapers, creams and wipes, car seats, cribs, and strollers.
Ohio Rev. Code Sec. 5739.02(B) exempts from sales and use tax sales to the State of Ohio or any of its political subdivisions. HB 33 modifies the exemption by adding a reference to construction materials and services sold or rented to government entities for the purposes of temporary traffic control or drainage. The provision codifies the Ohio Supreme Court's decision in Karvo Paving Co. v. Testa, 2019-Ohio-3974.
Financial institutions tax
Under current law, financial institutions tax applies to financial institutions, including all entities that are reported on the institution's federal regulatory FR Y-9 or call report. HB 33 clarifies that a financial institution includes all of the entities consolidated, rather than included, in the institution's report. For a holding company that is not required to file a FR Y-9 under federal law, the legislation clarifies that the financial institution includes all of the entities that would be included in statement FR Y-9 if the company were required to file one. The uncodified language of HB 33 indicates that this provision is remedial and clarifying in nature and should be construed accordingly.
Sports gaming tax
Ohio's sports gaming tax applies to the "sports gaming receipts" of online and in-person sports gaming businesses, other than those that offer gaming through lottery terminals. The current rate is 10%. Beginning July 1, 2023, HB 33 increases the tax rate from 10% to 20%. Beginning in 2027, a portion of the promotional gaming credits wagered by patrons will be included in the tax base.
Corporation franchise tax amended filings
Ohio's franchise tax was fully repealed in 2013. If an adjustment to a corporation's federal tax return altered the franchise tax liability, however, an amended return was required. HB 33 removes the requirement to file an amended return, or request a refund of franchise tax, after December 31, 2023.
Administrative provisions — issuance of tax notices
For any tax notice currently required to be sent by certified mail, HB 33 allows the Department to alternatively send the notice by ordinary mail, email4 or text message. In addition, HB 33 allows electronic notices to be sent to a taxpayer's authorized representative and requires the Department to establish a system to issue notifications of tax assessments to taxpayers through secure electronic means.
Municipal income/net profits taxes
Net operating losses (NOLs)
From 2018-22, a business could deduct NOLs subject to a limitation of the lesser of 50% of the NOL or 50% of the income needed to reduce municipal taxable income to zero. HB 33 corrects an erroneous cross-reference in municipal tax law, clarifying that the 50% limitation ceased to apply in 2023. Municipalities are required to incorporate this change into their ordinances and apply it to tax years beginning in 2023.
Net profits apportionment
Currently, municipalities may impose a net profits tax on the net profit of businesses operating within their jurisdictions. A business apportions its net profits using an evenly weighted three-factor formula based on the business' payroll, sales, and property. For tax years ending on or after December 31, 2023, HB 33 allows a business with remote workers to elect to apportion payroll, property, and sales to a designated reporting location instead of the remote worker's location. This election is available to businesses that file net profits returns with municipalities or have elected to file their returns in the centralized filing system administered by the Department.
To use the modified provisions, a business must assign a remote employee to a designated reporting location, which is defined as a location owned or controlled by the employer or, in some circumstances, by a customer of the employer. A designated reporting location will be either (a) the location at which the employee works on a regular or periodic basis, (b) the location at which the employee's supervisor works on a regular or periodic basis if the employee has no regular or periodic work location, or (c) any reporting location designated by the employer, if neither the supervisor nor the employee has a regular or periodic work location, provided that the designation is made in good faith and is reflected in the employer's business records. A business can change a remote employee's designated reporting location at any time. If the business is a PTE, it may also designate a reporting location for any of its equity owners who work remotely.
The election must be filed with each municipality in which the business is required to file a net profits tax return or, if the business has elected into the centralized filing system, with the Department. The election can be made on the business' net profit return, a timely filed amended return, or a timely filed appeal of an assessment. Once the election is made, it applies to each municipality in which the business operates and to all future tax years, until revoked.
All other aspects of current law's apportionment rules will continue to apply to a business that makes the election. A business can still request to use an alternative apportionment method, although HB 33 provides that a business cannot be compelled to use an alternative method that would require it to file a return with a municipality solely because an employee is working remotely in the municipality.
Previously, a municipality, or the Department if a business elects into centralized filing, could impose a penalty of $25 for each month a taxpayer failed to file a required income/net profits tax or withholding return, up to $150 for each return. HB 33 reduces the penalty to a one-time $25 penalty and permits an abatement of penalty for a taxpayer's first failure to timely file. These changes apply to tax years ending on or after January 1, 2023.
Filing extensions for businesses
Under current law, the extended filing deadline for individuals and businesses is the same as the federal deadline. HB 33 provides an additional, automatic one-month filing extension for municipal net profits tax returns where a business entity has received a six-month federal extension, bringing the full duration of the extension to seven months beginning in tax years ending on or after January 1, 2023.
Prohibited notices and inquiries on extended returns
HB 33 prohibits a municipal tax administrator or the Department from sending any inquiry or notice to a taxpayer with an extension in place for its municipal return until after the taxpayer either files the return or the extended due date passes. Municipalities that send a prohibited inquiry or notice must reimburse the taxpayer for any reasonable costs incurred in responding to it, up to $150. These limitations do not apply if the municipality or the Department has actual knowledge that the taxpayer did not actually file for a federal or municipal income tax extension. The law's new limitations apply to tax years ending on or after January 1, 2023.
With the increased gross receipts exclusion amounts, HB 33 enacts the first major restructuring of the CAT since its adoption in 2005. Taxpayers engaged in research and development in Ohio will need to consider the changes to the CAT research and development credit. The changes to the resident credit will also be welcomed by individuals who invest in PTEs that may make "SALT deduction cap workaround" elections in other states. Corporations considering amending franchise tax returns to seek a refund should be cognizant of the December 31, 2023 deadline, after which refund claims will not be allowed. Finally, businesses with remote workers should consider the ability to elect to apportion net profits based on a reporting location.
Published by NTD’s Tax Technical Knowledge Services group; Maureen Sanelli, legal editor
1 Ohio allows a business income deduction for up to the first $125,000 in business income for spouses filing separate returns ($250,000 for married filing jointly). Business income exceeding that amount is subject to a flat 3% tax rate.
2 Amounts withdrawn from such an account but not used to purchase the account holder's primary residence must be added back to the owner's taxable income.
3 Ohio is a full member of the Streamlined Sales and Use Tax Agreement (SSUTA). The SSUTA allows for sales tax holidays for specific, defined items and contemplates Ohio's current "back-to-school" holiday. HB 33 requires the Department to coordinate with the SSUTA's governing body to pursue means as to how Ohio can comply with the SSUTA.
4 Under current law, a taxpayer has to consent to receive notices electronically.