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Ohio Biennial Budget bill tax changes

Lots of exciting tax news for the great state of Ohio! On July 4, 2023 Governor DeWine signed the Ohio Biennial Budget bill, making many changes to state and local tax laws. While not an all-encompassing list, many of the wider-reaching and larger impact changes are discussed below.

Commercial Activity Tax

The existing CAT exemption will be increased from $150,000 in annual taxable gross receipts to $3 million for 2024. The exemption is further increased to $6 million for 2025 and later years. Businesses with over $150,000 in taxable receipts will be required to file CAT returns even with no balance due. Taxable receipts in excess of the exemption amounts will continue to be taxed at 0.26%.

Receipts for lost business relating to the February 3, 2023 East Palestine train derailment are not subject to CAT tax.

Pass-Through Entity Tax

In 2022, Ohio created a pass-through entity (PTE) tax, whereby businesses could elect to pay Ohio tax at the entity level and receive a federal tax deduction. Unlike many states, Ohio did not allow a credit for taxes paid to other states where the entity had paid a similar tax. This legislation now allows the investors to take a credit for taxes paid to other states for tax years beginning in 2022. Amended returns may be filed for 2022 if the owners wish to take advantage of this.

Any amount of credit received for PTE taxes from any state must be added back to Ohio income in order to avoid the taxpayer receiving a double benefit. This income is now considered business income subject to business income tax rates.

Municipal Income Tax

Late filing penalties that municipalities are allowed to charge have been reduced from $150 to $25. In addition, the taxpayer is allowed a one-time abatement of penalties.

This legislation also allows an extra month for filing city returns when a federal extension was granted. Previously, a calendar year taxpayer had until October 15 to file a city return that had been extended. The new extended due date is November 15.

Individuals under the age of 18 will no longer be subject to local income tax.

Stock options and nonqualified deferred compensation is exempted from municipal income tax levied by any municipality starting in 2024.

Perhaps the biggest change affecting business will be the ability to use an alternative apportionment method in determining the taxable income to each city when the business has remote or hybrid employees. The business will be allowed to elect to treat the wages, property, and receipts associated with these taxpayers as being apportioned to a location owned or controlled by the business or it’s customers. In effect, the business can elect to treat the employee as being onsite instead of remote for purposes of the net profits tax. However, employee withholding should still be remitted to the city where the work is being performed.

Personal Income Tax

The highest tax bracket has been reduced to 3.75% for 2023, and 3.5% for 2024 and later years. The top tax bracket will apply to taxable income in excess of $100,000 for 2024 ($115,300 for 2023). Taxation of business income in excess of the small business income deduction remains at 3%.

The legislation also created Home Ownership Savings Accounts. A taxpayer contributing to these accounts will be allowed a deduction up to $5,000 per year ($10,000 for married filing joint returns) for contributions to these accounts. The lifetime maximum deduction is $25,000 per taxpayer per account. In addition, the taxpayer can deduct the interest earned and any employer contributions to the accounts. The state will need to provide further guidance on these accounts before any contributions can be made. Any withdrawals from these accounts that aren’t used for a primary residence within Ohio will be taxable. Contributions can be made to accounts for descendants and siblings of the taxpayer, although federal gift tax issues should be considered in these cases.

An Ohio credit for contributions to a Scholarship Granting Organization of up to $750 per taxpayer had previously been allowed. With the new legislation, taxpayers now have until the due date of their tax return to make these contributions for the tax year.

Another change to prior law relates to tuition payments made to non-chartered, non-public schools. The maximum credit is increased from $500 to $1,000 for taxpayers with total income below $50,000, and from $1,000 to $1,500 for taxpayers with income of $50,000 and above. There had previously been an income limit of $100,000 applied to this credit, but that has been removed.

Government and railroad company payments relating to the February 3, 2023 train derailments will also be exempt from Ohio tax. This is true for both business and individual income.

One important non-tax item relates to the expansion of the EdChoice Scholarship program. Individuals will be eligible for a scholarship relating to tuition paid for K-12 education to a private school that meets the Ohio requirements. Previously, there had been a limit on eligibility based on the parent’s income level. Under the new law, all individuals can take advantage of this. There is a reduction of the scholarship amount for households with income in excess of 450% of the federal poverty level, but there is not a total phaseout of the benefit for higher income taxpayers.

Other items

There have also been changes and enhancements made to various tax credits for items such as research and development, low income housing, job creation and retention, and film and theater productions along with related capital improvements. Various other changes have been made in the sales and use tax and property tax areas as well.

If you would like to learn how any of these items might impact you or your business, a Cassady Schiller team member will be happy to discuss your specific situation. If you already have a Cassady Schiller contact, feel free to reach out to them; if not, call us at (513) 483-6699 and we can get you in touch with someone that can help out.


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