While this legislation is awaiting Ohio Governor Mike DeWine’s signature, the “emergency” aspect of this legislation means it will become effective immediately and enacted into law upon the Governor’s signature.
Business Provisions
The allowance of a 30-year depreciation period for certain residential rental property
The temporary allowance of a full deduction for business meals (generally, business meals are only 50% deductible)
A clarification of the tax treatment of Paycheck Protection Program loan forgiveness, including a clarification that expenses paid with covered loans can be deductible (for both “first draw” and “second draw” loans)
An extension of the payment deadline for certain deferred payroll taxes (including certain self-employment taxes)
The extension of the work opportunity tax credit (Ohio allows a deduction for employee wages that could not be deducted from the business owners’ FAGI due to the work opportunity credit)
The extension of an exclusion for certain employer payments of student loans
An extension of the limitation on excess business losses for noncorporate taxpayers
An exclusion from gross income for Restaurant Revitalization Fund (RRF) grants and Targeted Economic Injury Disaster Loan (EIDL) advances
Pass-Through Entity Withholding Tax
Under continuing law, the Ohio income tax applies to income received by an owner or investor in a pass-through entity (PTE) from the PTE’s business activities in the state. (Passthrough entities include S corporations, partnerships, and limited liability companies treated for federal income tax purposes like partnerships.) Under current law, in order to ensure collection of the tax from nonresident individuals and entities – which, aside from their ownership of the PTE, would not be required to file an individual tax return – a PTE is required to withhold the income tax due from its nonresident investors. This “withholding tax” is imposed directly on the PTE, even though the underlying tax liability belongs to the investors.
The bill sets the rates at which PTEs remit taxes on nonresident investor income equal to the 3% income tax rate that applies to taxable business income, effectively reducing the PTE withholding rates from 5% to 3% for individual investors and from 8.5% to 3% for nonindividual investors. The bill does not change an existing alternative means for a PTE to report and pay income taxes owed by its noncorporate investors: a PTE may file a composite return (Form 4708) covering its investors and pay tax for them at the highest of the graduated tax rates for nonbusiness income (4.797% currently).
The rate changes apply to a PTE’s taxable years beginning on or after January 1, 2023.
Commercial Activity Tax (CAT) Provisions
The bill exempts “second draw” paycheck protection program (PPP) loan amounts forgiven under the CAA 2021 from the commercial activity tax (CAT). A similar exemption already exists for “first draw” PPP loan amounts forgiven under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under continuing law, similar to federal income tax law, forgiven debt is generally considered to be taxable gross receipts for purposes of the CAT.
Individual Provisions
A temporary increase in the amount of the child and dependent care credit (Ohio allows a piggy-back credit for certain taxpayers that receive the federal child and dependent care credit.)
The extension of an exclusion from gross income for the discharge of indebtedness of a qualified principal residence
A temporary exclusion from gross income for the discharge of student loan indebtedness
A temporary exclusion from gross income for the first $10,200 received in unemployment benefits for taxpayers with $150,000 or less in FAGI (or $300,000 for joint filers)
An extension of the temporary allowance of a deduction for charitable contributions by nonitemizers
A clarification that the educator expense tax deduction includes expenses for personal protective equipment and other supplies related to the prevention of the spread of COVID-19
An exclusion from gross income for emergency financial aid grants
The transition from a deduction for qualified tuition and related expenses to an increased phase-out threshold of the Lifetime Learning Credit
Temporary special rules for health and dependent care flexible spending arrangements
The bill also allows individuals to elect to have state income tax withheld from their unemployment benefits. Currently, individuals may request, at the time they apply for benefits, that the Department of Job and Family Services (JFS) withhold federal income tax on their benefits. However, current law does not allow such a withholding request for state income tax, though federal law authorizes states to do so, provided the withholding mechanism is approved by the U.S. Secretary of Labor. Under the bill, the Director of JFS, in consultation with the Tax Commissioner, prescribes the rate or rates at which state income tax will be withheld from unemployment benefits. Federal income taxes are withheld at a flat 10% rate.
Tax Return Filing Deadline
While not contained within Ohio Senate Bill 18, the Ohio Department of Taxation has announced the state will follow the federal government and IRS in extending the deadline to file and pay Ohio individual income and school district income taxes for tax year 2020.
The new deadline is May 17, an extension of approximately one month from the original deadline of April 15.
As with the IRS extension, Ohio will be waiving penalty on tax due payments for tax year 2020 made during the extension. Also, as part of legislation passed addressing the continuing emergency, there will be no interest charges on payments made during the extension.
IMPORTANT NOTE: The first quarter estimated income tax payment for tax year 2021 is not impacted by this extension and must still be made by April 15.
At Cassady Schiller, we are prepared to help you understand how these provisions can apply to your specific situation. Accordingly, please reach out to us to see how we can help you take full advantage of these new provisions.