On Thursday, July 1, 2021, Governor Mike DeWine signed Am. Sub. House Bill 110 (HB 110) into law. Namely, the budget:
- Provides 2021 municipal income tax guidance to employers and remote workers;
- Exempts employment labor services and employment placement services from sales tax;
- Reduces personal income tax rates (Ohio top rate is now 3.99% versus 4.797%);
- Made no significant changes to the business income deduction, which offers many business owners a lower 3% tax rate on qualifying income; and
- Streamlined several incentive programs and extended or created several new incentive programs for taxpayers retaining or creating Ohio jobs.
1. Return to Work - Municipal Withholding Extension and Changes
As many employers are aware, Ohio’s emergency order ended June 18, 2021, and with that the withholding modification provided in the prior year’s HB 197 expires 30 days after, or July 18, 2021. To assist employers as they evaluate their post-COVID return to work procedures, HB 110 allows, but does not require, employers to extend the HB 197 withholding procedures through December 31, 2021. HB 197 passed last year required employers to continue to withhold at an employee’s principal place of work prior to the pandemic instead of the municipality where the employee was temporarily working. While this COVID modification was very beneficial to businesses experiencing a sudden shift to temporary worksites, effective January 1, 2022, employers will be required to revert back to the pre-COVID 20-day rule.
As a result, employers should carefully consider the state and local tax, administrative and legal costs of any proposed remote work plans.
While many businesses benefited from COVID withholding provisions, some employees were negatively impacted when transitioning their work duties to lower or no tax municipalities. HB 110 will allow employees to file refund claims with their principal place of work city for days they did not work within the withholding city during 2021 only.
Some legislators also wanted to extend the refund opportunity back to 2020, but ultimately decided to leave the 2020 employee municipal refund opportunity up to the courts. Several taxpayers have filed suit against Cleveland and Columbus, among other cities, to secure 2020 tax refunds for days that were not worked at their principal place of work due to Ohio’s stay-at-home order. It could take a year or more before a final decision is issued. As we wait for further 2020 guidance, employees may file protective refund claims if they believe a refund is due to the temporary municipal withholding provisions.
2. Significant Business Sales Tax Exemptions Repealed, Reinstated
Mark your calendars! Effective October 1, 2021, Ohio will repeal the sales and use tax on employment services and employment placement services. Ohio sales tax on temporary labor and headhunting services put Ohio employers at a disadvantage compared to their competitors in neighboring states that do not tax these services.
Ohio also reinstated the sales tax exemption on qualifying investments in metal bullion and coins, we believe effective for transactions occurring on or after October 1, 2021.
3. Impactful Individual Income Tax Reductions
Once again, Ohio will reduce the number of tax brackets and apply lower tax rates at each bracket. While most brackets see a 3% rate reduction, the most substantial reduction applies to taxpayers earning more than $110,650 with a rate reduction from 4.797% to the new 2021 top tax rate of 3.99%. Also, beginning in 2021 Ohio income tax is completely eliminated for those earning less than $25,000.
Comparison Between 2020/2021 Individual Tax Brackets
| 2020 Tax Rates |
|
| $0 - $22,150 |
0.000% |
| $21,151 - $44,250 |
2.850% |
| $44,251 - $88,450 |
3.326% |
| $88,451 - $110,650 |
3.802% |
| $110,651 - $221,300 |
4.413% |
| $221,301 and above |
4.797% |
|
| 2021 Tax Rates |
|
| $0 - $25,000 |
0.000% |
| $25,000 - $44,250 |
2.765% |
| $44,251 - $88,450 |
3.226% |
| $88,451 - $110,650 |
3.688% |
| $110,651 and above |
3.990% |
|
>> Review historical tax brackets in Ohio dating back to taxable years beginning in 2005
4. Additional Individual Tax Changes
Ohio’s new budget includes several new deductions or credits available to Ohio taxpayers:
- Increases Opportunity Zone Investment Credits available to an individual from $1 million to $2 million during the new fiscal biennium
- Conforms Ohio to federal railroad retirement benefit exemption
- Creates a credit up to $250 on purchases of supplies by homeschoolers
- Permits up to a $750 annual credit on charitable contributions made to a nonprofit scholarship granting organization (SGO) for low-income primary and secondary school students (Ohio will post a list of qualifying SGOs once certified)
- Allows a nonrefundable income tax credit on private school tuition — $500/$1,000 credit for families with Federal Adjusted Gross Income (FAGI) less than $50,000/$100,000
- Revokes a production contractor’s eligibility for the motion picture tax credit
5. Income Tax Deductions on Qualifying Capital Gains
The good news is the new budget includes two capital gain carve outs for business owners; the bad news is that these deductions are not effective until tax year 2026. As such, these provisions will not assist taxpayers currently selling their business from facing a slew of audit notices when attempting to apply the Ohio business income deduction. Further, the past year tells us a lot could change between now and 2026.
Below is a summary of the two carve outs.
Capital Gains Originating from Sale of Business. Allows a capital gain deduction by taxpayers who materially participated in a business that was headquartered in Ohio for the five preceding years or made a venture capital investment of at least $1 million in a qualifying business.
- The capital gain deduction is equal to the lesser of the owner’s capital gain or 50% of the business' qualifying payroll after applying the taxpayer's proportionate ownership percentage. The deduction is calculated by an owner on an entity-by-entity basis.
Venture Capital Investments. Provides a capital gain deduction for all or a portion of capital gains received by investors on the sale of their equity interests (presently, does not appear to apply to asset sales) in certain Ohio-based "venture capital operating companies" (VCOCs) certified by the Director of Development.
- A VCOC is considered Ohio based when more than 50% of their full-time equivalent employees are residents of Ohio.
- To qualify for certification, a VCOC must manage or have capital commitments of at least $50 million in active assets, and Ohio residents must constitute at least two-thirds of its managing and general partners.
- Taxpayers can receive a 100% capital gain deduction for amounts received from a qualifying interest in an Ohio VCOC attributable to the company's investments in Ohio businesses. An investor can also receive a 50% capital gain deduction from a qualifying interest attributable to an Ohio VCOC’s investments in all other businesses.
6. Commercial Activity Tax (CAT) Updates
- BWC Dividends. Earlier this year Ohio specifically enacted SB 18 to exempt the 2020 and 2021 Bureau of Workers’ Compensation dividend refunds employers received from the Commercial Activity Tax (CAT). The new budget creates a permanent CAT exemption for BWC dividend refunds received by employers.
- CAT Minimum Tax. The new budget also stipulates taxpayers should calculate the annual minimum tax applicable to the first $1 million in taxable gross receipts based on the taxpayer’s taxable CAT gross receipts reported in the prior year, rather than the current calendar year.
7. Job Creation and Retention Tax Credit Updates
Job Creation Tax Credit (JCTC) Annual Reporting. Ohio’s new budget permits taxpayers to include work-from-home employees in its annual 2020 JCTC reporting of employment and payroll. Previously, Ohio only allowed JCTC recipients whose applications were approved after September 29, 2017, to include work-from-home employees.
Job Retention Tax Credit (JRTC) Updates. JRTC applications will now be prioritized if they meet the criteria outlined below.
- The applicant has not received a JRTC or JCTC for the same location within the preceding five years;
- The applicant is not currently receiving a JRTC or JCTC;
- The applicant's facility has been operating in Ohio for the preceding 10 years;
- The project will involve more than routine maintenance; and/or
- The applicant intends to use materials and equipment sourced from Ohio businesses in the project.
Other Opportunities to Consider
- Tax Increment Financing (TIF) and Downtown Redevelopment Districts (DRD). Subdivisions are permitted to use TIF or DRD payments for off-street parking facilities. The new budget also allows municipalities to designate the beginning date of a TIF exemption.
- Qualified Energy Projects Exemption. The deadline to apply for a property tax exemption for a qualifying project extended through 2024.
- Disability Housing Property Tax Exemption. There is no longer the requirement that the charitable organization owning property must receive funding from one or more county boards of developmental disabilities. The new budget also adds limitations on the exemption to the portion of the property used by residents who are eligible for Medicaid-funded services, as well as the common areas used by all residents.
- Transformational Mixed-Use Development (TMUD) Credit. The availability of project certifications is extended two additional years to June 30, 2025, and makes available a maximum annual credit allotment of $100 million for FY24 and FY25.
- Rural Business Growth Program. Credit funding increased by $45 million for this credit focused on business located in rural counties with populations less than 200,000, and the program’s eligibility and investment criteria is modified as well.
- Notice of Taxable Use. A new requirement is imposed on owners of tax-exempt real property to notify the county auditor if the property ceases to qualify for an exemption. A significant penalty is permitted when the owner fails to notify the auditor and can be as much as five years of tax before the applicable exemption.
Contact Hannah Prengler at hprengler@cohencpa.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.