Ohio’s Biennial Budget Bill for Fiscal Years 2024-2025

Governor Mike DeWine signed Amended Substitute House Bill 33 (HB 33) into law earlier this month. The bill includes numerous pro-taxpayer changes, detailed below, for both Ohio businesses and their owners. Operating appropriations of the bill took effect July 4, 2023, while remaining provisions, unless specified otherwise in the bill, will take effect October 3, 2023.

Changes to Business Taxation in Ohio

Ohio Commercial Activity Tax (CAT)

Tiered Annual Minimum Tax (AMT) and Annual Returns
Both the tiered AMT and annual returns are ending: 

• The budget bill could excuse nearly 90% of taxpayers from future CAT liability. 
• In future years, Ohio will no longer impose a CAT annual minimum tax nor an annual return filing for those with under $1 million in gross receipts.
• Further, the CAT gross receipts exclusion will increase from $1 million to:
  • $3 million annually in 2024, and
  • $6 million annually in 2025.
• We do not recommend taxpayers rush to close their CAT accounts quite just yet. We anticipate the Ohio Tax Commissioner will issue further guidance on their interpretation of these provisions and the impact on CAT combined/consolidated reporting groups. 

Research & Development (R&D)

• The Ohio CAT R&D credit will now be calculated on a member-by-member basis for consolidated and combined groups; the credit will be allowed for members who were a part of the group on the last day of the year.

Exemptions
The following Ohio CAT exemptions have been granted:

• Gross receipts from government grants or debt forgiveness as they relate to broadband services. 
• 4% fireworks fee billed to a customer excluded from the retailer’s taxable gross receipts.

Municipal Income Tax in Ohio

Remote Worker Alternative Apportionment Election
An alternative apportionment election will be available to simplify business Ohio city apportionment in the post-Covid era. HB 33 allows businesses to elect an alternative apportionment method, which would permit a business to use the employer’s reporting city instead of the employee’s remote residence city. A reporting location is one that is owned or controlled by the employer. If the location is controlled by a customer, the business must be withholding for that employee at that location. 

• Although recent discussion and court cases have debated whether this election would be retroactive, it is not and therefore does not apply to prior tax years. Taxpayers should continue to report workplace wages for purposes of the net profit return until this election becomes active beginning in tax years ending on or after December 31, 2023.
• The bill does not change employer withholding rules; this is only an alternative apportionment election as it relates to a business’ net profit tax return.

Seven-Month Automatic Extension
A seven-month automatic extension will now be granted to businesses with a valid six-month federal extension on file. Beginning with tax years ending on or after January 1, 2023, businesses will now have an additional 30 days to file their municipal net profit income tax returns. 

Notices on Extended Returns
These can no longer be sent by Ohio cities. Therefore, if a return is extended the municipal corporation can be penalized (in the form of a reimbursement to the taxpayer for up to $150 for the cost of responding to the notice) for sending the taxpayer a notice for that tax year before the extended return would have been due.

Late Filing Penalty for First Time Offenders
These have been eliminated. If a taxpayer has been otherwise compliant, they no longer must pay the $25/month penalty for tax years ending on or after January 1, 2023, for a first-time failure.

Municipal Income Tax for Minors
Taxpayers under the age of 18 will no longer be liable for municipal income tax, as of tax years beginning on or after January 1, 2024.

Changes to Individual Taxation in Ohio

Ohio Income Tax

Individual Income Tax Brackets 
These will again be reduced. The highest rate will decrease from the current 3.99% to 3.688% in 2024. The rate reductions are phased in, and the new 2023 and 2024 tax brackets are below: 

• Any withholding requirement changes will be decided by the Tax Commissioner and have not been issued at this time.
• Business income will continue to be taxed at 3% on amounts exceeding the $250,000 exemption. 

Ohio Resident Tax Credit 
This personal tax credit will now be available for pass-through entity taxes (PTET) paid on the investor’s behalf to other states and the District of Columbia. 

• The resident credit is available for tax years beginning on or after January 1, 2023. Taxpayers can also amend their 2022 tax returns to add back any pass-through entity tax expense deducted from other states and take the resident credit.
• Should the Ohio resident individual decide to participate in a pass-through entity tax and receive a resident credit, the amount of tax deducted at the federal level will need to be included as an addition to the individual’s federal gross income for the year on their Ohio individual tax return.

Pass-through entity taxes were created as a federal work-around to the $10,000 state and local tax cap on taxes paid to other states by an individual. This creates opportunities for Ohio resident pass-through entity owners to claim these credits and pay entity level taxes in states outside of Ohio, rather than be subject to double taxation. Currently, 36 states and New York City have enacted a pass-through entity level tax.

Donations to Scholarship Granting Organizations (SGO)
Contribution timing is extended to the filing due date of the related tax return. Therefore, if a taxpayer donates to an SGO by April 15, 2024, they can still elect to include that donation on their 2023 Ohio tax return.

Tuition Credit for Nonchartered, Nonpublic Schools
Effective for 2023, this tuition credit has been increased to $1,500 for those with income exceeding $50,000. For those with income below $50,000, the credit increases to $1,000.

Sales and Use Tax Exemptions in Ohio

Exemptions for Certain Purchases

• Baby products: Including, child diapers, creams and wipes, car seats, cribs and strollers are exempt from sales tax beginning October 1, 2023.
• Fireworks: The 4% fireworks fee is exempt from sales tax if it is stated as a separate line item on an invoice.
• Construction materials to government agencies: Language in the bill clarified that the sale/rental of construction materials to government agencies for temporary traffic control or drainage purposes is included in the current exemption available for sales and rental construction materials to government agencies. This clarification likely was made due to the issue that was argued in the Karvo Paving Co. v. Testa court case. However, the governor vetoed language that this exemption would be retroactive, meaning the exemption for materials for temporary traffic control or drainage purposes will go into effect 90 days after the signing of the bill.  It should be noted that while not explicitly retroactive, if applicable, taxpayers should still evaluate their facts to determine if such a position is available in past periods pursuant to the laws in effect at that time.

Ohio’s Annual Sales Tax Holiday

• Effective in 2024, the holiday expands purchases of clothing, school supplies and instructional materials to any item $500 or less. 
  • The holiday excludes purchases of alcohol, motor vehicles, titled watercraft or outboard motor, tobacco, vapor products or any products containing marijuana.
• The 2023 holiday will run from Friday, August 4, 2023, to Sunday, August 6, 2023. During the holiday, the following items are exempt from sales and use tax: 
  • An item of clothing priced at $75 or less
  • An item of school supplies priced at $20 or less
  • An item of school instructional material priced at $20 or less

Additional Ohio Tax Opportunities to Consider

Employer Withholding 

• Employers who are remitting payroll on a partial weekly basis can now file annual reconciliations rather than quarterly reconciliations effective for calendar year 2024.

Property Tax Exemptions

• Residential land development on unimproved land, subject to further qualifications:
  • The exemption is equal to the value of the unimproved land in excess of the most recent sales price for up to eight years or until construction begins or the land is sold. There is also a provision that if the land is no longer used as farmland, it cannot be valued as such. 
• Extension granted for the qualified energy projects exemption.

Housing Development Credits

• Welcome Home Ohio Program
  • Qualifying developers selling to low-income buyers can receive a credit in FY24 or FY25 to be claimed against the personal income tax or financial institutions tax. The director of this program is able to issue up to $25 million in credits for each fiscal year. 
• Ohio Low-Income Housing Tax Credit (LIHTC)
  • For developers that qualify for the federal Low Income Housing Credit, the director of the Ohio Housing Finance Agency is now able to set aside money for a state credit in addition to the federal LIHTC. The project must be located in Ohio and is effective for those renting to low-income citizens after July 1, 2023, and prior to June 30, 2027. The credit is applied against income tax, insurance premiums tax or financial institutions tax. The credit is non-refundable.
• Single Family Housing Development Credit
  • This is another non-refundable credit applied to the income tax, insurance premiums tax or financial institutions tax. This credit is allocated by local governments and economic development entities to developers who are investing in the construction of affordable single-family housing. Like the LIHTC, this credit is due to expire on June 30, 2027. The credit is limited to the amount the fair market value exceeds the project’s development cost.
• Sports Gaming Tax
  • Effective July 1, 2023, the sports gaming receipts tax rate was doubled from 10% to 20%.

Corporate Franchise Tax Amended Returns

• Beginning January 1, 2024, corporations that were previously subject to the Ohio Corporate franchise tax no longer must submit amended returns for federal adjustments. However, refund claims will also be disallowed as of the same date.

Contact Marissa Holman at mholman@cohencpa.com, Karen Raghanti at kraghanti@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.