Governor Kasich signs 2016-2017 Ohio Budget Bill into law

Ohio Governor Kasich signed Amended Substituted House Bill 64 into law last week, which enacts a number of beneficial tax changes and cuts for Ohio individuals and small businesses. In short, the 2016-17 Budget (originally dubbed as Kasich’s “Blueprint for Ohio”) expands the Small Business Deduction and reduces both individual tax rates and tax rates on business income. The Budget Bill also enacts several other important Ohio tax law changes as highlighted below.

Here are the details of what the bill does, and how it might impact your Ohio taxes in 2015 and beyond:

Income Tax Provisions

• Retention of the 75% Ohio Small Business Deduction Percentage for 2015 with increase to 100% for 2016
  • The Ohio Small Business Deduction provides a deduction for investors in pass through entities (PTEs). For tax year 2014, the deduction percentage increased to 75% of the first $250,000 of post-apportioned income for businesses organized as PTEs.
  • For 2015, the 75% exemption is retained; for 2016, the exemption percentage increases to 100%, thus raising the maximum deduction to a full $250,000. Retention of the 75% level for 2015 and subsequent increase to 100% in 2016 further signifies Ohio’s intention to become more business friendly.
  • Remember: the exemption is at the individual level; so the increased exemption would apply to a calendar year taxpayer irrespective of whether the individual receives a K1 from a fiscal year entity. Also, personal and dependent exemptions can only be used to reduce non-business income.

• Personal Income Tax Rate Cuts
  • Personal income tax rates are cut by 6.3% for tax years beginning in 2015. This rate cut brings the top marginal Ohio personal income tax rate to just below 5% at 4.997%. A rate table below illustrates the new rates:
    • $0 – $5,000 has a marginal tax rate of 0.495% of Ohio taxable income;
    • $5,001 – $10,000 has a marginal tax rate of 0.990% with a base tax liability of $24.75;
    • $10,001 – $15,000 has a marginal tax rate of 1.980% with a base tax liability of $74.25;
    • $15,001 – $20,000 has a marginal tax rate of 2.476% with a base tax liability of $173.25;
    • $20,001 – $40,000 has a marginal tax rate of 2.969% with a base tax liability of $297.05;
    • $40,001 – $80,000 has a marginal tax rate of 3.465% with a base tax liability of $890.85;
    • $80,001 – $100,000 has a marginal tax rate of 3.960% with a base tax liability of $2,276.85;
    • $100,001 – $200,000 has a marginal tax rate of 4.597% with a base tax liability of $3,068.85; and
    • $200,001 and over has a marginal tax rate of 4.997% with a base tax liability of $7,665.85.

• 3% Flat Tax for business income exceeding $250,000
  • A new flat tax rate of 3% applies to business income (defined below) exceeding $250,000.
  • The definition of business income is largely unchanged, but is broadly stated as including income, gain, or loss from transactions, activities, and sources in the regular course of a trade or business. Business income includes income, gain, or loss from real property, tangible property, and intangible property if the acquisition, rental, management, and disposition of the property constitute integral parts of the regular course of a trade or business operation (See Ohio Revised Code 5747.01(B)).
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• Means test for Retirement Income Credit and Lump Sum Retirement Credit
  • The new law applies a means test to the retirement income credit, the lump sum retirement credit, the lump sum distribution credit, and the senior citizen credit. Specifically, for tax years beginning in 2015, only taxpayers with Ohio taxable income of less than $100,000 would be eligible for the credit._

Sales/Use Tax Provisions

• New Exemptions
  • A new exemption applies for any transaction where a rental vehicle is provided to someone whose motor vehicle is being repaired, or where maintenance is being performed, if the cost for the rental vehicle is reimbursed by the manufacturer or warrantor of the vehicle being repaired (i.e., auto dealer “loaner” cars).
  • The law creates a new exemption for provision of sanitation services to a meat slaughtering or processing operation where such sanitation services are required for the operation to be in compliance with new federal meat safety regulations.
• New Sales Tax Nexus Provisions
  • The law creates new criteria for determining whether out-of-state sellers have substantial nexus with Ohio. Specifically, the new law creates a presumption that out-of-state sellers have substantial nexus with Ohio, but allows the seller to rebut the presumption by demonstrating that the seller’s activities in the state do not significantly contribute to the seller’s ability to maintain a marketplace in Ohio.
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Cigarette Excise Tax Increase

• The law increases the Cigarette Excise Tax to $1.60 per pack.

Commercial Activity Tax Provisions

• The law creates a narrowly defined exclusion for otherwise taxable gross receipts of a manufacturer, supplier, or distributor of beauty, health, personal care, or aromatic products. The exemption only applies to sales made to certain vendors in an integrated supply chain within certain defined areas.

Tax Credit / Incentive Provisions

• Currently, both the Ohio Jobs Creation Tax Credit (JCTC) and the Jobs Retention Tax Credit (JRTC) are based on a percentage of the taxpayer’s Ohio Income Tax withholdings, which could include nonresidents working in Ohio. The new law revises the credit to be based on an agreed-upon percentage of the taxpayer’s Ohio resident employee payroll (less baseline Ohio payroll for the JCTC).
• The law authorizes the Tax Credit Authority to require a taxpayer to refund all or a portion of any credit received for failure to meet program requirements.
• A new requirement is created for the Director of Development to report to the public an estimate of revenue lost resultant from any incentives approved within 30 days after the TCA approves the incentive.
• The law allows the Ohio New Markets tax credit to be allocated to owners of a pass through entity when the credit is awarded to the pass through entity.

Municipal income tax / lodging tax provisions

• The new law clarifies that the 50% limit for carryforward and utilization of “new” municipal income tax NOLs (per provisions effective January 1, 2016) continues to apply to amounts carried forward to the 2019-2022 tax years.
• For non-individual municipal income taxpayers, the return filing deadline will be the 15^th day of the 4^th month following the end of a taxpayer’s taxable year.
• Beginning January 1, 2016, a municipality must grant a six-month extension for a municipal income tax return, even if a federal extension was not requested.
• The new law allows a municipality to require an individual to attach a completed Ohio Form IT1040 to his or her municipal income tax return.
• The new law allows a municipal income taxpayer to submit an affidavit certifying the individual is no longer a taxpayer in the jurisdiction. Submission of this affidavit will exempt further municipal income tax filing requirements for the jurisdiction unless the municipality becomes aware of information that conflicts with the affidavit.
• The new law allows a county with a population greater than 175,000 and less than 225,000 that has an amusement park with an average attendance exceeding two million and levied a 3% lodging tax on December 31, 2014 to impose an additional 1% lodging tax for the purpose of constructing sports facilities.

Many provisions originally included in the executive version of the budget were eliminated by the House or Senate. Below is a list of items that DID NOT make it into the final enacted version of House Bill 64.

• The new law does not contain a state-wide sales tax rate increase.
• The sales tax base was not expanded to certain specified services; in particular, the proposed tax on “management consultant services,” which could have potentially taxed many services provided to Ohio businesses.
• The new law does not reduce the trade-in credit for purchases of a watercraft or new motor vehicle.
• No sales tax on hotel intermediary services (i.e., online booking websites).
• No provisions increase or decrease the CAT rate or prescribed minimums.

A full text of the bill can be obtained here: https://www.legislature.ohio.gov/legislation/legislation-summary?id=GA131-HB-64

If you have any questions about how the new Ohio tax laws impact you, please reach out to your CSH Tax Advisor.