Home / Articles / Ohio Tax Update: Ohio 2022-2023 Biennial Budget Tax Reform

Ohio Tax Update: Ohio 2022-2023 Biennial Budget Tax Reform

July 8, 2021

Overview

Ohio Governor Mike DeWine signed 2021 HB 110 (“law” or “law change”), Ohio’s 2022-2023 biennial budget with significant tax law changes, rate reductions, and municipal income tax reforms. Many of the changes are effective retroactive to January 1, 2021 and other effective dates as noted below.

Individual Income Tax Law Changes

HB 110 reduces individual income tax rates for all brackets by 3% and eliminated the top individual income tax bracket (formerly 4.797%) for Ohio AGI over $217,000. The law changed the next highest income tax bracket for individuals with Ohio AGI over $110,650 to 3.99% (formerly 4.413%). The law also increased the lowest bracket to $25,000 (previously $21,750), meaning individuals with Ohio AGI under that threshold will not owe Ohio income tax. The rate reductions noted above are effective retroactively to January 1, 2021.

Other notable changes in the law:

  • Increasing the number of days required for resident individuals to report the resident credit to 90 days (formerly 60 days) for changes in their tax liability to another state or the District of Columbia.
  • Deferral of the date by which individuals must have Ohio income tax withheld from their Ohio unemployment income to January 1, 2023.
  • Repealed the requirement to report the NAICS code for each business the individual takes the business income deduction on form IT-BUS on or after January 1, 2021.

Sale of PTE Interest Capital Gain Exclusion Beginning in 2026

The Ohio HB 110 added a new qualifying capital gain exclusion for the sale of an interest in a pass-through entity by individuals in ORC Sec. 5747.79(B). The capital gain exclusion is available beginning on or after January 1, 2026, for the lesser of the qualifying capital gain or the qualifying amount of payroll attributable to that entity.

A qualifying capital gain is defined in new ORC Sec. 5747.79(A)(1) as gain from the sale of an entity not otherwise deducted or excluded from federal or Ohio AGI for the year if all the following apply: (A) the selling taxpayer materially participated in the entity’s activities for the five years immediately preceding the sale (by reference Treas. Reg. Sec. 1.469-5T(a)(1), (2), (3), (4), or (7) or directly made a venture capital investment (defined by reference to Treas. Reg. Sec. 2510.3-101) of at least $1 million in the entity; (B) the entity is organized, registered, or formed in Ohio during the five years immediately preceding the sale; and (C) the entity is headquartered in Ohio during the five years immediately preceding the sale.

The qualifying amount of payroll is defined in new ORC Sec. 5747.79(A)(3) as compensation used to determine the employer withholding obligations and paid by the entity generating the gain over one of the following periods: (A) five calendar years immediately preceding the sale of the entity by a seller that materially participated in the entity; (B) the period of investment up to five years prior to the sale of a taxpayer making a venture capital investment under ORC 5747.79(A)(1)(a)(i). The  qualifying amount of payroll will not include any amounts paid to the taxpayer, the taxpayer’s spouse, parents, grandparents, children or grandchildren.

If a taxpayer has multiple capital gains from different sales during the tax year each separate sale must meet the requirements to be classified as a qualifying capital gain for the exclusion.  The deductions for each entity are aggregated to determine the total deduction.

Municipal Employer Income Tax Withholding Changes

The law extended the requirement for employers to withhold individual municipal income tax based on the employee’s principal place of work (PPW) to December 31, 2021,[1] (formerly was to end 30 days after the Governor’s Covid-19 temporary work-from-home order). Governor DeWine lifted the temporary Covid-19 related restrictions under EO 2020-01D effective June 18, 2021.

The law also added a statement of legislative intent indicating that the temporary withholding provisions apply only to the employer’s municipal income tax withholding obligations and to the apportionment and situsing of the employer’s net profit beginning January 1, 2021. The statement further clarifies the legislative intent for the temporary provisions under Sec. 29 of HB197 (passed in March 2020) were not intended to apply for determining the location where an employee worked for purposes of calculating the employee’s municipal tax legally due on or after January 1, 2021. The legislation did not address calculation of the employee’s municipal tax liability for 2020. Presumably it is up to the Ohio courts to decide this for tax year 2020.

The new law clarifies (HB 110 Sec. 610.115) the municipal withholding requirements by:

  • Indicating an employer may assign an employee to a different work location during tax year 2021
  • The employer municipal withholding provisions do not apply for determining an employee’s municipal income tax liability on or after January 1, 2021. Previously, Sec. 29 only indicated the employer withholding provision expired 30 days after the Governor’s Covid-19 temporary order was lifted and did not address the determination of the employee’s income tax liability.
  • Holding that, if an employee requests a refund of municipal income taxes withheld pursuant to the temporary rule the municipality may not require any documentation from the employer other than a statement verifying that the employer has not refunded any withholding to the employee and the number of days the employee worked at the principal place of work. (Note: If an employee was assigned a different work location, conceivably, the municipality may request documentation from the employee proving a change in the employee’s assigned principal place of work location or change in temporary principal place of work location in order to support the municipal tax refund request).
  • Provisions are also included on the manner in which a municipality is to treat the employee’s taxable income if the employee’s municipal residential income tax rate is higher or lower than the employee’s principle place of work municipal income tax rate (for purposes of the municipality’s credit for tax paid to another municipality or in this case the municipality of the employee’s PPW).
  • A resident’s municipality may treat the employee wages as taxable to the extent of additional tax due in situations where the rate is higher but only if: (1) the employee does not claim a refund for taxes withheld based on the employee’s principal place of work and (2) the employee’s resident municipality has a higher tax rate than the employee’s principal place of work municipality.

Sales/Use Tax Changes

Ohio HB 110 repealed sales and use tax on providing employment services such as providing personnel to work under the purchaser’s supervision and control. The law also repeals the sales and use tax on employment placement services such as locating employees for an employer or employment for a jobseeker. Sales and use tax on memberships to physical fitness, recreational clubs, and sports clubs operated by a nonprofit IRC Sec. 501(c)(3) organization and sales and use tax on sales of investment metal bullion and coins were also repealed.

The repeal of sales tax on the above list is effective October 1, 2021.[2]

Ohio “Megaproject” Tax Incentives

The new law authorizes various tax incentives[3] for operators and certain suppliers of a “megaproject” (a development project[4] that includes at least $1 billion in investment or creates at least $75 million in new Ohio payroll[5]). An application must be made to the Director of Development Services similar to the JCTC application and its requirements. The incentives include an exclusion of a megaproject supplier’s[6] gross receipts from the Ohio commercial activity tax (“CAT”) of tangible property sold to a megaproject operator, real estate tax incentives, and more.  The new law increases the maximum number of years a JCTC may be awarded from 15 years to 30 years for a business that is a megaproject operator or qualifying megaproject supplier. Other incentives include property tax exemptions under the EZ or CRA programs.

Ohio Venture Capital Operating Companies (VCOC)

The new law authorizes a new venture capital gains income tax deduction. The legislation authorizes an income tax deduction for taxable years beginning in and after 2026 for all or a portion of capital gains received by investors in certain Ohio-based “venture capital operating companies” (VCOCs) certified by the Director of Development. A VCOC is required in order to qualify for certification, must manage, or have capital commitments of at least $50 million in active assets and must have residents of Ohio constitute at least two-thirds of its managing and general partners. The law limits the deductibility of gains to those that occur during the period for which the company is certified as an Ohio VCOC. Benefits include a 100% deduction of the capital gain received by the taxpayer received from a qualifying interest in an Ohio VCOC from Ohio Businesses and 50% deduction of capital gain received from a qualifying VCOC interest for all other investments in businesses.

Ohio CAT Tax Changes

The new law makes the Ohio Commercial Activity Tax (CAT)  exemption for Bureau of Worker’s Compensation (BWC) dividends paid to employers beginning with dividends paid in 2022 permanent (the legislature previously exempted BWC dividends for 2020-2021).

The Ohio CAT annual minimum tax is required to be calculated on the previous year’s gross receipts applicable for the first $1 million of gross receipts (previously based on current year’s estimated gross receipts). The CAT minimum tax law change is effective immediately.[7]

Other Tax Law Changes

  • HB 110, Sec. 755.10, establishes a Diesel Emissions Reduction Grant Program, sets the requirement, and the Director of Environmental Protection (“Director”) will administer the program. The Director shall solicit, evaluate, score and select all projects subject to application requirements and a maximum of $10 million in funds available in both FY2022 and FY2023.
  • Authorizes the Ohio Attorney General to participate in the federal Treasury Offset Program for delinquent municipal income tax collections.
  • Eliminates the campaign contribution credit.
  • Expands the Ohio opportunity zone (OZ) investment tax credit to include all investors in the OZ not just those subject to personal income tax. Non-taxpayer investors that cannot claim the credit may sell or transfer the credit to a taxpayer.
  • Ohio is implementing a real time data match program for casino operator(s) and management companies to identify patrons who owe amounts (tax, fees, support orders, etc.) to a state or political subdivision. If a patron owes such amounts to the state or political subdivision the casino or management company is required to withhold such amounts up to the amount of the patron’s winnings.[8]
  • Adopts a real property tax exemption for “qualifying parking garage” operated by a nonprofit arts institution or by a Single Member LLC operating by a nonprofit arts institution effective for tax years 2020 to 2024.[9]
  • Authorizes the Ohio tax commissioner to adjust refunds of tax as many times as necessary before issuing a final determination.[10]

For more information, please contact a member of Clark Schaefer Hackett’s state and local tax team:

Phil Hurak, Diane Merk, Keri Boergert, Cody Cain, Steve Estelle, Brian Murphy

Sources:

[1] Added in HB 110 Sec. 610.115 and 610.116.
[2] Added in HB 110 Sec. 803.93.
[3] Real property incentives adopted in ORC Sec. 5709.61, 5709.62, 5709.63, 5709.631 and 5709.632
[4] As defined under ORC Sec. 122.17(A)(11)(a) including a unique site, robust utility service, and technically skilled workforce.
[5] As adopted under ORC Sec. 122.17(A)(11)b), the average employee compensation must be at least 300% of the federal minimum wage.
[6] ORC Sec. 122.17(A)(13) identifies a megaproject supplier as one that sells tangible personal property to a megaproject operator and meets certain other requirements.
[7] HB 110 Sec. 812.20
[8] Under new ORC Sec. 3772.37(A) & (B).
[9] ORC Sec. 5709.121(E)(3)
[10] Added in new ORC Sec. 5703.70(C)(3)

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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