Gov. Mike DeWine signed the Ohio Biennial Budget Bill into law on July 4, 2023. There are significant business and personal tax changes included in the bill. Below are highlights of the various tax impacts, including Gov. DeWine’s line-item veto provisions.
Personal Income Tax Reductions
Personal Income Tax: The bill introduces a two-year phase-in of income tax reduction, reducing the number of brackets from four to two. Marginal rates will be set at 2.75% for incomes over $26,050 and 3.5% for incomes over $100,000. Ohio residents earning $26,050 or less will be exempt from paying income taxes.
Commercial Activity Tax Exemption Increase
Commercial Activity Tax (CAT): The law change makes significant changes to the CAT, including exclusions based on taxable gross receipts. For tax periods starting in 2024, all taxable gross receipts of $3 million or less will be exempt from CAT. This exclusion will increase $6 million or less for tax periods beginning in 2025. Amounts above these thresholds will continue to be subject to the existing 0.26% rate. This marks the first major change to the CAT since its inception in 2005.
The new CAT exclusion represents a substantial increase from the current exclusion threshold ($150,000 or less) that has remained unchanged for the past 18 years.
Taxpayers with taxable gross receipts exceeding the above exclusion amounts will be subject to the existing CAT rate of 0.26% on the excess. Clark Schaefer Hackett will provide any updates for this CAT requirement if anything changes.
PTET Election – Credit for PTE Taxes Paid to Other States
Resident Tax Credit for SALT Cap Deduction from Other States: This change allows Ohio residents subject to double taxation to return to a status quo position. It permits Ohioans to use the resident credit, in place since at least 1991, for pass-through entity taxes (PTET) paid to other states enacted for purposes of complying with internal revenue service notice 2020-75 retroactive back to tax years beginning 1/1/2022 or after. HB 33 stipulates this credit for new ORC Sec. 5747.05(B)(3) may be taken on an original or amended 2022 individual income tax return. However, it requires an add-back of PTET taxes deducted from the individual’s federal adjusted gross income.
Municipal Income Tax Changes
Municipal Notices and Late Filing Fees: The bill limits the late fees and penalties imposed on taxpayers for failing to file municipal income tax returns on time. The late filing penalty will be capped at $25 instead of the current $150. Additionally, the bill requires any late filing penalty imposed on a taxpayer’s first late filing to be refunded or abated once the overdue return is filed. The due date for filing municipal net profits tax returns will also be extended from October 15 to November 15.
Minors Exempt from Owing Municipal Income Tax: The bill exempts individuals under the age of 18 from Ohio municipal income tax.
Municipal Net Profits Tax Safe Harbor: Starting in 2024, businesses with remote or hybrid employees or owners will have the option to use a modified apportionment formula for municipal net profits tax. This formula allows businesses to allocate property, payroll, or sales (gross receipts) attributable to remote or hybrid workers to a designated location owned or controlled by the business or one of its customers. This change applies only to the net profits tax and does not affect the withholding tax.
Sales/Use Tax – New Parents & Guardians
Baby diapers, wipes, and skin creams and ointments are now exempt. So are car seats and booster seats, cribs (including portable cribs), and strollers designed for newborns to 36-months.
Sales/Use Tax – Road Construction
Sales or rentals of traffic control items and services by construction contractors to governments are exempt.
To address Ohio’s broader workforce challenges, the budget includes significant funding for workforce education and training, affordable housing to tackle shortages, income-based childcare support, improved broadband support, and economic development resources for creating shovel-ready sites, among other initiatives.
If you have any questions, please feel free to reach out to a member of the CSH SALT Team.