Ohio’s budget bill brings significant tax changes

On June 30, 2021, Ohio Governor Mike DeWine signed Amended Substitute House Bill 110, the state operating budget for fiscal years 2022-2023. In addition to funding the state government, this legislation enacts several tax provisions that will affect a wide variety of taxpayers, including nonprofits. Most of the changes in the 2,400-page bill will take effect in the fall. Below is a summary of the tax changes by tax type included in Ohio’s budget:

Sales and use tax

• Eliminates the sales and use tax on employment services and employment placement services effective on Oct. 1, 2021. Ohio is currently one of the few states to tax these services.
• Reinstates the sales and use tax exemption for metal bullion and investment coins. The tax exemption was repealed by legislation in 2019.

Municipal income tax

• Extends the temporary municipal income tax withholding law through Dec. 31, 2021. The temporary law, originally enacted in Am. Sub. H.B. 197 of the 133rd General Assembly was set to expire 30 days after the governor’s COVID-19 emergency declaration was rescinded.
• Employers may continue to withhold municipal income taxes based on an employee’s principal place of work, even though the employee is physically working from home or another location due to the COVID-19 emergency lockdown. So long as the employer continues to withhold based on the employee’s principal place of work, the bill prohibits local taxing authorities from penalizing an employer for withholding and net profit tax purposes.
• For tax year 2021, the withholding provisions only apply to an employer’s tax withholding obligations, not to the determination of an employee’s actual tax liability. So, for tax year 2021, employees may seek a refund of taxes for days worked outside of that municipality. There’s currently pending litigation that will determine if an employee may seek a refund for taxes paid for tax year 2020 to a jurisdiction in which the employee was not physically working.

Personal income tax

• Reduces personal income tax rates by 3% in tax year 2021 and beyond. In addition, the top bracket is eliminated and the new top rate is reduced further to 3.99%. The lowest tax bracket now begins at $25,000 in 2021. HB 110 also suspends the inflation adjustment to Ohio’s income tax brackets for tax year 2021. Inflation indexing will resume in 2022.
• Clarifies that the state of Ohio will not impose tax on unemployment compensation that was disbursed fraudulently to a third party.
• Allows a tax credit for up to $750 for donations made to nonprofit scholarship-granting organizations (SGO). This credit is also available to investors in a passthrough entity that files a composite return on the investor’s behalf. H.B. 110 directs the Ohio Department of Taxation to publish a list of approved SGOs.
• Increases opportunity zone tax credits available to $2 million per biennium for each individual. Previously, individuals were limited to obtain up to $1 million of opportunity zone credits per biennium. The total amount of the Ohio opportunity zone tax credits available remains consistent at $50 million total for the biennium period. Note that the Ohio opportunity zone tax credit is different from the federal tax credit. The next round of applications will be in January 2022 for investments made in 2021. If approved, the credits applied for in January would be available to claim in the 2021 tax year.
• Authorizes an income tax deduction for capital gains received by investors in Ohio-based venture capital operating companies (VCOC) for taxable years beginning after 2025. A VCOC must be certified by the Ohio Development Services Agency. To obtain certification, the VCOC must manage at least $50 million of active assets or have capital commitments of at least $50 million. Additionally, Ohio residents must make up at least two-thirds of its managing or general partners. The deduction equals 100% of the capital gain received by a taxpayer from their interest in an Ohio VCOC attributable to investments in Ohio businesses and 50% of capital gains received by a taxpayer from their interest in an Ohio VCOC attributable to the VCOC’s investment in other businesses.
• Allows an income tax deduction for taxpayers with a capital gain with an ownership interest in certain businesses, starting in tax year 2026. The deduction equals the lesser of the capital gain or a percentage of a business’s payroll over a specified period. The deduction is allowed for taxpayers who materially participated in a business headquartered in Ohio for the five preceding years or made a venture capital investment of at least $1 million to an Ohio-based business. Eligible businesses must have been incorporated, registered, or organized in Ohio during the five years immediately preceding the time of the sale. Further, the business must be headquartered in Ohio during the five years immediately preceding the time of the sale.
• Eliminates the requirement for businesses claiming the Ohio business income deduction (BID) to report the North American Industry Classification System (NAICS) code corresponding to the business or professional activity from which the income is derived. This change applies to all tax years and represents a shift away from earlier attempts by the Ohio General Assembly to carve out certain professions from being eligible for the BID.

Commercial activity tax (CAT)

• Allows businesses that claim the refundable Job Creation Tax Credit (JCTC) to report work-from-home employees in their employment and payroll for purposes of computing and verifying the JCTC. The change is effective for all reports filed for tax years starting in 2020 and forward. The law previously only allowed JCTC applications that were approved prior to Sept. 29, 2017 to include work-from-home employees.
• Permanently exempts Bureau of Workers Compensation (BWC) “dividends” from the CAT, starting with dividends paid in 2022. Prior legislation exempted BWC dividends paid in 2020 and 2021.
• Changes the calculation of annual minimum tax for the CAT. The minimum will be determined on the basis of the taxable gross receipts in the preceding calendar year, rather than the current calendar year. This applies immediately and will impact the CAT returns that include the annual minimum tax due May 10, 2022.

Property tax

• Penalizes property owners who fail to notify the county auditor that the owner or occupant of the property is no longer eligible for the homestead exemption. The charge equals the tax savings, plus interest, for each tax year that the owner or occupant was not eligible for the homestead exemption.
• Requires the owner of tax-exempt property to notify the county auditor if the property ceases to qualify for tax-exempt status. Failure to follow this notification requirement results in a charge equal to the tax savings for up to the five preceding years that the property did not qualify for the exemption.

Other taxation provisions

• Authorizes the Ohio Department of Taxation to adjust the amount of a tax refund multiple times in response to the refund requester submitting additional information before issuing a final refund determination.

The Ohio budget bill covered many different areas of Ohio taxes. If you have any questions, please feel free to contact us.