On July 4, 2023, Ohio Governor Mike DeWine signed into law House Bill 33, Ohio’s biennial budget for fiscal years 2024-2025. The bill makes significant changes to the Commercial Activity Tax (CAT), Pass-Through Entity Tax (PTET), and municipal income tax, as well as reduces the number of personal income tax brackets. The Bill will also provide funding to many areas including support for workforce education and training, affordable housing, income-based child care, greater broadband support, and economic development resources.

Commercial Activity Tax (CAT) changes

The changes under the Bill relative to CAT represent the largest change to the taxing scheme since its introduction in 2005. Prior to the Bill, those taxpayers subject to CAT were able to exclude from their CAT base annually $1 million in taxable gross receipts. This exclusion was available on a calendar year basis, and was shared among taxpayer groups who file combined or consolidated; meaning, each single taxpayer (for single filers) or taxpayer group (for combined and consolidated filers) were only entitled to a maximum exclusion amount of $1 million in taxable gross receipts.

Under the Bill the exclusion amount will increase to $3 million in 2024, and by 2025 it will be increased to $6 million.

Taxable gross receipts in excess of the applicable exclusion threshold will still be subject to the existing CAT rate of 0.26%. Additionally, effective for tax periods beginning on or after Jan. 1, 2024, the CAT annual minimum tax has been eliminated.

PTET credit

A resident Tax Credit for PTET paid to other states will now allow Ohio residents some relief if they are partners or members in pass-through entities who elect into other states’ PTET schemes. While many states authorized a PTET in response to the federal $10,000 SALT deduction cap, Ohio was one of the few that previously did not allow a credit for PTET paid to another state on behalf of Ohio resident partners/members. This modification will allow Ohioans to use the Ohio resident credit for PTET paid to other states. However, this credit does require an add-back of taxes deducted from the individual’s federal adjusted gross income on their Ohio personal income tax return.

This change to the Ohio resident credit is effective for tax years ending on or after Jan. 1, 2023. However, the state has provided mechanisms for taxpayers to apply the provision to an original or amended 2022 tax year return through a one-time election.

Personal income tax

Also included in the Bill is a  two-year income tax reduction, bringing the number of brackets down from five to four for the 2023 tax year. Additionally, by 2024 the brackets will be reduced again from four to three.

The Bill preserved the lowest marginal income tax rate, so Ohioans making $26,050 or less will continue to pay zero in income tax.

Municipal income tax

The Bill also made multiple changes regarding municipal income tax:

• Remote Worker Alternative Apportionment Election: Effective for tax year 2024, businesses with remote or hybrid employees/owners may elect to use a modified apportionment formula for municipal net profits tax instead of the standard three-factor formula. The business may choose to apportion any property, payroll, or sales (gross receipts) attributable to that employee/owner to a designated location owned or controlled by the business or one of its customers. This only applies to net profits tax and will not affect the withholding tax.
• Minor Exemption from Municipal Income Tax: Individuals under the age of 18 will no longer be liable for Ohio municipal tax, starting from Jan. 1, 2024, and onward.
• Municipal Late Filing Fees: Limits the late fees and penalties imposed on the taxpayer for late filing. The late file penalty will drop from $150 to $25, and any penalty assessed on a taxpayer’s first late filing will be refunded if paid or abated once the overdue return is filed appropriately.
• Municipal Extensions: An automatic seven-month extension will be granted to businesses that have a valid six-month federal extension on file, giving businesses an additional 30 days to file their municipal income tax return. Individuals will not receive the extra 30 days and still have the same six-month extension.

Sales and use tax exemptions

Some other notable changes under the Bill include:

• Baby products: Child diapers, creams, wipes, car seats, cribs, and strollers are exempt from sales tax effective Oct. 1, 2023.
• Fireworks: A 4% firework fee is exempt if it is stated as a separate line item on the invoice. This is effective Oct. 1, 2023.
• Construction materials to government agencies: Contractor sales or rentals of tangible personal property and services to provide temporary traffic control or structures to governments are exempt.

Housing development credits

The Bill also provided some expansions to various Ohio Housing Development Credits:

• Welcome Home Ohio Program: Qualifying developers selling to low-income buyers can receive a non-refundable credit in 2024 or 2025 to be claimed against personal income tax or financial institutions tax.
• Ohio Low-Income Housing Tax Credit: Developers that qualify for the federal LIHTC may also qualify for the non-refundable Ohio LIHTC, on the conditions the project is located in Ohio and is intended for renting to low-income citizens after July 1, 2023, and before June 30, 2027. The credit will be applied against income tax, insurance premiums tax, or financial institutions tax.
• Single Family Housing Development Credit: Non-refundable credit to developers investing in the construction of affordable single-family housing. The credit is applied to income tax, insurance premiums tax, or financial institutions tax and is set to expire June 30, 2027. The value of the credit is limited to the amount fair market value exceeds the project’s development costs. 

Other considerations

According to the Bill:

• Employer Withholding: Employers remitting payroll on a partial weekly basis can file annual reconciliations instead of quarterly reconciliations beginning 2024.
• Property Tax Exemptions: Residential land development on currently unimproved land. The exemption will equal the value of the unimproved land in excess of the most recent sales price for up to eight years, when construction begins, or when the land is sold.

What does CohnReznick think?

The Bill provided a number of significant changes, with the modification and expansion of the CAT exclusion starting with the 2024 tax year at the forefront. This change may result in significant tax savings for your business. Additionally, there are numerous changes that Ohio residents will see in the coming years, including the changes to tax brackets as well as the availability of the Ohio Resident Credit relative to PTET paid to another state.

Contact

Arvinder Kaur, CPA, Senior Manager, State and Local Tax Services

646.448.5466

Jason Gajramsingh, CPA, Senior Manager, State and Local Tax (SALT)

312.508.5911