Ohio budget updates: Significant tax cuts, resident credit for PTET, and more

On July 3, 2023, Ohio Governor Mike DeWine signed Amended Substitute House Bill 33, the state operating budget for fiscal years 2024–2025. This legislation funds the state government and enacts a series of tax law changes that impact a large variety of taxpayers. Most of the changes in the 6,200-page bill will take effect in the fall. Below is a summary of various tax changes by tax type included in Ohio’s budget.

Individual income tax

• Allows an Ohio resident a tax credit for pass-through entity (PTE) taxes paid to other states. Taxpayers have to add back PTE taxes paid to other states and deducted from an individual’s federal adjusted gross income in determining the taxpayer’s Ohio adjusted gross income. The new rule generally applies to tax years ending on or after Jan. 1, 2023, but taxpayers may apply the resident credit to their Ohio returns for years ending on or after Jan. 1, 2022, on an original or amended return. Prior to the change, Ohio residents were precluded from claiming a resident credit because the tax paid was deducted from the individual’s federal adjusted gross income. It’s anticipated the Ohio Department of Taxation (ODT) won’t revise the 2022 individual income tax forms but will issue guidance to identify how a taxpayer may claim the resident credit on their 2022 individual income tax return.
• Flattens and consolidates Ohio income tax brackets from four to two by tax year 2024. The top income tax bracket will also be reduced from 3.99 to 3.75% in 2023. In 2024, the top two income tax brackets will be consolidated and the rate reduced to 3.5%. 

Commercial Activity Tax (CAT)

• Expands the CAT Ohio taxable gross receipt exclusion from $1 to $3 million in 2024 and $6 million starting in 2025. The new law also eliminates the annual CAT filing and requires CAT returns to be filed on a quarterly basis. However, it doesn’t exempt a taxpayer that meets the increased CAT exclusion from filing returns, unless the taxpayer takes the necessary steps to cancel their CAT account. Taxpayers with Ohio taxable gross receipts under the exclusion amounts should file a final CAT return and cancel their CAT account in order to not be required to file quarterly returns.
• Eliminates the minimum tax starting with tax periods beginning after Dec. 31, 2023.
• Makes several changes to Ohio’s research and development (R&D) tax credit. Allows the ODT to audit qualified R&D expenses and requires taxpayers to maintain records substantiating the credit for four years. In addition, the new law specifies that the credit must be calculated on a member-by-member basis across an affiliated taxpayer group.

Sales and use tax

• Authorizes the Ohio Tax Commissioner to extend the sales tax holiday starting Aug. 1, 2024. The expanded sales tax holiday requires the Tax Commissioner and the Director of the Office of Budget and Management to set the length of the holiday, with a minimum of three days and up to 14 days, in consultation with local officials. During the sales tax holiday, all sales of tangible personal property priced $500 or less are exempt from state sales tax, except for motor vehicles, watercraft, alcohol, marijuana, tobacco, and vapor products.

Municipal net profit and income taxes

• Allows employers with remote employees to elect into an alternate apportionment formula for net profit tax purposes. The alternative apportionment election is available for taxable years ending on or after Dec. 31, 2023. The optional formula permits employers to source sales, payroll, and property to a designated reporting location that is owned or controlled by the employer or the employer’s customer, rather than the employee’s remote work location. The change doesn’t impact an employer’s obligation for employee withholding taxes. The change also prohibits municipalities from sending tax notices to a taxpayer who properly filed an extension to file a return. Interestingly, the new rule requires municipalities to reimburse taxpayers up to $150 for prohibited notices. The update applies to taxable years ending on or after Jan. 1, 2023. If a taxpayer doesn’t have an extension to file, a tax administrator is still allowed to send a notice to the taxpayer.
• Reduces the penalty for failing to timely file municipal tax returns to a maximum penalty of $25 instead of the current maximum penalty of $150. In addition, the penalty is waived for the first time a taxpayer files a late return.
• Provides an additional automatic one-month extension for municipal income tax returns for business entity taxpayers when the taxpayer has received a six-month federal extension. This applies for tax years ending on or after Jan. 1, 2023.
• Allows taxpayers to obtain a refund of any tax-related penalties that the taxpayer overpaid or paid improperly.

Property tax

• Authorizes the owner of a property subject to a 10-year property tax exemption for remediated brownfield development land to apply for an abatement or refund of taxes for tax years 2020 and 2021. When the abatement is approved, the duration of the exemption is shortened by two years to account for the abatement.

Other key taxation provisions

• Boosts the total amount of the motion picture tax credit available each fiscal year from $40 to $50 million. The motion picture tax credit is a refundable tax credit. The bill also authorizes a refundable tax credit for production companies that complete qualified capital improvement projects in Ohio, capped at $5 million per county.
• Authorizes a nonrefundable tax credit for companies that also receive the federal low-income housing tax credit for affordable housing projects. The credit is available for projects that begin renting units after July 1, 2023, and will last until June 30, 2027.
• Establishes a nonrefundable tax credit for investment in the development and construction of affordable single-family housing.

Overall, the Ohio budget authorized significant tax cuts for individuals and businesses operating in Ohio. If you have any questions on how the provisions in the budget impact you or your business or any other state and local tax matters, please feel to reach out to us.