Ohio House Bill 33: Tax-Related Provisions

While many of us were making last-minute Independence Day preparations, Governor Mike DeWine signed Ohio’s next budget bill late on July 3, 2023.  House Bill 33 (the “Bill”) makes a number of changes to Ohio’s tax laws and represents a compromise between Governor DeWine’s initial budget proposal, the Ohio House version, and the Ohio Senate version.  We’re pleased to compile noteworthy tax-related provisions:

Income Tax

• Brackets and Rates: The Bill reduces the number of income brackets and lowers the rates in 2023 and 2024.  These changes are summarized below.
  [Applicable Tax Rate]: [Ohio Taxable Income Range]

• Pass-Through Entity Tax (PTET) Credit and Add-Back: For tax years ending on or after January 1, 2023 (or, at the election of the taxpayer, taxable years ending on or after January 1, 2022), the Ohio resident credit calculation includes PTETs levied by other states.  Furthermore, a pass-through entity owner is required to add back such taxes to the extent the owner deducted them from the federal adjusted gross income.  These changes will allow an Ohio resident to enjoy the federal tax benefits of a pass-through entity tax election in another state without being whipsawed with an Ohio tax increase.
• Employer Income Tax Withholding Reconciliations: Beginning in 2024, employers required to withhold and remit employee income taxes on a partial weekly basis will file annual reconciliation returns (rather than filing quarterly returns required under current law).
• Home Purchasing Savings Account Deduction: Beginning January 1, 2024, an income tax deduction will be available for amounts contributed to a homeownership savings deposit account.  The deduction will be capped at $10,000 per year for married couples filing jointly and $5,000 per year for individuals, with a lifetime maximum of $25,000.  Interest earned on the savings in, and employer contributions to, those accounts will also be deductible.
• Non-Chartered, Nonpublic School Tuition Credit Changes: The Bill removes the requirement that a taxpayer’s and taxpayer’s spouse’s income not exceed $100,000 to qualify for the credit (if filing jointly). Additionally, the value of the credit is increased from $500 to $1,000 for taxpayers with income below $50,000 and is also increased from $1,000 to $1,500 for taxpayers with income at or above $50,000.

Commercial Activity Tax (CAT)

• Exclusion Amounts: Under current law, a taxpayer’s first $1,000,000 of taxable gross receipts (the “exclusion amount”) is subject to a minimum tax, and any taxable gross receipts above that threshold are subject to tax at 0.26%.  The Bill increases the exclusion amount to $3,000,000 in 2024 and $6,000,000 in 2025.  The Bill also eliminates the minimum tax on the exclusion amount.  The net result is that taxpayers will only pay CAT on taxable gross receipts that exceed the larger exclusion amounts.
• Calendar Year Filing Eliminated: The Bill eliminates the calendar year CAT filing, which was available for taxpayers with less than $1,000,000 in taxable gross receipts, who now will not owe any tax.
• Research & Development Tax Credit Changes: The Bill makes clear that the Tax Commissioner may audit samples of a taxpayer’s qualified R&D expenses and issue assessments based on the audit.  Additionally, members of a combined or consolidated group claiming the credit will be required to compute the credit on a member-by-member basis (rather than across the entire taxpayer group).  The credit will be allowed on the basis of members who were part of the group on the last day of the year.

Municipal Income Tax

• Minors: Individuals under the age of 18 are exempt from municipal income tax beginning in 2024.
• Net Profit Apportionment – Remote Employees: For taxable years ending on or after December 31, 2023, a business with remote employees is permitted to use a modified municipal income tax apportionment formula. Factors associated with such employees will be sourced to the employees’ reporting location (e.g., the employees’ office).  For many businesses, this will reduce the compliance burden associated with cities in which the business has no connection other than remote employees.
• Return Due Date: The extended due date for net profits tax returns is pushed out by one month to the 15^th day of the 11^th month after the taxable year, e.g., November 15^th for a calendar year taxpayer with a federal extension. This provision applies to tax returns filed for taxable years ending on or after January 1, 2023.
• Penalties: Effective January 1, 2023, a city may impose a $25 penalty on a taxpayer for failing to timely file a municipal income tax return, and a taxpayer’s first such penalty must be abated or refunded once the return is filed.  Previously, penalties were permitted to be assessed at $25 per month, up to $150.

Sales & Use Tax

• Sales Tax Holiday: The Bill provided for an expanded 14-day sales tax holiday in August 2024.  DeWine vetoed a portion of this provision so that there will still be a sales tax holiday in 2024, but the length will be determined by the Tax Commissioner in consultation with the Director of Budget and Management and the County Commissioners Association.  The holiday will apply to most items priced at $500 or less, whereas the existing holiday has been limited to certain apparel and supplies typically purchased during a “back to school” shopping trip.
• Baby Products: Beginning October 1, 2023, child diapers, creams and wipes, car seats, cribs, and strollers will be exempt from sales tax.
• Maintenance of Traffic: The Bill exempts temporary traffic control or temporary structures, including material and equipment used to comply with traffic control, where the state or a political subdivision takes title to or possession of such items, and including labor where the state or political subdivision receives the benefit of the services.  This provision codifies the holding of Karvo Paving Co. v. Testa, a 2019 Ohio Court of Appeals decision.  DeWine vetoed uncodified language stating that this provision was a clarification of existing law and applied retroactively, so any taxpayer with an existing assessment or appeal on this issue is sure to be disappointed.

Tax Credits and Incentives

• Welcome Home Ohio (WHO) Program: The Director of Development is authorized to issue up to $25,000,000 in tax credit certificates annually to qualifying developers and land banks that rehabilitate or build residences and sell them to lower-income owners-occupants.  The credit for each residential unit is capped at the lesser of $90,000 or one-third of the rehabilitation or construction costs.  Credits are non-refundable, but they are transferable and can be carried forward for up to five years.
• Low-Income Housing Credits: The Bill contains a provision that piggybacks on the federal Low-Income Housing Tax Credit (LIHTC) for affordable housing projects, authorizing a non-refundable credit against income tax, insurance premiums tax, or the Financial Institutions Tax (FIT), capped at a total of $100,000,000 per fiscal year in reserved credits, plus any unreserved credit allocations and recaptures or disallowed credits from the prior fiscal year.
• Single-Family Housing Development Tax Credits: The Bill creates a program for nonrefundable tax credits against insurance premiums tax, FIT, or income tax for investments in the development or construction of affordable single-family housing.  The credit for any single project is limited to the amount by which the fair market value of the project’s homes exceeds development costs and limits the credits in a fiscal year to $50,000,000.

Sports Gaming Tax

• Tax Rate Increase: Effective July 1, 2023, the sports gaming receipts tax rate is doubled from 10% to 20%.  This tax is barely a year old, but the State has already pivoted away from the original purpose for which the tax is levied.  As originally enacted, almost 50% of the revenue was to be used to support interscholastic athletics and other extracurricular activities for students in K-12.  The Bill changes this to more generic support for public and nonpublic K-12 education.

Property Tax

• Homestead Exemption Inflation Indexed: Beginning in 2023 for real property and in 2024 for homes subject to manufactured and mobile home tax, the homestead exemption ($25,000) will be adjusted for inflation. 
• Residential Development Land Exemption: The value (in excess of the most recent sale price) of unimproved land subdivided for residential development will be exempt from property tax for up to eight years or until construction begins or the land is sold.
• Joint Committee on Property Tax Review and Reform: Creates a 10-person committee of five Senators and five Representatives to study and make recommendations on reforms to real property tax laws.

This summary is not all-inclusive, and there may be details or additional provisions that are important to you and your business.  Please contact your GBQ tax advisor or a member of GBQ’s State and Local Tax team to learn more.