Ohio Enacts Bill Containing Favorable Tax Changes
On July 3, 2023, Governor Mike DeWine signed into law House Bill 33, Ohio’s 2024-2025 biennial budget legislation. This new law includes changes that will affect the Commercial Activity Tax exemptions, the resident tax credit, individual tax rates, and various municipal income tax provisions.
Commercial Activity Tax
Since the inception of the Ohio CAT in 2005 there has been a $150,000 annual exemption for taxable gross receipts. The law increases the annual exemption to $3 million of taxable gross receipts for the 2024 tax year and further increases the exemption to $6 million beginning in 2025. After the two-year phase-in, it is estimated that 90% of Ohio-based businesses will no longer pay CAT.
The governor vetoed the provision that would eliminate the filing requirement for businesses falling below the exemption thresholds, so taxpayers with more than $150,000 of taxable gross receipts that owe no CAT will still need to file returns reporting $0 tax due. We will continue to monitor for any future changes to the filing requirements.
Resident Credit for Pass-Through Entity (PTE) Taxes Paid to Other States
Many states, including Ohio, have enacted elective entity-level PTE taxes as a means to work around the $10,000 federal itemized deduction limitation for state and local taxes paid by individuals. The new law allows Ohio residents who are subject to double taxation on PTE income at the state level to return to a status quo position by claiming a credit on their individual income tax return for entity-level PTE taxes paid to other states. The law also requires that the PTE taxes that reduced an individual’s federal adjusted gross income be added back at the state level.
Individual Income Tax
An individual income tax reduction will be phased in over two years beginning in 2024. This will result in just two tax rates: 2.75% for income over $26,050 and 3.5% for income over $100,000. Individuals making $26,050 or less will not pay income tax to Ohio.
Municipal Net Profits Tax Safe Harbor
Beginning in 2024, businesses with remote or hybrid employees can elect to use a modified apportionment formula when calculating the municipal net profits tax. The modified formula allows businesses to allocate property, payroll, or sales attributable to a remote or hybrid employee to a designated location owned or controlled by the business or one of its customers rather than using the employee’s actual remote working location. This change can reduce the number of municipal tax locations for which a business must file net profits tax returns and can limit compliance costs when a business has remote or hybrid employees. This change applies only to the net profits tax and does not impact withholding tax requirements.
Other Municipal Tax Changes
The law made additional municipal income tax changes including:
- Reducing fees and penalties related to the late filing of municipal income tax returns.
- Requiring the abatement of assessed penalties for a taxpayer’s first time late filing once the overdue return is filed.
- Extending the due date for the filing of municipal net profits tax returns from October 15th to November 15th.
- Exempting the income of individuals under the age of 18 from Ohio municipal income tax.
To learn more about how these changes may impact you or your business, contact us at (513)858-6040 or reach out to any member of your Kirsch CPA Group client service team.