Ohio Budget 2021-2022 Key Changes

Date August 3, 2021
Categories
Article Authors
HBK CPAs & Consultants

  • Changes to the Individual Income Tax rates and brackets
  • Taxpayers will be permitted a refund for municipal income tax withheld against them during the 2021 year for days worked outside of their employer taxing district
  • Capital Gain Deduction set to begin in 2026
  • Temporary Labor and Employment Placement Services are no longer subject to sales tax
  • CAT exemption for BWC payments made permanent
  • New CAT calculation standard for calculating the minimum tax due

Ohio Governor Mike DeWine signed the $72 billion dollar state budget into effect earlier this month, a package which was met with opposition, including 14 line-items vetoed by DeWine himself. The Budget (“House Bill 110”) includes numerous changes to the state tax policy, which many taxpayers may find beneficial. A summary of those changes can be found below, most notably were changes to the municipal income tax, commercial activity tax (”CAT”), sales and use tax, and individual income tax.

Individual Income Tax Changes
The bill includes retroactive income tax rate adjustments that take effect as of January 1, 2021. Those updated rates are as follows:

Prior Rate Prior Bracket New Rate New Bracket
0 0-$22,150 0 0-$24,999
2.850 >$22,151 2.765 >$25,000
3.326 >$44,251 3.226 >$44,251
3.802 >$88,451 3.688 >$88,451
4.413 >$110,651 3.990 >$110,651
4.797 >$221,301

In addition to these general rate adjustments, there was a complete elimination of the top income bracket within the state, and an expansion of the 0% tax rate bracket so now Ohio taxpayers with less than $25,000 of taxable income will have no state income tax liability.

It should, however, be noted that both the prior and new rates above still apply to all taxpayers, whether single or married. Ohio has not yet adjusted the income tax rates for married taxpayers.

Additionally, Ohio has created a credit for up to $250 on purchases of qualifying supplies for homeschoolers, and now permits a nonrefundable income tax credit on private school tuition of up to $1,000 for married taxpayers with federal AGI less than $100,000 ($500 credit for single taxpayers earning less than $50,000).

Capital Gain Treatment
Another notable change includes a provision set to start in 2026 which would permit a capital gains deduction by certain taxpayers who materially participate in a business headquartered in Ohio. This deduction would be equal to the lesser of the owner’s capital gain on the sale of the entity interest or 50% of the business’s payroll calculated based on the taxpayer’s ownership percentage on an entity-by-entity basis.

In addition to the creation of this carve out, also in 2026, certain investors of Ohio-based venture capital operating companies that are certified by the state would be permitted a full or partial deduction for capital gains received on the sales of their equity interests.

While not effective until 2026, these provisions could create a massive benefit to qualifying taxpayers.

Municipal Income Tax Changes
The budget also includes a modification to House Bill 197 which was imposed during the height of the COVID-19 pandemic and required Ohio employers to maintain withholdings of the employers’ municipal rates even if employees worked outside of the taxing district due to the pandemic. The budget has modified this prior rule, and now allows but does not mandate employers to continue to withhold at the employer location municipal rate. This allows employees who were subject to employer-location withholding even when they worked outside of a taxing district to claim refunds for any tax over-withheld. RITA and CCA have previously stated they would accept all refund requests but hold that money until a determination was made by the state or in the courts on the legitimacy of House Bill 197. It should be noted that the change under the budget only applies for the 2021 year, the 2020-year refunds will need to be addressed by the pending court cases.

Sales and Use Tax Changes
A significant change in Ohio will begin October 1, 2021, when Ohio will repeal the sales and use tax required to be charged on employment placement services and employment services. This will remove the requirement in Ohio to charge sales tax on temporary labor.

CAT Changes
The budget also includes a permanent CAT exemption for Bureau of Workers Compensation (BWC) payments. Previously there had been debate over the taxability of these payments. Pursuant to the state of Ohio along with commentary from the OSCPA, prior to the budget the state of Ohio was requiring any dividend refunds received from the BWC to be included in CAT.

This exemption follows a temporary emergency provision which allows for the exemption of BWC dividends from CAT paid in 2020 and 2021, the budget will make this permanent for BWC payments made in 2022 and thereafter.

Additionally, the bill changes the methodology required to be used by taxpayers when calculating the annual minimum tax and the $1 million taxable gross receipts exclusion available under CAT. Current law imposes the annual minimum tax on the first $1 million in taxable gross receipts based on a graduated schedule, resulting in a minimum tax of $150 when taxpayers have $1 million or less in gross receipts in the current year. The 2021-2022 Budget modifies this such that the calculation is now based on prior year taxable gross receipts. This provision goes into effect immediately and only impacts calculations involving the first $1 million of gross receipts for purposes of the minimum tax.

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NJ Passes SALT $10,000 CAP Work Around

Date January 14, 2020
Article Authors
HBK CPAs & Consultants

Under the Tax Cuts & Jobs Act (TCJA), taxpayers are now limited to a deduction of $10,000 for state and local taxes. One state that has been impacted heavily by this provision is New Jersey.

New Jersey has higher than average state taxes, and state officials have been looking for a solution or work around to this cap since TCJA was passed. Ultimately, New Jersey unanimously passed the “Pass-Through Business Alternative Income Tax Act.” The Act has passed and was signed by the Governor on December 13, 2019. It went into effect January 1, 2020 and it is expected that this legislation will save New Jersey business owners between $200-$400 million annually on their federal tax bills.

Through this Act, New Jersey is effectively modifying their “state and local” taxes such that they become an income tax through an “elective entity-level” tax for businesses, allowing them to be taken as a business expense. The Act will allow flow through businesses located within the state of New Jersey to elect to pay income taxes at the entity level instead of at the personal level.

State officials have noted that litigation over this issue is likely, although they believe that they have the authority to make these changes.

Since this is a developing story, we will keep you apprised of developments as they occur. If you have specific questions, please contact an HBK advisor in one of our offices in the state of New Jersey or through the HBK Tax Advisory Group.

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PA Dept of Revenue Releases Tax Bulletins Impacting Certain Deductions

Date May 6, 2019
Categories
Article Authors
HBK CPAs & Consultants

The Pennsylvania Department of Revenue (DOR) has issued tax bulletins that impact the way hedging transactions and those associate with certain intangible income are taxed. This article was compiled to give Pennsylvania business owners and operators important information on how these changes may impact the ways they deduct certain types of income and the ability to file for some types of tax deductions.

Background Information: Corporate Tax Bulletins #1 & #2
Corporation Tax Bulletin 2019-01 – Corporate Net Income Tax Hedging and Foreign Currency Transactions
This bulletin addresses the apportionment factor for PA Corporate Net Income Tax. It states that receipts from hedging transactions are to be excluded from the numerator and denominator when calculating the apportionment fraction.

Corporation Tax Bulletin 2019-02 – Pennsylvania Corporate Net Income Tax Treatment of Global Intangible Low-Taxed Income and Foreign-Derived Intangible Income This much awaited bulletin addresses how Global Intangible Low-Taxed Income (GILTI) and Foreign-Derived Intangible Income (FDII) is treated for PA Corporate Net Income (CNI) and Personal Income Tax (PIT) purposes.

What are the GILTI & FDII Deductions?
For federal tax purposes GILTI is treated in a manner similar to Subpart F income as it is deemed to be repatriated in the year it is earned. The GILTI and FDII deductions are considered special deductions for federal income tax purposes and are not allowed in the calculation of PA CNI tax. Pennsylvania treats Subpart F income as dividend income for CNI tax. Therefore, GILTI income will also be treated as dividend income. CNI taxpayers should include GILTI in their tax base in the year it is recognized.

A deduction is allowed for corporations receiving dividends from foreign corporations for CNI tax. The GILTI income will fall into this definition. However, the deduction may be less than 100% depending on the ownership interest in the entity generating the GILTI.

The bulletin also discussed the treatment of GILTI for PIT purposes. Because the GILTI is a “deemed dividend” and not an actual cash distribution, it is not a dividend subject to tax under PA PIT. When an actual distribution of cash out of the current or accumulated earnings and profits of the foreign entity is made to a PIT taxpayer, it will be subject to PIT as a dividend.

Restricted Tax Credit Bulletin 2019-01 – Claiming Donation-Based Tax Credits after the Tax Cuts and Jobs Act and Restricted Tax Credit Bulletin 2018-02 – Claiming Education tax Credits after the Tax Cuts and Jobs Act.

Pennsylvania is addressing chairity-related taxable deductions and credits. To be clear, the state has attempted to clarify the rules around the deductibility of charitable donations in exchange for PA tax credits. The federal Tax Cuts and Jobs Act limited the amount of state and local tax deduction to $10,000. As a result, some states discussed legislating a work around to allow taxpayers to get a charitable deduction in lieu of taxes. In response, the Internal Revenue Service issued a clarification limiting the amount of the charitable deduction to the amount donated in excess of the credits received. This created some confusion and uncertainty for taxpayers wanting to take advantage of the PA Educational Improvement Tax Credit, the Opportunity Scholarship Tax Credit, the Waterfront Development Tax Credit, and the Neighborhood Assistance Tax Credit.

The PA statute states that the donations to organizations in order to qualify for the credit cannot for activities that are a part of a business firm’s normal course of business. Pennsylvania has stated that if the payment is not made in the normal course of a commercial transaction, a taxpayer may claim the state credit for payments made to eligible organizations even if the taxpayer claimed a deduction for federal income tax purposes. However, for personal income tax purposes a pass-through entity must adjust its PA income by the amount claimed as a deduction on its federal income tax return. The Department still considers the contributions to be charitable in nature.

Sales and Use Tax Bulletin #1
Sales and Use Tax Bulletin 2019-01 – Maintaining a Place of Business in the Commonwealth
This bulletin is in response to the U.S. Supreme Court ruling in South Dakota v. Wayfair, Inc. This decision upheld South Dakota’s economic nexus statute that required out-of-state vendors who sold more than $100,000 worth of property or had more than 200 separate transactions into South Dakota to collect and remit sales tax. Pennsylvania joins nearly forty states by implementing the economic nexus standard for the collection of sales tax for out of state vendors. Effective July 1, 2019 out of state vendors selling more than $100,000 worth of property into Pennsylvania will be required to collect and remit Pennsylvania sales tax. PA does not have a transaction threshold. Vendors selling between $10,000 and $100,000 into Pennsylvania have the option to collect and remit or notice and report.

Philadelphia Responds to Wayfair
In response to the Wayfair decision, Philadelphia amended its regulations regarding the Philadelphia Business Income and Receipts Tax (“BIRT”). An economic nexus standard is added for tax years starting on or after January 1, 2019. If a business with no physical presence in Philadelphia has at least $100,000 in Philadelphia gross receipts during any 12-month period ending in the current year, it will be considered having nexus for the gross receipts portion of the BIRT. The “active presence standard” for nexus with Philadelphia is also amended to provide that an “active presence” will subject the taxpayer to at least the gross receipts portion of the BIRT. “Active presence” is defined as purposeful, regular and continuous efforts in Philadelphia in the pursuit of profit or gain and the performance in Philadelphia of activities essential to those pursuits.

In addition, activity rising to the level of “solicitation plus” will result in both the gross receipts and net income portions of the BIRT. “Solicitation plus” refers to cases in which the taxpayer’s business activities exceed solicitation.

For questions, please contact HBK State and Local Tax group leader and Tax Advisory Group member, Suzanne Leighton, MTA at SLeighton@hbkcpa.com.

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Ohio Domicile Tax Updates: The “Bright Line” Tests

Date July 19, 2018
Categories
Article Authors

House Bill 292, which was signed into law on June 14, 2018, implements changes to Ohio’s “bright line” residency tests. Taxpayers that have abodes in Ohio or spend time in the state, but claim non-residency status will be impacted by these changes.

Effective for tax years beginning January 1, 2018, the following taxpayers will now be presumed NOT to be an Ohio resident under the revised “bright line” tests:

  1. An individual is presumed to NOT be domiciled in Ohio for the entire taxable year if the individual has less than 213 contact periods with the state. These contact periods in Ohio do not need to be consecutive. A “contact period” occurs when a person whose abode is outside Ohio spends time in Ohio during two consecutive days while away overnight from that abode.
  2. The taxpayer files the Ohio Form IT-DA with the tax commissioner by October 15 following the close of the tax year. This form is an affidavit that states the taxpayer is not an Ohio resident and meets the qualifications under penalty of perjury.
  3. The taxpayer has to have at least one abode outside of Ohio that they are not using for business purposes subjecting to depreciation.
  4. The taxpayer does not have a valid current Ohio driver’s license.
  5. The taxpayer does not claim any homestead exemptions on their home in the state of Ohio.
  6. Finally, the taxpayer is not receiving reduced tuition at a state institution/college due to being an Ohio resident.

These changes have been enacted as a result of the 2015 Ohio Supreme Court Case, Cunningham v. Testa. The Ohio Supreme Court reversed the determination by the Board of Tax Appeals (BTA) and found that the taxpayer failed to rebut the presumption of Ohio domicile in light of filing an Ohio homestead exemption in the same year he had filed an affidavit of non-Ohio domicile.

Not meeting these bright line tests does NOT necessarily preclude someone from being a nonresident; however, the taxpayer would need to prove otherwise that they were in fact not domiciled in Ohio.

The presumptions of being domiciled or not being domiciled in Ohio does not apply to an individual changing domicile from or to Ohio during a year. If you were to change domicile from Ohio to “Other State” in the middle of a year, you will be considered to be domiciled in Ohio for that portion of the tax year before the change and not domiciled after the change. The law is not clear on the standards to be applied for a change in domicile in a year. The number of days for the presumptive test is not prorated. At this point, we expect Ohio will apply a facts-and-circumstances test to a part year.

Previously, the presence of depreciation on an out-of-state abode, having an Ohio driver’s license, or claiming a homestead were not deal breakers for the presumption of non-Ohio residency. However, taxpayers that have been treating themselves as nonresidents may now be at risk of damaging this presumptions and putting their status as nonresidents in question. Anyone in this situation should contact their advisor immediately to implement changes that would help mitigate these risks.

The following actions can be viewed as evidence of domicile. Due to the changes in House Bill 292, and the results of previous case law, the following recommendations are all appropriate actions to take when changing residency as opposed to simply relying on “bright line” tests.

  1. File a “Other State” Declaration of Domicile with the local County Clerk’s office
  2. Rent a home in “Other State”
  3. Buy a home in “Other State”
  4. Do not claim homestead exemption for Ohio residence
  5. Spend less than 213 days in Ohio
  6. Maintain a log of time spent out of Ohio
  7. Obtain “Other State” driver’s license and surrender Ohio license
  8. Register automobiles in “Other State”
  9. Notify the Ohio Board of Elections that you are no longer eligible to vote
  10. Change voter registration to “Other State” and actually vote
  11. File for “Other State” homestead exemption when purchasing a “Other State” home
  12. File Federal income tax returns using the “Other State” address
  13. Have “Other State” bank accounts
  14. Close Ohio safe deposit boxes
  15. Open “Other State” safe deposit box
  16. Change Last Will and Testament to show a “Other State” resident
  17. If Ohio social clubs and country clubs are maintained, change the memberships to nonresident status
  18. Join “Other State” country club and social clubs, if desired
  19. Have credit card bills addressed to “Other State”
  20. Establish a business office in “Other State”
  21. Consider establishing a business entity under “Other State” law for your business activities
  22. Mail payroll checks to “Other State”
  23. Have some doctors in “Other State”
  24. Use “Other State” domicile on passports, contracts, deeds, and hotel registrations
  25. Use “Other State” address for correspondence, credit card charges, Social Security Administration and for all other purposes

Many taxpayers with residencies in Ohio may have questions related to these updates. For more information, please contact Nicholas Demetrios, CPA, MBA and Principal in the Tax Advisory Group of HBK CPAs & Consultants at NDemetrios@hbkcpa.com or 330-758-8613.

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Key Deadlines for Businesses, Employers

Article Authors
HBK CPAs & Consultants

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 2

• Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.

April 17

• If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.

• If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

April 30

• Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

May 10

• Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

• If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

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