- 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|
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.
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.