Ohio’s Biennial Budget Bill: Sweeping Changes for Businesses and Personal Taxpayers

Ohio Governor Mike DeWine took the occasion of Fourth of July holiday to sign the Ohio Biennial Budget Bill into law. The legislation brings sweeping changes to both business and personal taxes.

Key implications and impact of the 44-line-item veto provisions include:

Commercial Activity Tax Exemption Increase

The legislation significantly changes Ohio’s Commercial Activity Tax (CAT), particularly in relation to exclusions based on taxable gross receipts. As of 2024, all taxable gross receipts of $3 million or less will be exempt from the CAT, the exemption threshold increases to $6 million for tax periods beginning in the year 2025. Amounts exceeding the thresholds will still be subject to the current tax rate of 0.26 percent. This represents the first major revision to the CAT since its establishment in 2005.

The new CAT exclusion represents an increase from the current threshold of $150,000 or less, the threshold for the past 18 years.

Personal Income Tax Reductions

The bill introduces a two-year phase-in plan for reducing personal income taxes, which includes consolidating the number of tax brackets from four to two. Under the new structure, marginal tax rates will be set at 2.75 percent for incomes exceeding $26,050 and 3.5 percent for incomes over $100,000. Incomes of $26,050 or less will be exempt from personal income taxes.

Credit for PTE Taxes Paid to Other States

In an effort to alleviate double taxation for Ohio residents, the legislation allows the use of the resident tax credit for pass-through entity taxes (PTET) paid to other states. The change applies retroactively for tax years beginning on or after January 1, 2022, and was enacted to comply with Internal Revenue Service Notice 2020-75. The credit can be claimed on an original or amended 2022 individual income tax return. However, individuals deducting PTET taxes from their federal adjusted gross income will need to add back those amounts.

Municipal Income Tax Changes

The Budget Bill introduces several changes to municipal income taxes, including:

Municipal Notices and Late Filing Fees: Late filing penalties will be capped at $25 as opposed to the current $150. Furthermore, any penalties imposed on a taxpayer’s first late filing will be refunded or abated once the overdue return is filed. As well, the due date for filing municipal net profits tax returns has been extended from October 15 to November 15.

Minors Exempt from Municipal Income Tax: Individuals under the age of 18 are now exempt from Ohio municipal income tax.

Municipal Net Profits Tax Safe Harbor: As of 2024, businesses with remote or hybrid employees or owners will have access to a modified apportionment formula for municipal net profits tax. This formula allows businesses to allocate property, payroll, or sales (gross receipts) attributable to remote or hybrid workers to a designated location owned or controlled by the business or one of its customers. The change applies only to the net profits tax; it does not affect withholding tax.

Sales/Use Tax Changes

The Ohio Budget Bill includes the following sales/use tax changes:

Exemptions for New Parents & Guardians: Baby diapers, wipes, skin creams and ointments, car seats and booster seats, cribs (including portable cribs), and strollers designed for newborns up to 36 months old, are now exempt from sales/use tax.

Road Construction: The legislation exempts sales or rentals of traffic control items and services by construction contractors to governments from sales/use tax.

As well, Governor DeWine vetoed a provision in the Bill for a mandatory sales tax holiday for the first two weeks of August on the sale of nearly all goods priced below $500. He said he prefers a more expansive sales tax holiday, and that his veto will provide an opportunity for the Ohio Department of Taxation, the director of the Office of Budget and Management, and the Ohio County Commissioners Association to determine the duration of a sales tax holiday in 2024, noting that the associated expenses to the state remain uncertain.

The changes implemented with the Biennial Budget Bill have significant implications for both businesses and individuals in Ohio. For more information on the Biennial Budget Bill or other state and local tax matters, contact an HBK Sales and Local Tax professional at 856-486-2299.

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