Ohio State and Local Tax Update: Budget Bill 2024-2025 | Meaden & Moore

On July 5, 2023, Ohio Governor Mike DeWine finalized the state’s two-year fiscal year 2024/2025 budget. The budget — which calls for a total spending of $95 billion in 2024 and $95.7 billion in 2025 — focuses on the following:

•   Early childhood education
  •    Quality of life for seniors
  •    Mental health for adults
  •    College affordability and access
  •    Safety and security infrastructure
  •    Economic development
  •    Work opportunities
  •    Affordable childcare

House Bill 33 introduces significant changes to Ohio tax laws, directly impacting small businesses and their owners. It addresses the Pass-Through Entity Tax (PTET), allowing Ohio residents to claim credits for taxes paid to other states via PTET, retroactive to 2022. The Ohio Commercial Activity Tax (CAT) saw significant relief, eliminating the $150 flat fee minimum tax and exempting businesses with less than $3 million in gross receipts in 2024 (and $6 million in 2025) from filing CAT returns. For individual income taxes, the budget reduced tax brackets and lowered the maximum rate from 3.75% to 3.5%, along with introducing deductions for contributions to homeownership savings accounts. The bill also introduced and expanded several tax credits and incentives, such as the Low-Income Housing Tax Credit and the Single-Family Housing Development Credit, while increasing film and theater tax credits. These measures collectively aim to create a more favorable tax environment, encouraging entrepreneurship and economic growth across Ohio.

Pass-Through Entity Tax 

In 2022, Ohio enacted legislation that created a pass-through entity tax. PTETs allow pass-through entities (like S corporations and partnerships) to pay taxes at the entity level rather than passing business income down to the individual owners. In general, PTETs were created as a workaround to the $10,000 cap on state and local tax (SALT) deductions. In effect, PTETs help turn an individual tax deduction (which is capped at $10,000) into a deductible business expense (which is unlimited).

Unfortunately, Ohio’s didn’t allow its residents to claim a credit for taxes paid to other states if those taxes were paid via a PTET. This oversight in how the legislation was drafted made it so that Ohio owners would not benefit from making PTET elections in other states.

Fortunately, House Bill 33 fixed this problem. Retroactive to 2022, Ohio residents can claim credits for taxes paid to other states when those taxes were paid via a PTET. We go over this complex issue in more detail here.

Ohio Commercial Activity Tax

Ohio businesses have found the Commercial Activity Tax (CAT) to be a compliance burden for years.

In 2023, businesses with over $150,000 of gross receipts sourced to Ohio were required to file a CAT return and pay (1) a flat fee of $150, and (2) a tax of .26% of Ohio-sourced revenues that exceeded $1 million.

Most small businesses weren’t burdened by the tax liability but found the filing requirement to be a hassle. The CAT return asks for information about your business’s revenues, corporate officers, credits, and common ownership of related entities (if filing a consolidated CAT return).

House Bill 33 removed this compliance burden for most businesses. It did this by:

• Eliminating the $150 flat fee minimum tax beginning in 2024.
• Not requiring businesses to file and pay CAT returns if they have less than $3 million of gross receipts sourced to Ohio in 2024, or $6 million beginning in 2025.

These changes ensure that nearly 90% of all Ohio-based businesses will no longer have to pay or file the CAT.

State of Ohio Individual Income Tax

Ohio’s new budget reduced the number of tax brackets for individual taxpayers starting in 2024. It also dropped the maximum tax rate from 3.75% to 3.5%, reducing tax liabilities for higher income taxpayers.

House Bill 33 also created an income tax deduction for individuals who contribute to a homeownership savings account.

Homeownership savings accounts are state-approved savings accounts that are earmarked for purchasing your primary residence. Interest earned on these savings accounts is tax-free in the state of Ohio, and if you meet certain requirements, you can also deduct your account contributions. Annual deductions are limited to $10,000 for joint filers and $5,000 for all others, with a lifetime maximum of $25,000 per contributor. To qualify for both tax-free interest and contribution deductions, the withdrawn funds must be used for closing costs on the purchase of your primary residence.

Tax Credits and Incentives

House Bill 33 introduced, expanded, or altered quite a few tax credits, including the following:

• It created the nonrefundable Low-Income Housing Tax Credit, which encourages the development of low-income rental housing.
• It created the Single-Family Housing Development Credit, which is awarded to those who invest in qualifying single-family development projects in Ohio.
• It further restricted the Historic Building Rehabilitation Credit from being used with certain federally subsidized residential rental properties.
• It increased the film and theater tax credits and rewards theatrical production companies that complete capital improvement projects that further the film and theater industry in the state.
• It funded the Welcome Home Ohio (WHO) programs, which provide grants and tax credits to those who develop and preserve affordable housing development.
• It increased the Non-Chartered, Nonpublic School Tuition Credit and made it available to more taxpayers by removing the income limitation.

Other Ohio Tax Changes

House Bill 33 made some of the following additional tax-related changes:

• It authorized a sales tax holiday for items under $500 to occur in August 2024, to coincide with the “back-to-school” tax holiday.
• Businesses with remote employees can now use a modified apportionment formula when determining their multistate tax liabilities. Instead of apportioning income based on the location of their employees, they can apportion income by using the employee’s “reporting location,” which can be any place owned or controlled by the employer.
• Beginning in 2024, businesses that apply for an extension on their municipal income tax returns will receive a seven-month extension rather than a six-month extension.
• Stock options and deferred compensation income can now be exempt from municipalities’ income tax returns.
  Beginning in 2023, NOLs will no longer be limited to 50%; beginning in 2023, businesses may deduct up to the full amount of its NOL from taxable net profits.
• In an aim to reduce the tax burden on minors, individuals under the age of 18 who earn income will no longer have to pay municipal income tax in Ohio.

For more information on how your business may be affected by the various provisions in the extensive 6,200-page Ohio budget bill, contact us.