Explore our latest blog, inspired by Gregory M. Saul, Esq., CAE, Vice President of Government Relations at The Ohio Society of CPAs, who recently led a session on the Fall 2024 Legislative Update as part of our Xcelerate CPE Learning Series.

Elected members of the Ohio legislature are given two years to enact new public policy. The state’s 2023/2024 legislative session is set to terminate on December 31^st, at which time the 136^th General Assembly takes over.

The recent elections have maintained the GOP supermajority, with the Republican Party controlling the governorship, the House, and the Senate. While we cannot know for certain what the majority and minority leaders will do in 2025, we can get an idea if we look at the state budget.

Source: Ohio Office of Budget and Management

Looking at this year’s budget — especially in comparison to prior years — we notice the following:

• The General Revenue Fund (GRF) has been growing.
• Medicaid spending has increased and makes up more than two fifths of the budget.
• Spending on K-12 and higher education has risen in each of the last few years, but as a percentage of the overall budget, it has taken up a slightly smaller piece of the pie.
• Fiscal year 2024 reported a deficit of $484 million after three years of reporting surpluses.
• The Assembly increased Ohio’s Rainy-Day Fund has a record balance of $3.83 billion.

Let’s review recent tax and regulatory changes that affect Ohio residents and businesses.

Commercial Activity Tax (CAT)

The Ohio legislature made significant changes to the Commercial Activity Tax (CAT) to reduce the tax and compliance burdens on small businesses.

• Minimum tax: Beginning in 2024, there is no minimum tax for CAT returns. This eliminates the filing requirements for many small businesses whose only tax burdens were the minimum tax.
• Exclusion threshold: In 2024, the first $3 million of gross receipts are excluded for CAT purposes, up from $1 million the year before. This exclusion threshold jumps to $6 million in 2025, which means that even fewer businesses will be subject to the CAT next year.
• Quarterly filings: Annual filings are no longer required, but businesses still subject to the CAT will be required to file returns and pay taxes quarterly.

Taxpayers no longer subject to the CAT should file final CAT returns with the Department of Taxation and cancel their CAT accounts. Combined and consolidated taxpayers should consider the taxable gross receipts of all members of the group when considering the exclusion amounts in 2024 and 2025. Members of a combined group can request to file their CAT returns separately, but if they do, they can’t claim any portion of the combined group’s exclusion.

Pass-Through Entity Tax (PTET)

Retroactive to 2022, Ohio created its pass-through entity tax (PTET) that allowed partnerships and S corporations to elect to pay income tax at the entity level rather than passing that business income down to the individual owners. The purpose of the PTET in Ohio (and similar taxes in other states) was to circumvent a federal law that capped state and local tax deductions at $10,000. In effect, this new regime turned an individual tax deduction (which is limited to $10,000) into a business tax deduction (which is uncapped).

Unfortunately, this change brought a new problem for Ohio residents: taxpayers couldn’t take a tax credit for their proportional share of PTET paid in other states, making their Ohio tax bills higher than in prior years. A recent bill fixed this problem. PTE owners can now claim a resident credit on their Ohio tax returns for their proportional share of PTE taxes imposed by other jurisdictions. This credit is available beginning in 2022. Claiming the credit is a bit tricky because it requires you to add back other states’ PTE taxes to your Ohio adjusted gross income, but don’t worry — your accountant can handle the details for you.

Personal Income Tax

On the personal income tax front, quite a few things have changed:

Nonbusiness Taxable Income Tax Rates

Ohio recently changed its tax brackets (and dropped its maximum marginal tax rate) for nonbusiness taxable income.

Withholding Tax Tables

There are new withholding tax tables effective July 1, 2024.

Marriage Tax Penalty

Although not yet passed, the Ohio legislature has introduced a bill that would correct a problem colloquially referred to as the “marriage tax penalty”. If this bill passes, married taxpayers’ combined tax liabilities would be capped at the amount of tax they’d owe if they had filed separate returns, ensuring married taxpayers aren’t penalized for filing joint returns.

Business Income Definition

For individual taxpayers in Ohio, “nonbusiness income” and “business income” are taxed differently. Nonbusiness income is taxed at a maximum marginal rate of 3.5% as we’ve shown in the table above, and business income is taxed at a flat rate of 3%. Not only does business income get preferential tax rates, but the resulting taxes can be offset with the Ohio Business Income Deduction (BID). If you are a single filer or file jointly, the first $250,000 of business income you earn can be deducted from your Ohio taxable income. The BID is an appealing deduction, which is why many taxpayers want their earnings to be classified as business income.

Two recent bills help provide a better definition of business income:

1. Enacted law: HB 515 clarifies that Ohioans’ gains from the sale of ownership interest in a business is considered business income for purposes of the BID.
2. Pending law: If passed, HB 138 would classify guaranteed payments paid to investors of pass-through entities as “business income” regardless of their ownership interest. This makes these earnings eligible for the BID and the preferential 3% flat business income tax rate.

Remote Employees

Since the COVID-19 pandemic, more and more businesses have agreed to hire partially or fully remote employees. Unfortunately, this can create some problems, both from a withholding tax standpoint, and from a business tax standpoint.

Withholding Tax

In general, employers should source payroll to the state where their employees perform the work. This means that if you hire an employee who works remotely from California, you should withhold California state taxes for that employee. If that employee lives three months out of the year in New York, those three months of withholding should be sourced to New York. If you have an employee who works in a state with no state income tax (like the state of Texas), you won’t need to withhold anything for that employee.

Ohio has similar rules for its municipal income taxes. In general, employers should withhold municipal income taxes where the employee performs the work, including for each portion of the day. There are only a few exceptions to this rule.

1. 20-Day Occasional Entrant Exception: Employers won’t have to change their employees’ state of withholding if their employee spends 20 or fewer days in a different jurisdiction.
2. Independent Contractor Occasional Entrant Exception: Typically, employers won’t need to withhold taxes for independent contractors, but if they do, the same rules apply to independent contractors: if they spend 20 or fewer days in a different jurisdiction, withholding can continue to be sourced to their home state.
3. Small Employer Withholding Exception: If a business is considered a “small employer,” they only need to withhold income tax to their fixed location, even if their employees work remotely from other municipalities. A business is considered a “small employer” if they have less than $500,000 of revenue in the prior taxable year, unless they are a government entity or treated as a government entity for tax or regulation purposes.

Apportionment Formula

Businesses with remote or hybrid employees can now elect to use a modified apportionment formula when determining their Ohio Net Profit Tax.

Traditionally, a business will source its income to Ohio using a three-factor formula using payroll, sales, and property. Because sourcing payroll to each remote worker’s home state would be administratively burdensome, recent legislation now allows businesses to assign each employee to a “reporting location” when performing this calculation. The employee’s designated reporting location should be the location at which the employee works on a regular or periodic basis (as would be the case for hybrid employees). If no such location exists, then it should be the location at which the employee’s supervisor works on a regular or periodic basis. If neither exists, the reporting location can be chosen by the employer as long as the designation is chosen in good faith.

Taxpayers can elect into this apportionment formula on tax returns with taxable years ending on or after December 31, 2023.

Looking Ahead to 2025

2025 will be a noteworthy year for many reasons, but we have a general idea of what’s to come. We will keep you abreast of changes as they are discussed in the legislature so you and your business can prepare. 

For more information on Ohio’s 2025 Economic Environment Outlook, contact us.