Ohio’s Budget Bill tax changes aim to increase Ohio investment and reduce burdens on recovering businesses
Ohio’s Biennial Budget Bill (Am. Sub. H.B. 110) was signed into law by Governor DeWine on June 30, 2021. The bipartisan bill boasts substantial measures to boost school and scholarship funding, create incentives for investing in Ohio, provide relief to businesses hit hard by COVID-19, and even allow college student-athletes to benefit from their own name, image, and likeness. However, this post focuses on the significant changes to Ohio’s tax laws in this taxpayer-friendly budget bill.
- Municipal Income Tax – The temporary COVID-19 withholding rules will be preserved for 2021 and expire beginning in 2022, while the existing 20 day safe-harbor will apply. Explained more fully in this post, the law allows employers to withhold income taxes as if employees are still working in the office, even if they are working remotely from a different municipality, while employees can obtain refunds for 2021 to the extent they actually performed the services outside the municipality. This provision is being continually challenged as an unconstitutional violation of taxpayers’ due process rights because at least for 2020 the income is not being taxed to where the services are actually being performed.
- State Income Tax – In a pro-taxpayer move, Ohio reduced the number of tax brackets from 5 to 4, and cut income tax rates by 3% across the board beginning in tax year 2021. The bill also eliminates any income tax for those making less than $25,000. Looking ahead, there are two significant income tax deductions for certain capital gains that are set to take effect beginning in 2026:
- Venture Capital Gains Deduction – Taxpayers can receive a full or partial deduction for capital gains from investments in certified Ohio-based “venture capital operating companies” (VCOCs). Designed to spur investment into Ohio businesses, a VCOC will qualify for certification if it has at least $50M in active assets and 2/3 of its general / managing partners are Ohio residents. Taxpayers can receive 100% deduction for gains attributable to investments in Ohio businesses and 50% from a qualified VCOC’s other investments.
- Capital Gain from Sale of Business – Taxpayers who materially participated in an Ohio-headquartered business for the 5 preceding years or made at least $1M in venture capital investments in a qualifying business can claim a deduction attributable to a capital gain from the sale of an ownership interest in the business equal to the lower of the capital gain or the taxpayer’s proportionate share of the business’s deductible payroll.
- Sales / Use Tax – Beginning October 1, 2021, Ohio will no longer impose sales / use tax on employment services or employment placement services. The change removes the tax burden of providing staff to businesses returning to full operation post-pandemic, and may curb litigation over employment services issues that have repeatedly made their way to the Ohio Supreme Court over the years. Additionally, Ohio revived the exemption for qualifying investments in metal bullion and coins, which is also effective beginning October 1.
- Ohio Commercial Activity Tax – The Budget Bill creates a permanent exclusion from gross receipts for Bureau of Workers’ Compensation dividend refunds, and repeals the exclusion for receipts from beauty, health, personal care, or aromatic products between businesses with integrated supply chains. See R.C. 5751.42. Additionally, the bill mandates that taxpayers calculate their annual minimum tax on the first $1M in taxable gross receipts based on the prior year’s receipts instead of the current year.
- Megaproject Tax Incentives – In what was previously proposed as a standalone bill to attract large employers and investors to Ohio, the conference committee added a provision not contained in the House or Senate versions that provides “Megaproject” operators and qualifying suppliers with major tax incentives. Projects must have at least $1B in investment or $75M in Ohio payroll to qualify as a Megaproject. The provision extends the maximum limit for certain tax credits, including Job Creation Tax Credits, from 15 to 30 years and allows qualifying suppliers who sell tangible property to Megaproject operators to exclude those receipts from its Ohio CAT base.
- Other Tax Changes – The bill also contains several other beneficial tax provisions such as: prohibiting local governments from imposing gross receipts taxes on medical marijuana businesses, increasing the Opportunity Zone tax credit limit from $1M to $2M in any fiscal biennium, and creating other investment incentive programs for brownfield remediation and building demolition and site revitalization, among others.
As noted above, the Budget Bill includes several important tax changes that we will cover more in-depth in future posts. If you have any questions about the provisions in Ohio’s budget bill, please do not hesitate to contact us.
Attorney Steven A. Dimengo is Managing Partner of Buckingham, Doolittle & Burroughs, LLC. He helps clients with complicated tax challenges including Ohio sales/use, income, commercial activity and federal taxes and has represented clients before the Ohio Supreme Court. Steve can be reach at [email protected] or 330.258.6460.
Richard B. Fry III is a partner and Buckingham’s Taxation Practice Group Chair. He focuses on state and local tax compliance and controversies, including Ohio and multistate sales/use tax, commercial activity tax, and personal income tax issues. Rich can be reached at [email protected] or 330.258.6423
Nathan M. Fulmer is an associate in Buckingham’s Taxation Practice Group. He represents clients on a broad range of tax planning and controversy matters. His joint degree in taxation allows him to provide unique solutions when assisting clients on business matters. Nate can be reached at [email protected] or 330.258.6464.
About Buckingham, Doolittle & Burroughs:
Buckingham, Doolittle & Burroughs, LLC is a corporate law firm that counsels middle-market executives and business leaders all over Ohio and beyond. With offices in Canton, Akron, and Cleveland, Buckingham offers clients Business Law Reimagined through sophisticated and practical legal services. Serving the region for more than 100 years, Buckingham’s mission is to deliver meaningful experiences through the practice of law, exceed expectations in terms of service, counsel and business sense, and to offer continuous value to the industries, communities and clients they serve. For more information, news and updates, visit bdblaw.com.