On March 31, Governor DeWine signed Substitute Senate Bill No. 18 (“S.B. 18”) into law. The bill brings Ohio income tax law into conformity with recent changes to the Internal Revenue Code (“I.R.C.”) and contains a number of other provisions that may be of interest to Ohio taxpayers.
S.B. 18 conforms Ohio law to the I.R.C as it exists on the bill’s effective date. Because S.B. 18 contains an emergency clause, it goes into effect immediately. Prior law conformed to the I.R.C. as of March 27, 2020.The new conformity date of March 31, 2021 incorporates changes made by the Consolidated Appropriations Act, 2021 (“CAA 2021”) and the American Rescue Plan Act of 2021 (“ARPA 2021”).The I.R.C. update impacts the calculation of federal adjusted gross income (“FAGI”), which is used as the starting point for calculating a taxpayer’s Ohio adjusted gross income. School districts using FAGI as a starting point for their own tax bases will also be impacted by the update.
Business Tax Changes made by S.B. 18
Some of the more significant changes to Ohio’s business taxes are as follows:
- The allowance of a 30-year depreciation period for certain residential rental property. This allowance was contained in CAA 2021.
- The temporary allowance of a 100% deduction for business meals, which are generally allowed only a 50% deduction. This allowance was contained in CAA 2021.
- A clarification that forgiven Paycheck Protection Program (“PPP”) loans do not qualify as income for the Ohio income tax, and expenses paid with these loans are deductible. This provision applies to both 1st and 2nd draw PPP loans. The 2nd draw of PPP loans is allowed under CAA 2021.
- An exclusion from gross receipts for Commercial Activity Tax for forgiven PPP loans. S.B. 18 added 2nd draw loans to the exclusion that previously applied to 1st draw PPP loans.
- A temporary exemption from the CAT for Bureau of Workers Compensation dividends paid in 2020 and 2021.
Additional changes to Ohio business taxes include:
- An extension of the deadline to pay certain deferred payroll taxes.
- An extension of the work opportunity tax credit.
- An extension of the exclusion for certain employer payments of student loans.
- An extension of the limitation on excess business losses for taxpayers that are not corporations.
- An exclusion from gross income for grants from the Restaurant Revitalization Fund and targeted Economic Injury Disaster Loan advances.
Individual Income Tax Changes made by S.B. 18
Of the changes to Ohio’s income tax, which falls on individuals, perhaps the most significant is a temporary exclusion from gross income of the first $10,200 of unemployment benefits received. This applies to taxpayers with $150,000 or less in FAGI ($300,000 or less for joint filers). This provision was a part of ARPA 2021.
Also related to unemployment benefits, S.B. 18 provides that taxpayers receiving such benefits may elect to have state income taxes withheld from their unemployment compensation, beginning January 1, 2022.S.B. 18 also provides that the Tax Commissioner may temporarily waive any interest, penalty, or interest penalty imposed under either of Revised Code chapters 5747 (income tax) or 5748 (school district income tax). A taxpayer who has paid such interest, penalty, or interest penalty may apply for a refund under Revised Code section 5747.11. This temporary waiver requires the taxpayer to file a 2020 tax return timely. It also requires that the taxpayer pay the tax due by June 30, 2023 or the abated amounts will be reimposed on the unpaid amount calculated from the original due date. Under continuing law, however, the Tax Commissioner has discretion to permanently abate the penalties, though not the interest, for the taxpayer.
Additional changes to Ohio non-business taxes include:
- A temporary look-back rule for determination of earned income for purposes of the Earned Income Tax Credit (“EITC”).
- A temporary expansion in the amount of, and eligibility for, the EITC.
- A temporary increase in the amount of the child and dependent care credit.
- The extension of an exclusion from gross income for the discharge of indebtedness related to a qualified principal residence.
- A temporary exclusion from gross income for the discharge of student loan indebtedness.
- An extension of the temporary allowance of a deduction for charitable contributions by those who do not itemize their deductions.
- A clarification that the educator expense deduction includes expenses for personal protective equipment and supplies related to preventing the spread of COVID-19.
- The exclusion from gross income for emergency financial aid grants.
- The transition from a qualified tuition and expense deduction to an increased phase-out threshold of the federal Lifetime Learning Credit.
Changes made to Pass-Through Entity (“PTE”) Withholding Tax
S.B. 18 makes some important changes to the PTE withholding tax, effective for taxable years (of the PTE) beginning on or after January 1, 2023. Under Revised Code section 5733.41 as amended by S.B. 18, the rate at which PTEs subject to the tax must withhold will be “equal to the tax rate imposed on taxable business income under division (A)(4)(a) of section 5747.02 of the Revised Code.” The rate in the referenced Revised Code section is 3.0%, meaning the PTE withholding tax is reduced from 5.0% in the case of individual investors, and from 8.5% for investors that are not individuals. The option for a PTE to file a composite return is not affected by S.B. 18.A composite return requires that tax be paid at the highest individual rate, currently 4.797%.While that is a higher rate of tax, some PTEs use this option for the convenience of their investors.
If you would like to discuss how S.B. 18 might apply to your individual or business tax situation, please contact Tom Zaino, Derek Heyman or any other ZHF professional.