Nine Recent Changes to Ohio’s Tax Laws

Ohio joins the ranks of states that passed substantial tax reform, like Minnesota and New Jersey. On July 4, 2023, Ohio Governor DeWine signed legislation that impacts numerous taxes, including personal income, pass-through entity, commercial activity, sports gaming, sales and use, and municipal income taxes.  

1. Personal Income Tax – Income Tax Rate and Bracket Reductions

In 2023 and 2024, Ohio is favorably adjusting its personal income tax graduated rates. In 2023, the brackets are reduced from four brackets to three, and the highest and lowest rates are reduced. In 2024, the top two brackets will be combined into a single bracket with the rate lowered to 3.5%.  

2023

• More than $26,050, but not more than $100,000 – $360.69 plus 2.75% of the amount in excess of $26,050.
• More than $100,000, but not more than $115,300 – $2,394.32 plus 3.688% of the amount in excess of $100,000.
• More than $115,300 – $2,958.58 plus 3.75% of the amount in excess of $115,300.

2024

• More than $26,050, but not more than $100,000 – $360.69 plus 2.75% of the amount in excess of $26,050.
• More than $100,000 – $2,394.32 plus 3.5% of the amount in excess of $100,000.

The changes to the personal income rates and brackets are estimated to result in a reduction of tax collections of $153 million in FY 2024 and a further $48 million in FY 2025.

2. Personal Income Tax – Deduction for Contribution to Home Ownership Savings Account

For taxable years beginning on or after January 1, 2024, to encourage homeownership and the use of homeownership savings accounts, Ohio provides a deduction for contributions made to a home ownership savings account of up to $5,000 for single filers and $10,000 for joint filers. 

3. Personal Income Tax and Commercial Activity Tax – East Palestine Derailment Compensation

On February 3, 2023, a Norfolk Southern train derailed causing massive devastation to New Palestine, Ohio. The legislation provides that individual taxpayers can deduct relief payments from a government agency, railroad company, insurer or agent of a railroad company. Similarly, for commercial activity tax (“CAT”) purposes, “gross receipts” do not include receipts provided from a government agency, railroad company, insurer or agent of a railroad company received to compensate for business lost due to the train derailment.  

4. Pass-Through Entity Tax – Credit for Taxes Paid to Other Jurisdictions

Ohio will allow its residents to claim a credit for pass-through entity taxes paid to other states and the District of Columbia. However, to avoid a double benefit, taxpayers will also have to add back such taxes that were deducted from federal adjusted gross income.  

The credit mechanism is not only effective for taxable years ending on or after January 1, 2023, but taxpayers may also apply these provisions to their pass-through entity tax return calculations for taxable years ending on or after January 1, 2022, on an originally filed return or an amended return.  

5. CAT – Increase of Exclusion Amount

Presently, business with less than $150,000 in annual gross receipts do not have to pay the CAT. In 2024, the exclusion amount increases dramatically to $3 million or less and then increases even further to $6 million or less in 2025.  

Interestingly, Governor DeWine used his line-item veto to strike a provision that empowered the tax commissioner to increase the exclusion amount annually based on a national inflation rate.

6. CAT and Financial Institutions Tax – Changes to R&D Tax Credit

The legislation makes changes in certain ministerial aspects of the credit. It enables the tax commissioner to “audit a sample of the taxpayer’s qualified research expenses over a representative period to ascertain the amount of tax credit the taxpayer may claim[.]” Also, all members of a financial institution group, elective consolidated group for CAT purposes, or combined group for CAT purposes must calculate their own credit based on their own qualified research expenses. Any excess credits that are carried forward can only be utilized by a member of the group as of the last day of the tax year that the credit is generated.  

7. Sports Gaming Tax – Tax Rate Increase

Previously, sports gaming receipts, less winnings paid and other adjustments, were subject to a sports gaming tax rate of 10%. Receipts received on or after July 1, 2023, will be taxed at 20%. It is estimated that the rate increase will result in increased collections of $100 million to $135 million annually.  

8. Sales and Use Tax – Certain Children’s Items Are Exempt 

Children’s diapers, creams and wipes, car seats, strollers and cribs are exempt from sales and use tax beginning on October 1, 2023.  

9. Municipal Net Profit Tax – Elective Payroll Factor Sourcing

Ohio did not abandon its three-factor sourcing in favor of single sales factor sourcing (in line with many taxing jurisdictions) for its municipal net profit tax regime. Rather, Ohio updated its three-factor formula to comport with the evolving remote/hybrid workplace business environment for taxation. Ohio adopted an elective factor sourcing centered around a qualified remote employee’s “qualified reporting location,” for municipal net profit tax purposes. Generally, tangible personal property is sourced to where it is used. Wages, salaries and other compensation paid during the taxable period to individuals are sourced to where the services are performed, and gross receipts from services are sourced to where the services were performed.  

The legislation allows taxpayers to source all three factors based on a “qualifying reporting location” for factors associated with “qualified remote employees,” which are employees who are assigned to an office location but are permitted or required to work remotely. A “qualifying reporting location” is generally a permanent or temporary place of business that is owned or controlled by the taxpayer where an employee or owners perform services for the taxpayer on a regular or periodic basis during the taxable year. With this election, taxpayers would source tangible personal property used by a qualifying remote employee to the individual’s qualifying reporting location; wages would be sourced to their qualifying reporting location; and gross receipts from services would be sourced to their qualifying reporting location.  

To prevent “nowhere factors” for municipal net profit tax purposes, a taxpayer’s affirmative election under this provision is applicable to all municipalities. This election is available for taxable years ending on or after December 31, 2023.