Ohio 2016-2017 Budget Offers Opportunities for Many Taxpayers– July 10, 2015

Posted by Patrick Walsh, MAcc

The first half of 2015 was filled with speculation regarding Am. Sub. H.B. 64, better known as Ohio’s Biennial Budget Bill (Budget Bill), and the tax impact it would have on both resident individuals and businesses in 2016 and 2017. But the final Budget Bill signed by Governor John Kasich on June 30, 2015, resulted in some unexpected changes in areas such as personal and business taxation, sales and use tax, municipal income tax uniformity law, Am. Sub. H.B. 5 and higher education reform. Below are a few of the most noteworthy updates that made their way into this $71.2 billion dollar piece of legislation.

Personal Income Tax
Overall, Ohioans will enjoy lower income taxes, and small business owners will reap larger deductions. Beginning in 2015, personal income tax rates are reduced by 6.3% for all individuals, reducing the top income earner tax rate from 5.333% to 4.997%.

Additionally, there are many significant changes to the Ohio Small Business Deduction that will, for the most part, continue to assist sole proprietors and pass-through entities. The Deduction:

  • Is increased for tax year 2015 from 50% to 75% of up to $250,000 of an individual’s gross income.
  • Is increased for tax years 2016 through 2017 to a 100% deduction up to $250,000 of an individual’s gross income.
  • Assesses a flat 3% tax rate beginning in 2015 on self-employed and small business income after the Deduction is used. (While this provision was intended to begin in 2016, unless a technical correction is issued, some taxpayers may see a one-year tax increase in 2015.)

To counter the reductions in personal income tax rates, vice taxes such as the Tobacco Tax increased $.035 per pack of cigarettes as of July 1, 2015.

Business Taxes
After much lobbying by business taxpayers, the final Budget Bill removed many of the non-friendly tax provisions originally proposed by Governor Kasich.

The final business tax provisions included the following:

  • A sales and use tax exemption is available for certain activities related to vehicle rentals while a separate vehicle is under repair or maintenance.
  • The petroleum activity tax (PAT) will now use the average market price of propane as the base to compute tax due as opposed to the average market price of diesel.
  • Remote sellers, business located outside of Ohio that sell into the state, will be subject to click-through nexus standards for sales and use taxes.
  • Foreign insurance companies will now be able to offset their retaliatory tax with the use of the New Markets Tax Credit Program.

The final Budget Bill excluded the following provisions:

  • No increase to the state sales and use tax rate (previous drafts proposed an 8.7% increase).
  • No increase to the commercial activity tax (CAT) (previous drafts called for an increase of 23%).
  • The proposed tax amnesty program was vetoed by Gov. Kasich, suggesting the state is looking to widen the gap between Ohio’s last amnesty program and a new version.

Municipal Income and Net Profits Tax
In December of 2014, House Bill 5 (HB 5) was enacted and significantly changed the way Ohio municipalities tax individuals and businesses. The Budget Bill provides additional clarity on several technical issues from HB 5 that caused additional burdens on Ohio taxpayers.

Updates to HB 5 that will be effective for tax years beginning on or after January 1, 2016, include the following:

  • Due dates for fiscal-year-end entities filing a municipal tax return will conform to federal and state filing deadlines.
  • Taxpayers may file an affidavit with a tax administrator certifying they are not required to file a tax return with a particular municipality.
  • Publicly traded partnerships may elect to be taxed as a C Corporation for municipal income tax purposes.
  • Clarifications are made regarding pre-2017 net operating losses restricted to 50% use beginning in 2019.

2020 Commission
In a global economy, businesses are constantly evaluating where to grow or move, and Ohio wants to ensure the state remains competitive in attracting and retaining businesses and their owners. So, in addition to the changes made for tax years 2016 and 2017, a new tax commission has been formed to review the state’s current tax policies and offer recommendations for reform.

The Ohio 2020 Tax Policy Study Commission (2020 Commission) is tasked with publishing its findings on Ohio’s current tax structure. The Severance Tax reform is the commission’s first publication, due to the state on October 1, 2015. Some of the goals for the 2020 Commission include:

  • Maximizing Ohio’s competitive business landscape on a national and international platform.
  • Evaluate reducing personal income tax rates to nearly a 3.5% flat rate by 2018.
  • Simplifying the Historic Rehabilitation Tax Credit while also converting the credit to a refundable tax credit or grant.
  • Reforming the Severance Tax to maximize its impact.

While the budget process started out like a lion, with Governor Kasich proposing significant business tax changes, the final Budget Bill exited like a lamb for most taxpayers. The ongoing initiative to create business-friendly tax policies, including previous efforts such as the phase-in of the CAT and phase-out of personal property taxes and corporate franchise taxes, puts Ohio in a much better financial position than most states trying to close significant budget deficits.

We want to hear from you! We encourage you to comment below on this blog post and share it on social media. Contact Patrick Walsh at pwalsh@cohencpa.com or Hannah Prengler at hprengler@cohencpa.com or a member of your service team for further discussion.