On Wednesday, April 26, the Ohio House of Representatives voted to pass Substitute H.B. 33, the operating budget for the state’s next biennium. From here, the bill moves on to the Senate for consideration.
Hopping on the Omnibus
Prior to reaching the House floor, H.B. 33 spent some time in the House Finance Committee, where a substitute version was accepted, followed by an omnibus amendment. Here is a list of tax-related items that entered the bill via the omnibus amendment:
- Exempting the fireworks fee imposed by R.C. 3743.22 from both sales/use and commercial activity taxes
- 15-year extensions to be allowed for municipal tax increment financing (TIF) districts provided certain conditions are met
- For purposes of qualified energy projects, defines the “Internal Revenue Code” to be that in existence on the bill’s 90-day effective date
- Sets $150 as the maximum amount that a municipality must reimburse a taxpayer for expenses related to responding to a prohibited notice received from the municipality’s tax administrator
- Addresses recordkeeping requirements for the new low income housing tax credit and removes the requirement that the county commissioners approve a project in their county before the Ohio Housing Finance Agency (OHFA) may finance or assist it under any of OHFA’s programs
- Creates the Joint Committee on Property Tax Review and Reform, which will review the history and purpose of Ohio’s property tax law and make recommendations on pending legislation and possible reform of the law
- Re-couples Ohio income tax with federal bonus depreciation provisions (discussed below)
- Simplifies the procedure for a park district to renew, increase, or decrease its existing property tax levy
There were also two items removed from the bill via the omnibus:
- The extended date for converting the CAT credit for NOLs accrued under the corporate franchise tax to a refundable credit
- The requirement (and funding) of video and audio recordings at the Board of Tax Appeals
From De-coupling to Re-coupling
One of the new provisions that will excite many individuals who either own, manage, or prepare taxes for a business will be the recoupling of Ohio income tax law to federal bonus depreciation and enhanced expensing. Currently, Ohio is decoupled from Internal Revenue Code (I.R.C.) sections 168(k)and 179, which provide for bonus depreciation and enhanced expensing of asset purchases. This means that, in calculating Ohio adjusted gross income, Ohio taxpayers must add back a portion of the bonus depreciation or enhanced expensing taken for federal tax purposes and deduct that addback ratably over the next several years. In most cases, the addback is five-sixths of the federally allowed expense, taken ratably over the subsequent five years.
The provision added to H.B. 33 is essentially the same as that contained in H.B. 116, reported out of the House Ways and Means Committee on May 2nd. Beginning in 2023, a taxpayer would not have to add back any portion of the expense allowed under I.R.C. sections 168(k) or 179, meaning the Ohio adjusted gross income calculation would be the same in this respect as the federal adjusted gross income calculation. This both simplifies the preparation of the Ohio tax return and lowers the taxpayer’s liability in the year the expensed assets are placed in service. Moreover, for assets placed in service in pre-2023 tax years for which the taxpayer has already added back a portion of the expense and would be currently deducting their yearly ratable portion, the taxpayer may elect to deduct the entire amount not previously deducted, beginning with their 2023 tax return.
Other Tax Items in the House-passed bill
We issued a Buzz on the Executive version of the budget bill and another on the House Finance Committee’s substitute bill. For ease of reference, here is a synopsis of the pre-omnibus provisions remaining in the bill passed by the House. It is organized by tax type, except the tax credit provisions and the changes to the requirements for tax notice delivery are discussed at the end.
Personal Income Tax
- Authorizes a deduction for certain amounts contributed to a homeownership savings linked deposit account, beginning in 2024
- Authorizes a deduction for payments received in compensation for lost business from the East Palestine train derailment
- Consolidates the two lowest tax brackets and sets the rate at 2.75%, beginning in 2023
- Suspends the indexing of tax brackets and exemptions for inflation for the 2023 and 2024 tax years
- Authorizes a $1,000 nonrefundable credit for certain volunteer first responders
Sales and Use Tax
- Provides an exemption for certain baby products, such as diapers, creams, car seats, and strollers
- Gives the Tax Commissioner the authority to suspend vendors’ licenses in certain circumstances
- Modifies the criminal provisions in R.C. 5739.99, specifying a class of misdemeanor or felony for listed offenses
- Clarifies that the exemption for sales or rentals to government agencies includes construction material and services for traffic control and drainage improvement
Withholding Tax
- Removes the quarterly reconciliation return requirement for certain employers
Municipal Net Profits and Income Tax
- Alters information sharing requirements between the Ohio Department of Taxation and municipalities
- Exempts individuals under 18 years of age from filing requirements
- Limits notices that may be sent to a taxpayer who has a filing extension in place
- Limits failure-to-file penalties
- Provides an automatic one month extension for a business that has a 6-month federal extension, thereby making the return due seven months beyond the original due date
Commercial Activity Tax
- Clarifies the situsing provisions in R.C. 5751.033(E) and (G) by changing “motor carrier” to “common carrier” and to “common or contract carrier,” respectively
- Excludes from “gross receipts” grants or debts forgiven for the purpose of expanding broadband service in Ohio
Property Tax
- Indexes the homestead exemption for inflation
- Allows the second and third publication of a property tax foreclosure action to be made online
- Prohibits local governments from levying replacement property taxes, beginning with elections held in 2025
- Allows the transfer of a parcel from one tax increment financing (TIF) to another, as long as the parcel owner has not yet made any payments in lieu of taxes under the existing TIF arrangement
- Prohibits the approval of a reduction in the taxable value of an electric power plant’s tangible personal property of more than 7.5% from the preceding year’s value, to take effect in 2024
- Exempts from tax for up to eight years the excess of the value of unimproved land subdivided for residential development from its value prior to subdivision, until construction begins or the land is sold
- Extends the property tax exemption for qualified energy projects from 2025 to the later of 2032 or the date the U.S. Treasury Secretary determines that annual greenhouse gas emissions from electricity production have been reduced by 75% from their 2022 levels, and makes other changes to the requirements for qualified energy projects
- Authorizes the owners of remediated brownfield development land to apply for an abatement or refund of 2020 and 2021 assessed taxes in certain limited circumstances
Financial Institutions Tax
- Changes the definition of “financial institution” to read “all entities that are consolidated” in the FR Y-9 or call report and specifies that where a holding company is required to file a parent-only FR Y-9, “financial institution” includes the group the institution would include if it were required by the Federal Reserve Board to file a consolidated report
Lodging Tax
- Authorizes the repurposing of lodging tax revenue to fund certain costs for convention,
- entertainment, or sports facilities. Cincinnati is specifically allowed to repurpose a portion of its 1% special convention center tax for these purposes.
- Authorizes Hamilton County to levy an additional 1% lodging tax to fund construction or operation of such facilities.
- Authorizes a county to use a portion of the revenue from its 3% general lodging tax to fund public safety in a resort area. At present, this applies to certain islands in Lake Erie.
- Authorizes a county with a population over 800,000, or a municipality in such a county, to exempt from lodging taxes a hotel that has been designated a “headquarters hotel” for a convention center. A “headquarters hotel” is designated as such by the nearby convention center, which may designate only one.
- Authorizes the municipality or county that exempted taxes from a headquarters hotel to require payments in lieu of taxes by that hotel.
Fuel Use Tax
- Imposes personal liability on certain employees of a business that is required to file and pay the fuel use tax, or any officers or trustees responsible for the business’ fiscal affairs, if the business fails to file its reports and pay the tax due
Corporation Franchise Tax
- Eliminates the requirement to file an amended report to show changes resulting from a federal income tax audit, and disallows an application for refund based on federal adjustments, beginning January 1, 2024
Cigarette Excise Tax
- Allows a distributor of tobacco products to obtain a tax refund for bad debts
- Changes annual license renewal deadline from 4th Monday in May to June 1st
Tax Credits
- Creates a nonrefundable low income housing tax credit to be awarded in conjunction with the federal low income housing tax credit, to be applied against the insurance premiums tax, financial institutions tax, or income tax
- Increases the cap on the motion picture and theatrical productions credit and extends the temporary cap increase in the historic rehabilitation credit by a year
- Allows the Tax Credit Authority to adjust the certified clawback amount in certain cases of noncompliance with regard to the Jobs Creation and Jobs Retention Tax Credits
- Makes several changes to the Qualified Research Expenditures (“QRE” a.k.a. “R&D”) Credit, including a requirement that an entity be a member of a taxpayer group on December 31 of the year in which a QRE was incurred for the group to claim the credit, and an authorization for an Ohio auditor to use a representative sample when auditing the qualified expenses for a credit
Tax Notices
The House-passed bill retains most of the original bill’s loosening of the requirements placed upon the Department of Taxation’s delivery of notices and inquiries to taxpayers, provisions which we discussed at length in this earlier Buzz. A positive development is that the House-passed bill restores the requirement that a taxpayer must consent to electronic delivery of notices before electronic delivery may be used.
Next step
H.B. 33 was introduced in the Ohio Senate on April 27th. Regarding the income tax provisions in the bill, Senate President Matt Huffman has stated that the combination of the lower two brackets with the corresponding rate cut was a good idea but should be expanded to increase the size of the tax cut from around $200 million to between $800 million and $1 billion.[1] We’ll be closely following this and all other changes the Senate proposes to the budget bill, and will keep you informed.
[1] As reported by WOSU Public Media, https://news.wosu.org/2023-04-27/two-year-state-budget-moves-to-ohio-senate-where-republican-leader-plans-big-changes (accessed Apr. 28, 2023).