Ohio S.B. 18, enacted on March 31, 2021, updates the Ohio Tax Code to address recent changes in the Internal Revenue Code (IRC) made in response to the COVID-19 pandemic, along with revisions to the state’s Commercial Activity Tax (CAT).1
S.B. 18 has fully updated the Ohio Tax Code to conform with recent changes to the IRC.2 This conformity includes significant updates made in the Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA).3 The changes to conformity with the IRC, which are generally taxpayer-favorable, will impact Ohio state and local individual and school district (municipal) income tax bases of many taxpayers for the 2020 tax year by changing the federal adjusted gross income (FAGI) that is reportable for purposes of such taxes.
For tax years ending after March 27, 2020, and before March 31, 2021 (the effective date of S.B. 18), Ohio provides taxpayers the ability to make an irrevocable election to use the IRC in effect for federal income tax purposes in that tax year to calculate their Ohio tax liability, rather than using the IRC in effect on March 31, 2021.4
S.B. 18 authorizes the Ohio Tax Commissioner to abate penalties and interest from the non-payment of taxes on unemployment benefits received in 2020 if the taxpayer timely files an individual income tax return for the 2020 tax year.5 However, if a taxpayer receiving an abatement of penalties and interest on unemployment benefits does not pay the tax owed for 2020 by June 30, 2023, all amounts originally owed will be reinstated.6 The Ohio Tax Commissioner retains the power to permanently abate penalties and interest.7 Further, for unemployment benefits paid on or after Jan. 1, 2022, the legislation will allow recipients the ability to elect whether state income taxes are withheld from their unemployment benefits.8
S.B. 18 will not include in gross income determined for CAT purposes amounts from the second round of forgiven Payroll Protection Program (PPP) loans granted by the government, as Ohio has already done for the first round of PPP loans.9 The legislation also provides that gross receipts for CAT purposes will exclude any amount of excess surplus of the state insurance fund received by a taxpayer from the Ohio Bureau of Workers (OBW) Compensation in 2020 or 2021.10 Based on this provision, Ohio has mandated the OBW to create a process where worker’s compensation premiums are returned to employers. Ohio considers a premium as an amount of the grant left over after the amount of money needed to keep solvency is satisfied.11 Therefore, companies who paid CAT based on OBW premiums included in their gross receipts may be eligible for a CAT refund.
The legislation lowers Ohio’s pass-through entity withholding tax rates to 3% for tax years beginning on or after Jan. 1, 2023, with respect to the income of all investors.12 This withholding tax rate historically has been 8.5% for pass-through entities with non-individual qualifying investors, and 5% for pass-through entities with individual qualifying investors.
The federal government has addressed pandemic relief through a variety of laws in the past year, including the CAA and ARPA. These laws, which have included grants for businesses of all shapes and sizes from small local restaurants to major airlines, have helped to keep the economy afloat in the face of the pandemic through funding and other support. The tax provisions within this legislation, however, were enacted without significant consideration as to whether the states will conform to such provisions for purposes of their own taxing regimes. Ohio’s substantial conformity to the CAA and ARPA will benefit taxpayers still recovering from the economic effects of the pandemic, but at the same time will cost the state needed revenue.
Given the wide-ranging effect of the changes to the IRC and its outsized effect on the composition of the state tax base, IRC conformity policies are receiving extra attention in this year’s state legislative sessions. Especially in states that adhere to a static conformity policy like Ohio, where the IRC conformity date shifts on a periodic and somewhat uncertain basis, many businesses, individuals and tax professionals find it difficult to gauge how the states as a whole will react to recent federal income tax changes. With a continued likelihood that the IRC will change substantively in the coming months, states that use static conformity will continue to have to play catch-up to ensure that unexpected changes in the revenue base do not go unnoticed.
Finally, it should be noted that Ohio is considering an eventual repeal of the CAT regime, which could require the state to revisit its entire tax structure. H.B. 234, which is currently in the Ohio House Ways and Means Committee, would gradually reduce the CAT rate by 20% for tax years beginning in 2022 to tax years beginning in 2025, until the CAT is repealed for tax years beginning in 2026 and thereafter. Beyond overcoming the normal political hurdles inherent in eliminating a state tax, a repeal of the CAT may be especially challenging at this time, as ARPA contains a provision preventing states that receive federal funding under ARPA to combat the effects of the pandemic from enacting tax cuts until the end of 2024.
1 S.B. 18, Laws 2021.
2 S.B. 18, § 1, amending OHIO REV. CODE ANN. § 5701.11.
3 P.L. 116-260; P.L. 117-2.
4 S.B. 18, § 1, amending OHIO REV. CODE ANN. § 5701.11(B)(1).
5 S.B. 18, § 5.
7 Pursuant to OHIO REV. CODE ANN. § 5747.15(C).
8 S.B. 18, §§ 1, 8, amending OHIO REV. CODE ANN. § 4141.321(A)(3). Unemployment benefit recipients currently have the power to elect federal income tax withholding on such payments.
9 S.B. 18, § 3.
10 S.B. 18, § 6.
12 S.B. 18, §§ 1, 7, amending OHIO REV. CODE ANN. §§ 5733.41; 5747.41.
Ying Lee is a partner in Grant Thornton's State and Local Tax practice, and leads the Ohio State and Local Tax practice. Ying has extensive experience advising companies on multistate tax planning strategies aimed at minimizing state and local tax liabilities, resolving tax controversies, performing M%26A due diligence reviews, and assisting with complex compliance issues.
- State and local tax
- Private client services
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Jamie C. Yesnowitz
Jamie Yesnowitz, principal serving as the State and Local Tax (SALT) leader within Grant Thornton's Washington National Tax Office, is a national technical resource for Grant Thornton's SALT practice. He has 22 years of broad-based SALT consulting experience at the national and practice office levels in large public accounting firms.
Washington DC, Washington DC
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