Although a couple of weeks late, Ohio Governor Mike DeWine finally signed into law the new state budget on Thursday, July 18. It was the third time in 28 years that Ohio lawmakers missed the annual June 30 deadline. That noted, the new financial plan does contain a number of important changes.
Business Income Deduction
Many were concerned that the small business deduction would be reduced, but the adopted budget kept that number the same for those eligible. Since 2016, and now going forward, the first $250,000 of business income earned by taxpayers filing “single” or “married filing jointly” is 100% deductible. Anything above that threshold is taxed at a flat 3% rate. The new budget leaves these parameters intact for tax year 2019, though for 2020 attorneys and lobbyists will no longer qualify for the business income deduction.
Sales Tax Update
Ohio sales tax has a few changes as well. In light of the Supreme Court ruling in last year’s South Dakota v. Wayfair case, the state has updated its sales tax nexus. Effective August 1, vendors and sellers with $100,000 of sales to Ohio or at least 200 transactions in a 12-month period need to register and remit monthly sales tax to the state.
Taxpayers may also now claim an exemption for equipment and supplies used to clean qualifying manufacturing equipment that processes food. In addition, effective October 1, investment coins/metals and the sale of vehicles, repair services and/or parts to a professional racing team are no longer eligible for the sales and use tax exemption.
Individual Income Tax Reductions
In a move that probably hits closest to home, the state has reduced individual income tax rates. For 2018 and earlier, Ohio taxation began at a taxable income level of $10,501. For 2019, the state tariff doesn’t apply until Ohio taxable income exceeds $21,100.
Lawmakers also eliminated the bottom two tax brackets and gave all Ohioans a 4% rate reduction, which equates to $25 a year for an individual with a taxable income of $41,000, and $50 annually for a family of four making $73,000.
Additionally, the $50 credit for contributions to candidates running for political office in Ohio was eliminated commencing with 2019 income tax returns.
New Tax Credit for Investment in Opportunity Zones
Beginning in 2018, federal law allowed states to designate economically distressed areas that meet certain criteria as opportunity zones. When a taxpayer reinvests capital gains in an opportunity zone fund, the tax on those capital gains is deferred until the investment is sold or exchanged from the fund.
The new state budget contains a nonrefundable income tax credit equal to 10% of a taxpayer’s investment in an Ohio opportunity zone. The bill limits the total credit allowed to any individual to $1 million and caps the total credits allowed at $50 million. Additionally, it requires 100% of the investment in the Ohio opportunity zone versus 90% for federal. Taxpayers can apply to the Development Services Agency between January 1 and February 1 following the year in which an investment is made. If successful, the credit can be claimed for the year of the investment or in the next year, based on the date on the certificate. The credit is nonrefundable and can be carried forward five years. It’s also transferable once during a five-year period.
The passage of the budget was a win for all Ohio taxpayers, with the possible exception of those lawyers and lobbyists who won’t qualify for the business income deduction beginning next year. We expect further communication from the Department of Taxation to gain more clarity on all the above changes. Feel free to reach out to your Schneider Downs tax professional if you have additional questions.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.