On July 1, Ohio Governor Mike DeWine signed Am. Sub. House Bill 110 (HB 110) into law.
This covered general spending for the two-year period from July 1, 2021, through June 30, 2023, and containing several important provisions, including revisions to personal income tax, sales tax, municipal income tax withholding and deductions for qualifying capital gains.
Personal Income Tax Rate Reduction and Bracket Changes
The bill includes a reduction in the number of tax brackets, as well as lowering the rate within each. While most brackets will see a 3% reduction, HB 110 also applies a new top rate of 3.99% and eliminates income tax for those earning less than $25,000.
A comparison of the new rates and brackets are as follows:
Ohio’s New Tax Rates and Brackets
Old Individual Income Brackets
New Individual Income Brackets
All rate cuts are retroactive to January 1, 2021.
Repeal of Sales Tax on Employment Services and Employment Placement Services
Beginning October 1, Ohio will no longer subject employment services and employment placement services to the state’s sales tax. The Ohio Revised Code had defined employment service as “providing or supplying personnel, on a temporary or long-term basis to perform work or labor under the supervision or control of another, when the personnel so supplied receive their wages, salary or other compensation from the provider of the service,” while employment placement service was defined as “locating or finding employment for a person or finding or locating an employee to fill an available position.”
The change is welcome, as the tax had created a great deal of controversy and litigation in its three decades of existence. Industries impacted most include manufacturing, distribution and similar industries that commonly use the services of temporary employees and/or employment service agencies. Because the change is not effective until October 1, employers will need to continue to analyze and document the taxability of exemptions for periods prior to that date. They should also analyze the impact of the change on existing direct pay permits.
Municipal Income Tax Withholding Provisions
HB 110 also addresses municipal income tax withholding, important because Ohio’s emergency order ends on July 18, 2021, and many Ohioans continue to work remotely fulltime or under a hybrid work arrangement. HB 110 permits employers to extend HB 197’s withholding procedures through December 31, 2021, providing employers with additional time to evaluate and develop their post-COVID return-to-work plans.
As you may recall, HB 197 was enacted in response to the COVID-19 pandemic and required employers to continue to withhold at the employee’s principal place of work prior to the pandemic as opposed to the municipality where the employee was temporarily working. Effective January 1, 2022, employers will once again be required to apply the pre-COVID 20-Day Occasional Entrant Rule with respect to employee withholding.
Schneider Downs is well-positioned to assist employers in analyzing the impact and costs of these provisions and design remote workplans that are tailored to the provisions of HB 110.
The bill also addresses the impact of COVID withholding provisions to the employee, allowing them to file refund claims with their principal place of work municipality for days they didn’t actually work within the taxing jurisdiction. This provision applies to 2021 only, leaving those employees looking for 2020 municipal withholding refunds to seek relief through the courts. While lawsuits challenging the ability to claim refunds for days worked away from the principal place of work have been filed, it’s expected that a final decision on the issue may take a while. As a result, employees should consider filing protective refund claims if they believe a refund is due.
Both employers and employees should note: HB 110 clarifies that if an employee requests a tax refund pursuant to the temporary rule, the municipality may not require the employer to provide documentation of the employee’s work location other than a statement verifying that the employer has not already refunded any withholding tax and the number of days the employee worked at the principal place of work.
Income Tax Deductions on Qualifying Capital Gains
HB 110 also includes two capital gains carveouts for business owners. Unfortunately, these deductions are not effective until tax year 2026, meaning taxpayers currently selling their business will not benefit. The two new provisions include:
1. Qualifying Capital Gains Deduction. Allows a deduction for taxpayers who derive capital gains from the sale of a business interest. The deduction equals the lower of the qualifying capital gain or deductible payroll, as defined by the Ohio Revised Code. By limiting the deduction to the lesser of the qualifying capital gain or deductible payroll, the provision aligns the tax benefit with the number of jobs created by the business.
2. Venture Capital Gains Deduction. Provides a capital gain deduction for all or a portion of capital gains received by investors on the sale of their equity interests in certain Ohio-based venture capital operating companies (VCOCs), as defined by the Ohio Revised Code and certified by the director of development.
It is important to note that these deductions apply only to the sale of a business interest and appear to not apply to transactions treated as asset sales. Further, since the benefits do not become effective until 2026, business owners seeking to sell a business interest should carefully consider the timing and form of the sale of the business.
Schneider Downs State and Local Tax professionals will continue to monitor the impact of the tax provisions of HB 110 and provide timely updates as necessary. Should you have further questions about any of the provisions discussed above, please contact any of our tax advisors.
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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.