On March 31, 2021, Gov. Mike DeWine signed into law Ohio Senate Bill 18, incorporating a number of recent federal changes including provisions from the Consolidated Appropriations Act, 2021 (CAA) and the American Rescue Plan Act of 2021 (ARPA). The federal changes affect Ohio income taxpayers by adjusting federal income, the starting point for Ohio tax returns. A summary of several highlighted provisions is below.
Commercial Activity Tax (CAT) exclusions
Senate Bill 18 exempts any Paycheck Protection Program (PPP) loan amounts forgiven under the CAA (the second round of PPP) from the Ohio commercial activity tax. Initial PPP loan forgiveness amounts under the CARES Act were previously excluded from CAT.
The bill also provides a temporary exemption from CAT for Ohio Bureau of Workers’ Compensation (BWC) dividends paid to employers in 2020 and 2021. The BWC has returned excess workers’ compensation premiums to employers during 2020 and 2021. The returned payments, referred to as ‘dividends’ by the BWC, were considered to be a taxable gross receipt for CAT prior to the bill.
Pass-through entity withholding tax rate
Senate Bill 18 reduces the tax rates for pass-through entity withholding on nonresident investors to the 3% business income tax rate. The rate change applies to a pass-through entities taxable year beginning on or after Jan. 1, 2023.
Prior to the reduction, pass-through entities were required to withhold tax at a 5% rate for individual investors and 8.5% for non-individual investors (other pass-through entity investors). Once the new 3% rate becomes effective in 2023, taxpayers will no longer be required to pay the additional tax when the income was ultimately only subject to a 3% tax rate. This is a welcomed and long-awaited change for most taxpayers.
Conformity and alternative tax law election
Senate Bill 18 will conform the IRC as of the date the legislation is signed by Gov. DeWine, i.e., March 31, 2021. The legislation also allows a taxpayer to elect to use the version of the Internal Revenue Code as of the end of the taxpayer’s taxable year for any tax year ending after March 27, 2020 (the last time Ohio updated its conformity to the IRC) and before March 31, 2021. Accordingly, taxpayers can elect to apply the prior version of the code before the CAA (December 2020) and ARPA (March 2021).
Takeaways
The updated conformity to the federal Code provides Ohio taxpayers much anticipated clarity as they navigate the tax filing season. The conformity to the CAA, and thus the deductibility of PPP expenses for Ohio purposes, joins a number of states that have recently taken similar actions. The reduction of the nonresident withholding rates provide welcome relief for taxpayers beginning in 2023. For questions about Ohio’s conformity or the other changes in Senate Bill 18, please contact your state and local tax adviser for more information.
