On March 31, 2021, Governor Mike DeWine signed Senate Bill 18 into law. The bill was designated as an emergency measure, and therefore, the bill takes effect immediately instead of the normal 90 day waiting period. Recently enacted legislation, including the Consolidated Appropriations Act of 2021 (“CAA”) and the American Rescue Plan Act of 2021 (“ARPA”), are not automatically incorporated into Ohio law. Thus, absent this conformity legislation, Ohio taxpayers would have been required to make adjustments at the state level, effectively undoing the federal changes in order to compute state taxable income. Senate Bill 18 now makes such adjustments unnecessary.
Senate Bill 18 also makes two other important changes of note. First, the legislation excludes from the definition of “gross receipts” for Ohio Commercial Activity Tax (“CAT”) purposes the “dividends” received from the Ohio Bureau of Workers Compensation Fund and the proceeds from the second round of Paycheck Protection Program (“PPP”) loans that have been forgiven. Second, the non-resident withholding rates have been reduced from 5% to 3% for non-resident individuals and qualifying trust beneficiaries and from 8.5% to 3% for all other qualifying investors for tax years beginning on or after January 1, 2023.
Internal Revenue Conformity
The CAA and ARPA have enacted several important tax changes, affecting both individual taxpayers and business taxpayers. Among the most impactful changes to individual taxpayers are:
- The temporary exclusion from gross income of the first $10,200 of unemployment compensation received for taxpayers with modified adjusted gross income of $150,000 or less;
- The temporary allowance of a $300 charitable contribution deduction for standard deduction taxpayers;
- Exclusion from gross income for emergency financial aid grants;
- Temporary exclusion from gross income for the discharge of student loan indebtedness.
For businesses Ohio now conforms to certain federal changes, including:
- Temporary allowance of a full deduction for business meals;
- Clarification that expenses paid from forgiven PPP loans are deductible, reversing a U.S. Treasury decision that such expenses were not deductible.
Thus, as a result of the passage of Senate Bill 18, these federal changes are incorporated into Ohio law.
Exclusion of Gross Receipts from the Commercial Activity Tax
The Ohio CAT imposes a tax on Ohio taxable gross receipts. The definition of “gross receipt” is broadly defined, encompassing many different types of gross receipts. In 2020, the Ohio Bureau of Workers Compensation issued three “dividends” to taxpayers and issued these dividends on federal Form 1099-G. With many workers working from home, the Ohio Bureau of Workers Compensation Fund saw very few claims relative to the premiums charged, thus resulting in a large surplus of cash. The decision to return the excess premiums to taxpayers in the form of what the Department of Taxation called a “dividend” resulted in a dispute as to whether these payments were taxable gross receipts subject to Ohio CAT. The Ohio Department of Taxation’s position was that these payments were “dividends” and therefore, should be considered Ohio taxable gross receipts. Senate Bill 18 nullifies the Department’s position by providing a specific legislative exclusion from the definition of “gross receipts” for these payments.
The CAA also authorized a second round of PPP loans. As with the first round, if recipients of the PPP loans met certain requirements, the loan would be forgiven by the United States Federal Government. In November, 2020, the United States Treasury Department took the position that certain expenses incurred from the receipt of non-taxable income would not be deductible. The practical effect of this decision was to make the PPP loans taxable in the sense that even though the loan would not be subject to tax, if the expenses incurred from the loan proceeds could not be taken as a deduction, taxpayers would effectively be taxed on the value of the loans. The CAA overruled Rev. Rul 2020-27 and allowed taxpayers to deduct expenses that were paid from PPP forgiven loans. Senate Bill 18 adopted the federal treatment and thus, taxpayers are both not taxed on the PPP forgiven loans but are also allowed to take a deduction for expenses paid from these loans.
Ohio Nonresident Withholding Rates Reduced
Perhaps the most meaningful change resulting from Senate Bill 18 is on the computation of non-resident withholding. In Ohio, business owners are allowed to deduct the first $250,000 of business income ($125,000 for married filing separately) included in federal adjusted gross income. Any amounts earned in excess of the $250,000 are taxed at a flat 3% rate. Ohio’s antiquated withholding rules require businesses to withhold at a rate of 5% for nonresident individuals and nonresident beneficiaries of a trust and 8.5% for all other investors other than nonresident individuals.
Ohio’s top marginal rate for individuals is 4.797% , meaning that the withholding is at a rate higher than the rate any individual would ever pay in Ohio, which is nonsensical. The legislation reduces the withholding rate from 5% to 3% on business income for nonresident individuals and qualifying trust beneficiaries and from 8.5% to 3% for all other qualifying investors. Though the reduction in withholding will still result in over withholding since the $250,000 deduction is not taken into account in the withholding computation, the amount of excess withholding should be reduced substantially. Importantly, the 8.5% withholding rate, which has not been used since 2004 when corporations were subject to that top marginal rate, has been eliminated, and thus, the non-resident withholding rates will now more closely align to the tax rates associated with the income, thus reducing the amount of income subject to over withholding.