On June 30, 2015, Gov. John Kasich signed the 2016-17 Ohio budget bill (H.B. 64). The key tax provisions of the bill include a 6.3% across-the-board state income tax cut for all taxpayers and the expansion of the preferential tax treatment available to small business taxpayers.
Personal Income Tax Rates
Prior to the signing of the budget bill, the personal income tax rates ranged from 0.528% to 5.333%. The budget bill reduces those rates to a range of 0.495% to 4.997%. As a result of the 6.3% reduction in tax rates, taxpayers earning $40,000 will save approximately $60 while taxpayers earning in excess of $200,000 will save approximately $336 for each $100,000 of income.
|Income Level||Marginal Tax Rate||Base Tax Liability|
|$0 - $5,000||0.495%||-|
|$5,001 - $10,000||0.990%||$24.75|
|$10,001 - $15,000||1.980%||$74.25|
|$15,001 - $20,000||2.476%||$173.25|
|$20,001 - $40,000||2.969%||$297.05|
|$40,001 - $80,000||3.465%||$890.85|
|$80,001 - $100,000||3.960%||$2,276.85|
|$100,001 - $200,000||4.597%||$3,068.85|
Small Business Exemption
For the taxable year 2015, the budget bill increases the tax exemption from 50% to 75% on up to $250,000 of Ohio small business investor income. For the taxable year 2016, the bill increases the exemption to 100%. Additionally, the bill creates a new 3% flat tax that will be applied to small business investor income in excess of $250,000.
Explains Natalie Takacs of Meaden & Moore’s Personal Tax Advisory Group, “The small business tax breaks in the budget bill will result in significant tax savings for many taxpayers. The increase in the exemption rate from 50% to 75% in 2015 can add up to an additional $3,100 of tax savings to the $6,200 of tax savings already available through the 50% exemption.” Takacs continues, “when the 100% exemption goes into effect in 2016, the total exemption savings can be as much as $12,500.”
But in Takacs’ opinion, the new 3% flat tax on “small business investor income” offers the greatest potential savings. Takacs observes, “the term ‘small business investor income’ is a misnomer. Although the executive version of the bill would have limited the small business tax benefits to income derived from businesses whose gross receipts did not exceed $2 million for the taxable year, the $2 million gross receipts restriction was not included in the bill as enacted. Since the preferential tax treatment is available for almost all business income reported on personal income tax returns - irrespective of the size of the business – the 3% flat tax can result in tremendous tax savings.” Takacs gives an example of a married couple who reports $1,250,000 of Ohio business income on their personal return. Prior to the introduction of the 3% flat tax, $1,000,000 of the S corporation income would have been subject to Ohio 4.997% regular tax rate – resulting in a tax liability of approximately $50,000. The 3% flat tax reduces this tax to $30,000 (approximately a 40% tax reduction).
The budget bill makes changes to several credits. These changes include, but are not limited to, the following.
The legislation restricts the retirement income credit, the lump-sum retirement credit, the lump-sum distribution credit, and the senior citizen credit to taxpayers whose individual or joint adjusted gross income is less than $100,000. Previously, there were no income restrictions on the credits.
Job Creation and Retention Tax Credits
The computation of the job creation and retention tax credits is amended so that the credit equals an agreed-upon percentage of the taxpayer's Ohio employee payroll instead of Ohio income tax withholdings. The legislation reduces the amount of time a taxpayer has to submit a copy of a job creation or job retention tax credit certificate to 30 days (previously 60).
New Markets Tax Credit
The legislation amends the calculation of the Ohio new markets tax credit so that it is based on the full amount paid for a qualified equity investment while requiring most of that investment to be made in low-income businesses.
Gov. Kasich used his line-item veto to eliminate 44 provisions from the budget, including the following tax-related provisions:
The budget had included a tax amnesty program to be offered from January 1, 2016 – February 15, 2016. In vetoing the proposed amnesty program, Gov. Kasich cited Ohio’s 2012 amnesty program and explained that “waiting longer between amnesty programs will encourage greater tax compliance in the interim and generate higher revenues when programs are held.”
In an attempt to combat the filing of fraudulent income tax returns that aimed to steal refunds, in January, 2015, the Ohio Department of Taxation began requiring selected taxpayers requesting refunds to pass an “Identity Confirmation Quiz” before the Department would process their refund requests. Many Ohioans complained that the knowledge-based authentication questions were unduly holding up their refunds. An Ohio Department of Taxation spokesperson, however, defended the quiz, stating that 97% of the people who took the quiz had passed the quiz, and that the quiz is operating as intended.
The budget had included a provision that would have required the Tax Commissioner to evaluate the effectiveness of the measures being used to reduce tax fraud and to submit a report and recommend improvements to select members of the Ohio legislature. While stating that the Administration “is committed to continue making improvements to the methods used for identity verification,” Gov. Kasich vetoed the provision out of concern that it would “severely limit the tax commissioner’s ability to fight fraud and protect taxpayer money.”
If you have any questions regarding the impact of the 2016-17 Ohio budget bill on your tax situation, please contact Leslie Kasten or Natalie Takacs at (216) 241-3272.