Republican Gov. Mike DeWine approved S.B. 18, a bill that will have Ohio follow the federal tax rules for certain coronavirus aid. The law provides a commercial activity tax exclusion for second-draw PPP loans under December's Consolidated Appropriations Act , and clarifies that expenses paid with covered loans can be deductible. The state already offered that tax relief for forgiven PPP loans under the Coronavirus Aid, Relief and Economic Security Act .
Under the new law, which takes immediate effect, Ohio will conform to the temporary federal income tax exclusion for the first $10,200 in unemployment benefits received by taxpayers with less than $150,000 in federal adjusted gross income, or $300,000 for joint filers. The law also conforms to the federal allowance of a 30-year depreciation period for certain residential rental properties and the temporary full deduction for business meals.
The law also allows Ohio's tax commissioner to temporarily waive any interest or penalties if a taxpayer doesn't make a full and timely payment of state and school district income taxes due on unemployment benefits received in 2020, provided that they file a timely return. Moreover, it provides a commercial activity tax exclusion for Ohio Bureau of Workers' Compensation dividends paid to employers for 2020 and 2021.
Beginning Jan. 1, 2022, the law will allow taxpayers to elect to withhold state income taxes from unemployment benefits. And starting Jan. 1, 2023, the law will also reduce the withholding rate for certain pass-through entities with nonresident investors to 3%, which matches the individual tax rate for business income. Currently, Ohio's entity-level taxes are 5% for qualifying investors who are individuals and 8.5% for qualifying investors that are not individuals to help curb tax avoidance, according to a fiscal note on the bill.
The reduction in the withholding rate won't alter the state's tax collections because taxpayers who withhold excess taxes can apply for refunds. However, the lower rate will result in a one-time reduction in revenue after the final refunds for the higher tax rates are paid in arrears for the previous tax year, the fiscal note said.
Altogether, the bill is estimated to provide more than $200 million in tax relief for Ohio residents and businesses, according to the fiscal note.
The bill passed unanimously through the General Assembly. The measure's primary sponsor, Sen. Kristina Roegner, R-Hudson, was not immediately available to comment on the bill's enactment.
But Roegner had said when the bill received final passage that the legislation was important to simplify the tax rules and provide relief for taxpayers during the ongoing spread of the coronavirus.
"With an already complex tax season, further complicated by the pandemic, it is vital we make these adjustments to ensure Ohio taxpayer's best interests are protected," Roegner said in a statement after lawmakers gave final approval to the bill March 24.
Ohio does not levy a corporate income tax, but business are subject to its commercial activity tax, a gross receipts tax. David Ebersole of BakerHostetler told Law360 that the law will simplify the tax filing for businesses that received PPP loans because excluding gross receipts from the forgiven loans is akin to not recognizing them as income for federal tax purposes. He also noted that the law equalizes the state's tax treatment for first-draw and second-draw PPP loans.
Removing the disparities in the withholding rates for certain pass-through entities and matching them to the tax rate for business income for individuals is also a significant change for businesses, Ebersole said.
"That's been an issue for some time," he said, adding that provision could reduce the amount of refund claims that taxpayers may need to file.
Representatives for DeWine and the Democratic minority leadership in the state House of Representatives and Senate did not immediately respond to requests for comment.
--Additional reporting by Asha Glover. Editing by Neil Cohen.
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