Ohio’s 2020-21 Budget – the Tax Law Changes

By: Bryan Davidson, CPA- Tax Manager

The finalized HB 166 contains significant tax changes.  These changes include the expansion of Ohio’s sales/use tax nexus standards, a reduction of individual income tax rates and changes to the Ohio Business Deduction (BID).

Sales and use tax nexus standards modified

The definition of “substantial nexus” has been modified and the following thresholds now apply to a seller.

  • Derives more than $100,000 in Ohio receipts from the sale of tangible personal property or taxable services where the benefit is received in Ohio.
  • Engages in 200 or more separate transactions from the sale of tangible personal property or taxable services where the benefit is received in Ohio.

As a result of these changes Ohio’s previous existing nexus provision (click-through nexus and cookie nexus) were repealed.

Business Income Deduction

Beginning January 1, 2020 this new provision provides that income from certain trades or businesses are not eligible for Ohio’s business income deduction (BID).  The BID has been around since 2015 and was intended to be an economic development tool.  Under the current law sole proprietors and owner’s of pass-through entities can deduct up to $250,000 in business income ($125,000 for married filing separately).  Any remaining business income is taxed at a flat 3% rate.

During the budget process the Ohio House wanted to reduce the exclusion down to $100,000 and remove the 3% rate for any other business income.  The Ohio Senate proposed retaining the BID which led to the delay of the overall budget enactment.

The final version of HB 166 doesn’t change the BID for most taxpayers.  It does however adopt a new definition of “eligible business income” which will apply for determining the entitlement to the BID.  The new definition of “eligible business income” specifically excludes the following:

  • Legal services provided by an active attorney admitted to the practice of law in Ohio or by an attorney registered for corporate counsel status under Ohio Supreme Court rules
  • Executive agency lobbying activity, retirement system lobbying activity, or active advocation by a person required to register as a lobbyist under Ohio law.

Individual income tax bracket changes

The individual income tax brackets have been reducing from seven to five by eliminating the bottom two brackets.  This effectively exempts Ohio individuals from tax if their income is below $21,750.  The indexing of brackets and exemptions is also frozen for 2019 and 2020 at 2018 levels.  The remaining brackets have been reduced by 4% for tax year 2019. Should you have question, please reach out to our firm. We would be happy to help you.