When Governor Kasich signed Am. Sub. House Bill 5 it provided significant reform to income taxes levied by Ohio municipalities. House Bill 5 requires municipal corporations that levy an income tax as of January 1, 2016, to amend existing income tax ordinances to comply with the changes set forth in the legislation. The bill requires uniformity in the tax base (with some exceptions) and also intends to simplify what has been a very complex local tax structure. The following provides a high level summary of some of the key provisions of the legislation:
Computation of taxable income
- Provides for a uniform tax base applicable to all municipalities levying an income tax (with a few exceptions) depending on whether the taxpayer is a resident individual, non-resident individual, or a business entity.
- For a pass-through entity, net profit must be computed as if the entity is a C corporation (similar to current law).
- Intangible income reported on Schedules C, E, F, and Form 4797 is generally exempt.
- Pensions are exempt from municipal income tax. However, Supplemental Employee Retirement Plans (SERPs) were not addressed.
Net Operating Losses (NOLs)
- Provides a mandatory and uniform five year carryforward period for all municipalities for NOLs first incurred in taxable years beginning on or after January 1, 2017. NOL utilization is phased in over a five-year period with a 50 percent per year limitation beginning in taxable year 2018 and delaying full utilization of NOL carryforwards until taxable year 2023.
- NOL carryforwards will be calculated and applied on a pre-apportioned basis.
- Permits NOLs generated prior to 2017 to continue to be carried forward if allowed under pre-2017 municipal tax ordinances.
Consolidated tax returns
- Authorizes corporate taxpayers that file a federal consolidated tax return to also elect to file using the federal consolidated group for municipal net profit tax purposes.
- The election to file on a consolidated basis is binding and a taxpayer may opt out of the consolidated filing election after five years.
- Imposes the municipal net profits tax on a pass-through entity at the entity level. The income that passes through to an individual owner is only taxable in the city where the owner resides, although this treatment may not apply to all S corporations for the 119 municipalities that voted in 2002 or 2004 to tax S corporations at the shareholder level.
- Net profit of a disregarded entity shall be included in the net profit of the owner, with some exceptions.
- Gains and losses generated by a resident taxpayer’s different pass-through entities and such resident taxpayer’s own net profit reported on schedules C, E, & F may now offset each other during the year in which such gain or loss was generated.
Occasional entrant exemption
Current law allows an exemption that generally prevents compensation earned by a nonresident on 12 or fewer days within a municipality in a calendar year from being subject to tax and withholding in that municipality. The following highlights some of the significant changes applicable to the “casual” entrant exemption:
- Adopts a 20-day threshold, by which the employer generally is not required to withhold tax for a municipality if the employee is working in the municipality 20 or fewer days in the calendar year. Instead the employer is required to withhold tax for the municipality in which the employee’s principal place of work is located (“the Principal Place of Work Municipality”).
- An employee may only be considered to have worked in one municipality on a single calendar day.
- Once an employee exceeds 20 days in a municipality, the employer must withhold tax in that municipality from day 21 going forward. However, employers are permitted to retroactively elect to withhold taxes from day one.
- Requires an employer that reasonably expects that it will be providing services in a municipality for 21 days or more in a calendar year to withhold municipal income taxes in that municipality for all employees from the first day.
- Adopts a “small employer” exemption from withholding. Small employers are only required to remit municipal income tax withholding to their “fixed location” municipality, without regard to the 20-day rule. A small employer is a business or sole proprietorship with gross receipts of less than $500,000. A “fixed location” is the permanent place of doing business in Ohio, such as an office, warehouse, or similar location owned and controlled by the employer.
- Provides an income tax employer withholding schedule (monthly or quarterly) for all municipal corporations based on previous withholding amounts:
- Withholding taxes must be remitted monthly if collected taxes were greater than $2,399 in the previous calendar year or were greater than $200 in any month during the previous calendar quarter. Otherwise, the withholding tax must be remitted quarterly.
- Municipal corporations can require taxes to be remitted semimonthly if the taxes withheld were greater than $11,999 in the previous calendar year or were greater than $1,000 in any month during the prior calendar year.
- Taxpayers with an estimated annual withholding tax liability of less than $200 can pay annually.
- Provides uniform estimated tax payments as follows:
- Estimated taxes are required if the annual estimated tax due is greater than $200 (or $50 per quarter).
- Municipalities have the option not to require any estimated payments.
- A penalty will not apply for estimated tax payments which fall under the safe harbor provisions (90 percent of current year tax, 100 percent of prior year tax, taxpayer not domiciled in municipality on January 1 of taxable year).
- Adopts the “mailbox rule” for annual tax returns and quarterly estimated tax payments, which means taxpayers are considered to timely file the document if it was placed in the mail and postmarked by the due date.
House Bill 5 provides major changes in Ohio municipal income taxation that can be quite complex and will greatly impact businesses and individuals. This high-level overview of some of the significant changes is not all-inclusive. Because the law changes are first effective for taxable years beginning on or after January 1, 2016, there is a possibility for further changes during 2015.
If you have any questions, please contact your tax advisor.