Ohio municipal income tax reform – Top 10 business tax provisions

Ohio House Bill 5 was signed into law on December 19, 2014 with an effective date of January 1, 2016. This bill brought sweeping changes to the Ohio municipal tax system in an effort to provide uniformity and simplicity to what has been a very complex municipal tax structure. Following are the top 10 provisions that businesses should be aware of when navigating the new tax structure.

1. Pass-through entity (PTE) treatment:
1. S Corporations = no change in law. These will be taxed at the entity level and the owners’ flow-through income will not be subjected to tax in most municipalities. A major exception: allows the 119 municipalities who previously voted to tax resident S corporation owners at the shareholder level to continue that treatment.
2. Pass-through entities other than S Corporations = the municipal net profits tax will be imposed on all PTE‘s at the entity level. Municipalities will also tax only its residents on the income of PTE’s. Municipalities are allowed to offer a credit to residents for tax paid by pass-through entities owned by the resident.
3. Publicly Traded Partnerships = may elect to be taxed as a C corporation resulting in no flow-through of income to the individual resident owner.
2. Net operating losses:
1. The law provides for a statewide five-year carryforward for NOLs incurred in taxable years beginning after 2016. Note that this is a one-year delay from the bill’s effective date.
2. Taxpayers may only claim 50% of the available NOL carryforward during years 2018 through 2022. Any unused NOLs resulting from the 50% limitation can be carried forward. 100% utilization starts in tax year 2023.
3. Pre-2017 NOLs are permitted to be carried forward using the current municipal treatment (i.e., municipality-by-municipality basis). Pre-2017 NOLs must be utilized before utilizing the NOL’s generated after 2016 and the 50% limitation does not apply.
4. NOL carry-forwards are calculated and applied on a pre-apportionment basis.
3. Twenty-day withholding rule:
1. An employer need not withhold tax for a municipality if the employee is working in the municipality for twenty or fewer days. Instead the employer must withhold to the Principal Place of Work.
2. An employee can only be considered to be in one municipality on any given calendar day. They shall be considered to have spent a “day” performing services in a municipality only if the employee spent more time performing services for or on behalf of the employer in that municipality when compared to all the other municipalities in which the employee worked on that day.
3. Withholding would start on day twenty-one (i.e., the employer would not need to retroactively withhold on the first twenty days).
4. The twenty day withholding rule does not apply if the employee performed services at one or more presumed work locations. This is a construction or other temporary worksite in Ohio at which the employer provides services that can reasonably be expected by the employer to last more than twenty days in a calendar year.
5. The twenty day withholding rule also does not apply to a professional athlete, professional entertainer, or public figure.
4. Small employer withholding exception:
1. A small employer need only withhold tax on employees to the small employer’s fixed location.
2. Small Employer is defined as any employer that had less than $500,000 of total revenue (broadly defined as any type of receipt) during the preceding taxable year.
3. Fixed location means the permanent place of doing business in Ohio, such as an office, warehouse, storefront, or similar location owned or controlled by an employer.
5. Apportionment:
1. The apportionment factors generally are consistent with current law provisions. Real estate commissions are sitused to the municipality in which the underlying property is located. Net profit from rental activity of an individual is subject to tax only by the municipality in which the property is located and the municipality in which the individual taxpayer/owner resides.
2. Current law sales factor “throwback” rule stays in place. Requires that solicitation or promotion be performed by employees of the taxpayer regularly at the place where delivery is made for the throwback rule to NOT apply. This would also include sales made outside of Ohio.
3. Taxpayer or tax administrator may use alternative apportionment if the statutory apportionment factors do not fairly represent the extent of a taxpayer’s business activity in the municipality. If requested by the taxpayer, must be made in writing and must accompany the original or amended tax return.
6. Pensions:
1. Pensions will be exempt from tax and therefore no withholding is required on income included in Box 5 of Form W-2 if the income is exempt.
2. Courts have recently decided that a supplemental employee retirement plan is a pension and therefore exempt.
7. Consolidated tax returns:
1. Corporate taxpayers are permitted to elect to file a return using a federal consolidated group for municipal net profit tax purposes on an original or amended municipal tax return if a federal consolidated tax return is also filed.
2. Election is binding for five years. In order to opt out after five years, an election to discontinue must be made in the first year following the last year of the five-year consolidated return election period.
3. Corporate groups making the consolidated election may choose to include or exclude 80 percent or more owned pass-through entities form the group.
4. If a taxpayer filed a federal consolidated tax return, the tax administrator may require the taxpayer to file a consolidated return for municipal tax purposes.
8. Assessments and appeals:
1. Assessments trigger appeal rights and must be sent by certified mail and have the word “Assessment” written on the top of the first page.
2. Once an assessment is issued taxpayers have 60 days to file an appeal to the Local Board of Tax Review.
3. Statute of Limitations is three years after the tax was due or the return was filed, whichever is later or one year after any appeal of an assessment is finalized.
9. Due date conformity:
1. Withheld taxes are scheduled to be remitted:
1. Monthly if collected taxes exceeded $2,399 in the previous calendar year or collected taxes in any month during the previous calendar quarter exceeded $200.
2. If the monthly thresholds are not met, then the tax must be remitted quarterly.
3. Municipalities are permitted to enact an ordinance requiring taxes to be remitted semimonthly if withheld taxes exceed $11,999 during the prior calendar year or $1,000 during any month during the prior calendar year.
2. Municipal net profit tax returns are due on the 15th day of the fourth month following the end of the taxable year.
3. If a federal extension has been filed, then the city due date is automatically extended for the same period of time and no notice to the city is required.
4. No remittance of tax is required with a return if the amount shown to be due is $10 or less.
5. Mailbox rule is in place (i.e., must be put into the U.S. mail by the due date).
10. Affidavit of withdrawal:
1. A taxpayer can file an affidavit with a municipal tax administrator to certify that the taxpayer is no longer required to file returns in the municipality because it is no longer providing services in the municipality.
   

House Bill 5 provided major changes in Ohio municipal income taxation that can be quite complex and may greatly impact businesses and individuals. This high-level overview of some of the significant changes is not all-inclusive.