Ohio Municipal Income Tax Law Changes On the Horizon!

Sep 08, 2015

Over the years, the Ohio Society of CPAs (OSCPA) has voiced its concerns about the Ohio municipal tax system. It is overly burdensome for taxpayers and the OSCPA is calling for change.  At the of 2014, Ohio legislators finally listened and passed House Bill 5 which helps achieve common sense tax reform effective for taxable years beginning on and after January 1, 2016. Municipalities are required to amend their existing income tax ordinances to include certain statements incorporating the bill’s revisions.

A summary of some of the new law’s provisions are:

Pass-through entities

• Unless the municipality is one of the 120 or so previously voted to tax resident S corporation owners at the shareholder level, the municipal net profits tax will now be imposed at the entity level. If the owner is a resident, the municipality may still tax the non-S corporation pass-through income at the individual level.
• Gains and losses generated from different pass-through entities may also now offset each other during the year in which they are generated.

Net operating loss (NOL) carryforwards

• For NOLs first incurred in taxable years beginning on and after January 1, 2017, all municipalities must allow a 5-year carryforward of those losses. There will be a 50% limitation of the carryforward for the first 5 years, with full utilization of carryforwards starting taxable year 2023. Pre-existing losses may continue to be carried forward if current ordinances allow. NOL’s unused due to the 50% limitation are also carried forward 5 years.

Occasional entrant rule 

• The new law increases the number of days (from 12 to 20 per year) an individual may work in a non-principal place of business municipality before incurring income tax liability there. The new law defines a “day” to allocate tax liability to the city where an employee spent the majority of time working that day, and all compensation applies.
• A new provision states small employers must withhold municipal income tax to their fixed location municipality, regardless of the occasional entrant rule, if the employer is a business that has overall gross receipts of less than $500,000.

Residency and payment of withheld taxes 

• Withheld taxes are to be uniformly scheduled to be remitted on a monthly vs. quarterly basis if withholdings are over certain thresholds in the prior calendar year.
• Municipalities are allowed to treat an individual as a resident for income tax purposes only if the individual is domiciled there, and the new law adopts 25 generally recognized common law factors for determining an individual’s domicile.

Taxpayer Bill of Rights

• The new law includes the full version of the state’s Taxpayer Bill of Rights at the local level, and requires municipalities to publish a summary of the taxpayers’ bill of rights and responsibilities online, as well as publish its municipal tax ordinances and regulations.

Tax returns 

• Establishes a uniform tax base applicable to all municipal corporations levying an income tax (with a few exceptions) by further defining the income that municipal corporations can tax and the income that they may not tax.
• Authorizes corporate taxpayers to elect to file using a federal consolidated group for municipal net profit tax purpose.
• A municipal income taxpayer may receive a refund of overpaid taxes only if the amount overpaid is more than $10. Likewise, income and net profit taxpayers will not be required to remit tax due that is less than $10. However, even if the tax due is less than $10, taxpayers must still file the tax return.
• Form 2106 expenses (unreimbursed employee business expenses) are deductible to the extent deducted for federal tax purposes.
• Taxpayers may file an affidavit with a municipal tax administrator to certify the taxpayer is no longer required to file tax returns in the municipality.
• Taxpayers will receive an automatic municipal tax filing extension if they timely filed a federal extension. Specifies that taxpayers that do not request an automatic federal extension may request an automatic municipal tax return extension. This extension does not extend the due date for remitting tax.
• Authorizes taxpayers to use an alternative method of apportioning income and allows tax administrators to require the use of an alternative method if the statutory formula does not fairly represent the extent of the taxpayer’s business activity in a municipality.
• Requires all municipalities levying an income tax to comply with a uniform annual tax return filing schedule, with some exceptions. Synchronizes municipal return filing dates with state filing dates. Makes consistent with federal, state and current municipal tax law the tax return due date for entities with a fiscal year-end other than a calendar year-end.
• Limits the amount of penalties and interest (federal short-term rate plus 5%) that may be charged for the failure to file returns or pay taxes on time, and makes all penalties discretionary.
• Adopts the “Mailbox Rule” for annual tax returns as well as for quarterly estimated tax returns, meaning taxpayers are considered to timely file any tax return if it is placed in the mail and postmarked by the due date.

By: Brent Ringenberg, CPA

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