Bills Bring Changes to Ohio Municipal Income Taxes and Ohio’s Residency Rules
Governor Kasich Signs House Bill 5 and House Bill 494
On Friday, December 19, 2014, House Bill 5 (“HB5”) was signed into law by Governor Kasich. HB5 will bring additional uniformity to Ohio’s municipal income tax system. Every municipal corporation levying an income tax must comply with the provisions outlined below beginning January 1, 2016.
The following are some of the significant highlights of HB5:
Creates a new net operating loss carryforward for all municipal corporations and allows a five-year carryforward of such losses. The NOL carryforward provision will be phased in beginning in tax year 2018 for losses incurred in taxable years beginning on or after January 1, 2017. Pre-existing losses (those generated prior to 2017) can be carried forward if permitted by current ordinances. NOL carryforwards will be calculated and applied on a pre-apportionment basis.
Creates a Municipal Income Tax Net Operating Loss Review Committee to evaluate and quantify the potential financial impact of the five-year net operating loss carry forward on municipal corporations.
Allows a municipal corporation to treat an individual as a resident for municipal income tax purposes only if the individual is domiciled there. HB5 provides 25 generally recognized common law factors for determining an individual’s domicile for municipal income tax purposes.
Increases the casual entrant rule to 20 days. An individual may work in a municipal corporation for 20 or fewer days without incurring an income tax liability there. HB5 also defines how days are to be counted.
The casual entrant rule does not apply to employees of businesses with less than $500,000 in annual revenue. HB5 prohibits the taxation of income of such employees by any municipality other than the municipality where the business’s fixed location is sitused.
Allows 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 municipal corporation.
Retains the “throw-back” rule currently used by municipal corporations for sales factor apportionment purposes.
Provides uniform standards with respect to the filing of consolidated municipal income tax returns by affiliated groups of corporations.
In general, municipal income tax will be imposed on all pass-through entities at the entity level. However, municipal corporations where voters previously elected to tax S corporation income at the individual level may continue to tax S corporation income in that manner.
All municipal corporations levying an income tax are required to comply with uniform annual tax return filing due dates.
Municipal income taxpayers may receive a refund of overpaid taxes only if the amount overpaid is more than $10. In addition, taxpayers will not be required to remit tax due that is less than $10. However, if the tax due is less than $10, taxpayers will still be required to file a tax return.
Taxpayers will receive an automatic municipal income tax filling extension if they timely file a federal extension. The extended due date of the municipal income tax return will be the fifteenth day of the tenth month after the last day of the taxable year to which the return relates.
As mentioned above, HB5 will bring additional uniformity to Ohio’s municipal income tax system. However, several significant reform provisions are not included in HB5. Primarily, business taxpayers will still be required to file municipal tax returns in hundreds of separate filing jurisdictions. HB5 contains no mechanism for central collection and no de minimis filing threshold. As a result, municipal income tax compliance continues to be an administrative challenge for companies doing business in the state of Ohio. In many cases, business taxpayers will incur significant costs to comply with municipal income tax laws, but they will owe very minimal amounts of tax. In order to make Ohio more competitive in luring out-of-state businesses to Ohio, these issues will still need to be addressed going forward.
Change to Ohio Residency Rules Also Signed Into Law
Governor Kasich also signed into law House Bill 494 (“HB494”) which contains an important change to Ohio’s residency rules. HB494 gives an individual an additional 30 days of presence in the state before he or she is presumed to be a resident for Ohio income tax purposes. Therefore, HB494 increases the number of contact periods allowed before a person is considered to be an Ohio resident from 182 days to 212 days. HB 494 will likely impact post-2014 taxable years.
GBQ’s State & Local Tax team continues to monitor Ohio legislative updates. If you have specific questions about HB5 or HB494, please contact a member of GBQ’s State & Local Tax team.