House Bill 5 Awaits Signature by Governor Kasich

On Tuesday, December 9, 2014, House Bill 5 (“HB5”) received final approval from the Ohio House of Representatives by a vote of 57-31. HB5 was passed by the Ohio Senate on December 3, 2014. The House previously approved a different version of the bill last year. If signed into law, HB5 will bring additional uniformity to Ohio’s municipal income tax system.

The following are some of the significant highlights of HB5:

Creates a new net operating loss carry forward for all municipal corporations and allows a five-year carry forward of such losses.

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 standards 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.

All municipal corporations levying an income tax are required to comply with uniform annual tax return filing due dates.

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.

Provides uniform standards with respect to the filing of consolidated municipal income tax returns by affiliated groups of corporations.

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.

Retains the “throw-back” rule currently used by municipal corporations for sales factor apportionment purposes.

Action Items

Governor Kasich is expected to sign HB5. Once the bill is signed into law, GBQ’s State & Local Tax Team will provide a full analysis and commentary. Every municipal corporation levying an income tax must comply with the provisions outlined above beginning on January 1, 2016. If you have specific questions about HB5 and how it will impact your business, please contact a member of GBQ’s State & Local Tax Team.

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