Municipal Tax Reform and Your Business

municipal tax reformBusinesses in Ohio, and those nearby with operations in the State, are likely all too familiar with the frustrations that can accompany disparities among compliance with the income tax laws of the hundreds of municipalities within the State.  When are tax returns due?  Are we required to make estimated payments?  Does this city allow the carryforward of net operating losses, and if so, for how long? How does that city handle taxation of pass-through entities?

House Bill 5 (H.B. 5), signed into law on December 19, 2014 by Ohio Governor John Kasich, attempts to reform municipal tax law, making it more uniform and less burdensome for taxpayers.  Many of the provisions of H.B. 5 were effective January 1, 2016, while others kicked in as of 2017.  Several technical corrections to the bill were enacted during the biennial budget bill process, and others may still occur as taxpayers react to the bill’s provisions and how each municipality adopts such provisions.

While interpretation and education of this significant reform is still ongoing, here’s an overview of the key changes businesses should be aware of going into the 2017 filing season and beyond:

  1. 20-day withholding rule:
  • As a general rule, employers do not need to withhold income tax for a municipality if an employee is working 20 or fewer days during the calendar year in that municipality (this is increased from 12 days).  Instead, the employer must withhold to the employee’s “principal place of work” municipality (where he/she reports for employment duties on an ordinary basis, whether that is a fixed location, a worksite location, or the location at which he/she spends the greatest number of days in the year).  
  1. Small employer withholding exception:
  • A “small employer” (any employer with less than $500,000 of total revenue during the preceding taxable year) only needs to withhold income tax on employees to the municipality (if applicable) in which it has a “fixed location”.
  • A “fixed location” must be a permanent place of doing business in Ohio (office, warehouse, store), even if it is in a jurisdiction without a municipal income tax.
  1. Uniformity of estimate thresholds and due dates:
  • H.B. 5 established a standard threshold for the requirement of estimated income tax payments at an annual liability projection exceeding $200.  In the past, municipalities were spread across the board regarding this requirement, but most had settled for a lower threshold of $100.
  • All city income tax returns for businesses are now due on the 15th day of the fourth month following the end of its taxable year (April 15th for calendar year taxpayers).
  1. Net operating loss provisions:
  • Before H.B. 5, municipalities could choose whether to allow for the carryforward of net operating losses (NOL) and for how long.  Now, the bill enforces the application of a five-year NOL carryover period, effective for NOLs incurred in tax years beginning on or after January 1, 2017.  Pre-existing NOLs are permitted to continue to be carried forward if allowed by the municipality.
  • This NOL carryforward provision will be phased in over a five-year period, with a 50% per year limit beginning in tax year 2018 (any unused NOLs resulting from this 50% limitation may also be carried forward).  Full utilization at 100% of NOL carryovers will not occur until tax year 2023.
  1. Pass-through entity treatment:
  • Pass-through entities (S corporations and partnerships) must file and pay municipal tax at the entity level based on apportioned net profits (such entities are no longer able to push tax liabilities down to owners by filing informational only returns with municipalities).  

Although the intent of House Bill 5 is uniformity and simplification, it is inevitable that questions and differing interpretations arise, especially as the first filing season of the tax year for which H.B. 5 is effective approaches.  Therefore, taxpayers should be sure to consult with a tax advisor to determine the applicability of the H.B. 5 provisions to their specific circumstances and situations.

Jessica Nunn contributed this article, which was also published in the Toledo Business Journal on February 1, 2017 edition. Jessica is a CPA with Gilmore Jasion Mahler, LTD. She is a member of GJM's Manufacturing Industry Group, working with many manufacturing clients as well as clients in many other industries.

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