Ohio Overhauls Local Income Tax Code

December 22, 2014Articles

Ohio’s Governor recently signed major local income taxation reforms into law. Highlights of the overhaul include:

  • Important Date: As of January 1, 2016, municipal corporations must incorporate the new reforms; municipal corporations then imposing an income tax at a rate above 1% do not require additional voter approval to incorporate the new reforms.
  • Computing Taxable Income: Launches a uniform definition of taxable income by defining what is and is not “income” taxable by the municipality.
    • Exclusions:
      1. Alimony and child support
      2. Most compensation for personal injury/property damage 
      3. Gains from involuntary conversions 
      4. Interest on federal obligations 
      5. Nonbusiness income of an estate
    • Additions:
      1. Generally, income tax base of individuals includes certain deferred compensation and stock option income.
  • 5-Year Net Operating Loss Carryforward: All municipal corporations must permit five year carryforward of NOLs; allows pre-existing losses to continue to be carried forward if current ordinances permit.
  • Residency Standards (previously determined by municipal corporation):
    • Standards set in the State law reforms and the law codified 25 factors to determine “domicile” for purposes of residency standards, and only those factors can be used for determination. 
    • “Casual Entrant” Exemption to Residency – changed from 12 to 20 days per year and defines how the “days” are counted. The “Casual Entrant” Exemption does not apply to professional athletes, entertainers and public figures. 
    • Small business (under $500,000 in annual revenue) have a special exemption, which is only the municipality where the business’ fixed location is located may impose the local income tax.
  • Pass-Through Entities/Apportionment of Income
    • Current law, municipalities may tax pass-through entity net profits at either the entity or owner level but not both. Now, generally reforms result in entity-level taxation and the definition of net profits forming the tax base for pass-through entities is the “adjusted federal taxable income” after apportionment and allocation.
    • 3-Factor Formula Modified:
      1. Payroll Factor - compare compensation paid for services in a municipality compared to total compensation paid to that employee—bill limits comparison by setting specific locations for determining “total”.
      2. Sales Factor – compare receipts from where goods and services sold in a municipality against total receipts. Law changes a factor that when goods delivered to common carrier, the sale location is where the purchaser received the title. 
      3. Property Factor – adds that the calculation of property owned within the municipality includes the value of rented or leased tangible personal property.
  • Withholding Taxes:
    • Creates a set “schedule” for withholding; previously, each municipality determined the timing and schedule for withholding amounts. 
    • Electronic remittance options available if required for federal income tax purposes.
    • Permits employers to withhold income tax for a municipal corporation where an employee resides.
  • Filing, Collections, Refunds:
    • Generally requires uniformity in filing requirements such as deadlines, forms and procedures for annual returns.
    • Prohibits penalties for underpayment of estimated taxes if at least 90 percent due in year was paid in the estimates
  • Temporary Committee Formed: Determine, and make recommendations for fixes, for potential fiscal impact to municipalities for five year NOL carryforward requirements.

For more information, please contact Marc Kamer at [email protected] or Brian Close at [email protected].