HB 5 Becomes Law, Reforms Ohio Municipal Income Tax Structure– December 23, 2014 by Hannah Prengler

Amended Substitute House Bill 5 (HB 5) was signed into law on December 19th and, beginning in 2016, will bring us another step closer to creating a more uniform municipal income tax system. Ohio’s structure of nearly 600 local jurisdictions, each with its own municipal income tax rules, is considered one of the most complex local income tax structures in the United States. That same structure has often made it difficult to attract new businesses and retain Ohio’s existing, and even hometown, operations.

HB 5 provides some relief to the overly burdensome process and costs of navigating the tax code for businesses and their employees that span across multiple municipalities. Below are the major provisions applicable to tax years beginning on or after January 1, 2016.

Taxable Income Provisions

  • Mandatory five-year net operating loss carryforwards (NOLs) incurred in taxable years beginning on or after January 1, 2017, will be calculated on a pre-apportionment basis and thus will be standard across all municipalities. Individual taxpayers will also be permitted to carry forward NOLs.
  • Partnerships and Limited Liability Companies (LLCs) will be subject to municipal income taxes at the entity level. An owner will only be subject to tax on income received from a partnership or LLC in the owner’s resident municipality. (Note that S Corporations remain bound by current law.)
  • Resident individuals will be able to offset gains and losses realized from multiple flow-through entities, to deduct federal Form 2106 business expenses, and can continue to exclude intangible income and pensions from taxable income.

Withholding Provisions

  • The “occasional entrant rule” will increase the number of days to 20 whereby a traveling employee may enter a municipality before their employer is required to withhold on wages earned.
    • Employers will generally be required to begin withholding on the 21st day the employee conducts business within a municipality.
    • There are limitations under the new law. For example, if an employer expects the employee will work within a municipality for more than 20 days (e.g., construction site), the employer will be required to begin withholding on day 1.
  • A “small employer” withholding exception will be available for businesses with gross receipts of less than $500,000. These businesses will not be subject to 20-day rule and will only be required to withhold income tax for their principle work municipality.
  • A new uniform withholding schedule will outline tax collection thresholds for monthly and quarterly filers and will allow municipalities to enact rules requiring semimonthly withholding when collected taxes exceed a defined threshold.

Administrative Provisions

  • The rules around consolidated return elections have been refined, such as allowing an opt-out after five years, among others.
  • Tax administrators will be required to send assessments subject to the 60-day appeal period by certified mail and clearly identify correspondence as an “ASSESSMENT.”
  • The April 15th tax return deadline will remain intact, but the extended deadline of October 15th for calendar-year taxpayers (or the 15th day of the 10th month for fiscal filers) will be adopted. Automatic extensions will be available if a federal extension request is obtained.
  • A uniform interest rate (federal short-term rate plus 5%) will be required to be applied to both assessments and refunds. Under current law, some municipalities impose an 18% interest rate on assessments (similar to a penalty), but pay out a much smaller interest rate on refunds issued. The new law also allows tax administrators the power to fully or partially abate penalties.

Apportionment Provisions

  • Unfortunately, the municipal throwback rule will remain unchanged. As such, sales of tangible property originating from a municipality where the taxpayer is unable to show it is engaged in regular solicitation through its own employees at the place of delivery, will continue to be included in the taxpayer’s numerator of the originating municipality’s sales factor.
  • A taxpayer will be able to request, or a tax administrator may require, the use of an alternative apportionment method if the statutory method does not fairly represent the taxpayer’s activity within the municipality.

While HB 5 will bring taxpayers one step closer to a simpler and more uniform municipal tax code, the new law only gives taxpayers and municipalities one short year to educate and prepare themselves for numerous changes. We will be working with our clients throughout the year to help them plan for any and all opportunities. In the meantime, contact Hannah Prengler at hprengler@cohencpa.com or a member of your service team if you have specific questions.

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This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.