Ohio Municipal Income Tax Changes Signed Into Law

After many years of debate Municipal tax reform has finally been enacted in the State of Ohio. Skoda Minotti wanted to share with you the important provisions of Municipal reform (HB 5) that was enacted this week. The provisions are broken into the different areas impacted: employer withholding, entity changes and individual changes. The majority of the changes are effective 1/1/2016 with the exception of the net operating loss changes which are effective 1/1/2018.

Employer Withholding Provisions

HB 5 enacted a significant change to the employer withholding requirements when employee’s travel to multiple cities. This change will benefit businesses significantly.  Current law requires an employer to do city withholding if an employee is in a city for more than 12 days. HB 5 has changed the “occasional entrant rule” to 20 days. Withholding for the non-principal place of business will be required on the 21st day and forward but an employer can elect to retroactively go back and do municipal withholding from the beginning.

The key withholding provisions are the following:

• The threshold is now 20 days. If an employee is working in a municipality 20 or fewer days in a calendar year an employer is not required to withhold municipal tax on the wages earned.  Instead the employer will withhold municipal income tax based on where the employer’s principal place of business is located.
• The “occasional entrant rule” also eliminates the need to withhold municipal income tax for multiple municipalities for the same day. A preponderance of a work day determining where withholding will be required.  If an employee travels to eight different cities in a day and the majority of the day is spent in City A withholding will only have to be done for City A if the 20 days has been met.
• If the employer is operating a construction site or a temporary worksite, and it is reasonably expected that the work at the site will last more than 20 days, the employer is expected to withhold on employee’s wages at these sites from day one. This is to prevent an employer from rotating out employees to avoid the 20 day rule.
• Withholding would be required for a municipality if the employee seeks a refund from the “principal place of business” municipality for the days worked outside the municipality in other municipalities. There is a requirement to bypass the 20 day rule and municipal withholding is required.
• An exemption from the 20 day rule was is put in place for small businesses. A small business is defined as business with gross receipts of less than $500,000.  Any small business is not required to follow the 20 day rule and is only required to withhold municipal tax for their fixed location municipality.
• The 20 day rule does not apply to professional athletes, professional entertainers or public figures.

Individual Tax Provisions

The individual tax provisions of HB 5 are the following:

• Residency/Domicile – establishes 25 common law tests to be used by municipalities and individuals to determine residency. Neither the tax administrator nor the individual taxpayer may rely on any other factors to determine residency.  This provision was enacted to address the difference between the State of Ohio’s bright line test for residency and the common law test utilized by municipalities.

Entity Tax Provisions

Provisions impacting entity filings:

• Pass-through entities (other than S Corporations) – pass-through entities will be taxed at the entity level, but municipalities may tax the income that flows through to a resident individual owner. An owner of a pass-through entity cannot be directly taxed by a municipality where they are a non-resident on the flow up of income from the pass-through entity.
• S Corporations will be taxed at the entity level and the exemption that was in place for the individual owner’s remains in-tact. An S Corporation owner will be taxed on the flow up of income from the S Corporation if the owner resides in one of the municipalities that has already enacted the taxation of the owner (119 municipalities adopted this provision back in 2002 and 2004).
• HB 5 enacts a five year net operating loss (NOL) carry over for all municipalities. A five year carryforward is permitted for a loss incurred in taxable years beginning after 1/1/2017.  The NOL provisions are phased in over five years.  Beginning in 2018 50% of any NOLs may be carried forward and beginning in 2023 100% of any NOLs may be deducted.  Any municipality with an NOL provision will continue to permit the deduction.  NOLs will be deducted on a pre-apportionment basis, which will remove the requirement to track NOLs on a per city basis.
• As passed HB 5 also preserves the throwback rule that is in place for municipal taxation. It retains the requirement that the solicitation must be done by the entities own employees.
• Uniformity Provisions

HB 5 also simplified some of the filing issues that have existed in the past with Ohio municipalities.  HB 5 requires conformity with the different municipalities on various items.  In particular HB 5 requires the following:

• Withholding – All withholding taxes will be uniformly remitted either monthly or quarterly depending on the amount of taxes remitted the previous calendar year. Municipalities can enact legislation to require semi-monthly remittance based on prior year calendar withholding.  The requirement to remit withholding taxes electronically next business day was removed from HB 5.  The electronic requirement would have applied large taxpayers.
• Due Dates and Return Extensions – Calendar year taxpayers all returns are due 4/15 with an extended due date of 10/15. The extension request is automatic provided a federal extension has been filed.  HB 5 does not provide for a method of securing an extension if no federal extension request has been made.
• Minimum Tax Payment Threshold – No payment is required by either an individual or an entity if the tax due is less than $10.  The same is true for tax administrators, no refunds will be given if the refund is less than $10.  If the liability is less than $10 a tax return is still required to be filed.
• Estimate Payments – HB 5 increases the threshold for estimated payments to $200. Municipalities can decide not to require estimated tax payments for taxpayers.