Tax News Highlights: Ohio Passes Municipal Income Tax Reform

| 1/15/2015

Ohio Gov. John Kasich signed into law Amended Substitute House Bill 5, known as the municipal tax reform bill. More than 500 municipalities in Ohio impose an income tax on individuals and businesses residing in or otherwise transacting business within the municipal limits. While the Ohio Revised Code has standardized some of the provisions of municipal income tax laws, municipalities still were able to incorporate their own statutes and rules in various areas. The municipal tax reform bill further standardizes various areas of municipal income tax law.
These are highlights of the bill:

  • All municipalities are required to allow a five-year net operating loss (NOL) carryforward beginning with losses incurred in the 2017 tax year. Each municipality’s existing NOL rules will be in effect for NOLs created in 2016 and earlier tax years.
  • A business will not be required to withhold local income tax on an employee until the employee spends 20 days in the municipality. Prior to the change, withholding was required when the employee spent 12 days in the municipality.
  • Return due dates and extension periods are standardized, with returns due on April 15. A six-month extension period is available.
  • The treatment of pass-through entities other than S corporations is standardized. The pass-through entity will be subject to tax in the municipalities in which it does business, and the owner can be taxed only on the distributive share of income in its resident municipality.
  • Some municipalities impose tax both on S corporations and on distributive shares of S-corporation income received by individuals residing in that city. This treatment is retained.
  • A 25-factor test is used to determine where individuals are domiciled.
  • A personal income tax deduction for federal Form 2106, “Employee Business Expenses,” costs is allowed.
  • The throwback rule for computing apportionment is retained.
  • A municipal-level taxpayer bill of rights is incorporated.

Most provisions of the bill will be effective for tax years beginning on or after Jan. 1, 2016, with the NOL provisions set for Jan. 1, 2017.


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