Major Changes Enacted to Ohio’s Municipal Income Tax System

    December 2014

    On December 19, 2014, Ohio Governor John Kasich signed into law Substitute House Bill 5 (“HB 5”). The provisions of HB 5 take effect for municipal income taxable years that begin on or after January 1, 2016, and they significantly modify Ohio municipal income tax law.

    HB 5 seeks to make uniform both the income tax base of each Ohio municipal corporation and the administration of each municipal corporation’s income tax. It requires each municipal corporation that imposes an income tax to amend its income tax ordinances by January 1, 2016 so that those ordinances conform to Ohio Revised Code Chapter 718 (the Chapter of the Ohio Revised Code that governs municipal income taxation), as amended by HB 5.

    The attached publication summarizes the significant modifications to Ohio Revised Code Chapter 718 made by HB 5, some highlights of which are:

    • Enacts a uniform definition of taxable income that all municipalities must follow for municipal income tax purposes.
    • Adds to the exemptions from municipal income tax many items that are not currently exempt under Ohio Revised Code Chapter 718 but that are commonly exempt under the codified income tax ordinances of most municipal corporations.
    • Requires that each municipal corporation allow the carryover of excess net operating losses for a maximum of five taxable years after the taxable year in which the net operating loss is incurred.
    • Specifically exempts pensions from “taxable income” but continues to allow municipal corporations to tax the nonqualified deferred compensation, including supplemental executive retirement plan income, earned or received by individuals. Municipal corporations that wish to tax nonqualified deferred compensation to its full extent should make clear in their codified income tax ordinances that “pensions” do not include nonqualified deferred compensation, including supplemental executive retirement plans, for purposes of the municipal corporation’s income tax.
    • Allows municipal corporations to treat an individual as a resident for municipal income tax purposes only if the individual is domiciled in the municipal corporation.
    • Increases from 12 to 20 the number of days during a calendar year a nonresident individual may work in a municipal corporation before that individual is subject to the municipal corporation’s income tax on the wages or nonwage compensation earned in the municipal corporation (this 20-day threshold does not apply to professional athletes, professional entertainers, or public figures).
    • Modifies the property factor, payroll factor, and sales factor that comprise the equally weighted three factor formula that is used to apportion net profits to a municipality.
    • Under HB 5, each employer must withhold and remit municipal income tax on its employees’ qualifying wages pursuant to a uniform schedule, and HB 5 makes uniform (i) the due dates for filing annual municipal income tax returns and estimated taxes and (ii) the requirements for an affiliated group of corporations to file a consolidated municipal income tax return.

    If you have any questions regarding HB 5, including the amendments that must be made to a municipal corporation’s existing codified income tax ordinances before January 1, 2016, please contact the Squire Patton Boggs lawyer with whom you work.