Substitute Version of House Bill 5 Accepted

The House Ways and Means Committee accepted a substitute version of House Bill 5, which makes changes to and creates uniformity in Ohio’s municipal income tax statutes.

Among the revisions now being considered by the committee as part of the substitute bill are changes to the taxation of pass-through entities and their owners. The new version of H.B. 5 now requires taxation at the entity level and would prohibit taxation at the individual owner level, with the exception of the city in which the individual owner resides. The substitute bill also allows an individual resident to use certain losses incurred by a pass-through entity to offset any other net profit. The taxation of subchapter S corporations and their owners remains unchanged.

The bill also makes changes to exempt income, including retirement income, by exempting any pension plan or any pension benefit, whether or not included in qualifying wages, from tax payments. The bill also gives municipal corporations authority to exempt income earned by a person under the age of 18, but does not require the exemption. Changes are also made to exempt income provisions as they relate to nonresident compensation and pass-through entities.

Changes to net operating loss are also made in the substitute bill. All cities will be required to provide a five year net operating loss carry-forward period, but the provision is delayed until 2017 and limited to 50 percent of the deduction otherwise allowed for five years. In addition, the substitute bill creates a Municipal Income Tax Net Operating Loss Review Committee. This committee comprises 11 members representing taxpayers, municipalities, and the legislature and will study and issue a report on the potential fiscal impact of the required net operating loss carryover period in the legislation.

The substitute bill would also codify 11 common law factors used for determining a person’s domicile, including the location of an individual’s financial advisors, insurance agents, doctors, lawyers or accountants, where the individual is registered to vote, where they own property, where the individual shops and where the individual’s children go to school. H.B. 5 would also create a presumption of residency where a tax administrator reasonably concludes an individual is domiciled in the municipality. The 11 factors could be used to determine or to rebut this presumption.

The substitute bill makes many changes to the casual entrant provisions. Employers will not have to withhold tax on wages paid to employees who are present in a city for 20 days or fewer annually, but must begin withholding on the 21st day. An employer may elect, but is not required, to withhold back to day one. The bill also clarifies what constitutes a day working in a city for purposes of the rule, and makes other changes as well.

With respect to the apportionment of income, the bill retains the “throwback rule” found in current law with respect to sourcing sales. It also expressly permits the use of alternative apportionment rules in order to better reflect business activity within a city.

The bill also addresses a number of other issues, including rules regarding consolidated returns, the form of returns, minimum filing and payment thresholds, assessments and other provisions.

House Bill 5, introduced by Representative Cheryl Grossman (R) and Mike Henne (R), is currently pending in the House Ways and Means Committee. The substitute bill was accepted during the bill’s hearing and will now be further considered by the committee. Review the substitute bill’s comparative synopsis here.