What House Bill 5 Means to Your Business
By Joshua Schering and Nick Leacoma
Ohio businesses will experience fewer headaches when tax reform House Bill 5 (HB 5) goes into effect on January 1, 2016. The relief comes from standardization of multiple municipality tax policies and a reduction in the number of returns you may need to file. This change eases some burdensome requirements that affect real estate and construction companies doing business in several municipalities.
Here’s how the reform works
HB 5 increases the number of days a large business (annual revenue over $500,000) employee can work in a municipality from 12 to 20 days before city tax withholding is required for that city.
The 20-day exemption only applies if:
- The employee worked 20 or fewer days in a municipality outside of the employee’s principal work place
- The employer does not withhold taxes where the employee worked for 20 or fewer days
- A refund of taxes withheld is not requested by the employee from the municipality where the principal place of work is located
- To allocate an employee’s time, the bill provides a determination test. One day spent in a municipality is defined as working in that municipality more than in any other. The following activities are considered performed at the principal place of work:
- Commuting to and from work
- Traveling time to pick up, load, move, and/or deliver the employer’s product (unless said products are attached to real estate not used, controlled, or owned by the employer)
Small business employers (under $500,000 in annual revenue) are only required to withhold municipality taxes where their principal business is located.
This alleviates additional payroll tax filings for a number of companies with short term projects in other municipalities.
Net Operating Losses (NOLs) rules are standardized
HB 5 requires municipalities to allow NOL deductions and carryforwards for five years in taxable years beginning after December 31, 2016. If the NOL occurs before 2017, it is only allowed if the municipality adopts an ordinance allowing it. Net operating losses do not include losses from basis, passive activity loss limitations, and at-risk losses.
The NOL deduction and carryforward is limited to 50 percent of the full amount allowed for the first five years (years 2018 – 2022). The 50 percent limit doesn’t apply to NOLs incurred prior to 2017 and under an ordinance that allows the deduction and carryforward of NOLs. The portion of the NOL that was not deducted may then be carried forward. Tax years that begin after taxable year 2023 allow the full NOL deduction.
Net profit calculation is standardized
Pass-through entities must compute their net profit as if they were a C corporation. They are not allowed to deduct the following in re-computing their net profit:
- Guaranteed payments paid or accrued to an owner (or former owner)
- Payments or accruals to a qualified self-employment retirement plan
- Amounts paid or accrued for health insurance or life insurance plans for owners or owner-employees
To preclude NOLs from being deducted twice individuals are required to disregard NOLs carried forward by the entity to reduce the current year’s net profits.
Other noteworthy changes
- The sales apportionment factor has changed to include income from rental property
- If a taxpayer owes $10 or less to a municipality with their annual return they are not required to pay the tax but are still required to file a return
In conclusion
Ohio has long strived to be a pro-business state but maintained a burdensome municipal tax system. This latest round of municipal tax reform makes compliance easier and more cost effective. To learn about other changes that could affect your business, contact Ciuni & Panichi, Inc. at 216-831-7171 or cp-advisors.com.
Nicholas Leacoma, CPA, is a senior manager and Joshua Schering is a senior accountant in the Real Estate and Construction Services Group at Ciuni & Panichi, Inc. The Ciuni & Panichi, Inc. team provides audit and accounting services, tax compliance and consulting, management advisory services, wealth management, growth management, and retirement planning.
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