The most significant piece of the tax reform is the creation of the Commercial Activity Tax (CAT). The CAT was created to tax a broader base of taxpayers at a lower rate, so more businesses are paying their fair share. Excluded entities include public utilities, financial institutions, insurance companies and nonprofit organizations.
For the 2005 tax year, the rate is .06 percent and it will increase each year until 2010 when rates will hit .26 percent on annual Ohio taxable gross receipts in excess of $1,000,000. Businesses with annual gross receipts of $150,000 to $1,000,000 will pay a minimum tax of $150. Businesses with annual Ohio receipts less than $150,000 are not subject to the CAT.
Businesses with more than $150,000 in annual taxable gross receipts will be required to register for the CAT by November 15, 2005, and pay a one-time fee of $15 or $20. In addition, taxpayers will be required to pay the CAT tax on a quarterly basis.
Businesses should carefully review the following key factors with their tax advisers to ensure that the right amount of tax is paid.
- Defining taxable gross receipts
- Sourcing of gross receipts to Ohio
- Determining what credits will be available to offset the CAT
- Reporting where multiple businesses exist under common control and/or ownership
Businesses with high profit margins should experience a decrease in overall tax burden. Conversely, businesses that operate high-volume, lower margin operations may experience an increase in their Ohio tax liability (e.g., retailers, grocery stores, etc.).
There are other key aspects of the tax reform package to watch.
- A reduction of all personal income taxes, which, beginning in 2005, will be reduced by 4.2 percent each year until the total rate reduction reaches 21 percent in 2009.
- The phasing out of the corporate franchise tax over five years, beginning with franchise tax year 2006, with a reduction rate of 20 percent per year until it is completely eliminated in 2010.
- The elimination of tangible personal property tax, which will be phased out over four years beginning in 2006 and ending in 2009.
You should also consider these important tax provisions under the new bill.
- The state sales tax rate decreased from 6.0 percent to 5.5 percent.
- The vendor discount for timely filed and paid sales tax returns remains at .9 percent.
- The corporate franchise and personal income tax credits for purchases of new manufacturing machinery and equipment will no longer be available for purchases made after June 30, 2005.
- The personal income tax on trusts was made permanent.
- The 2005 tax year will be the final year that individual taxpayers will be able to deduct qualified tuition expenses in arriving at their Ohio adjusted gross income.
- The elimination of 10 percent rollback on commercial real property.
This tax reform is the most significant change in Ohio’s tax structure in more than 30 years. These are some of the highlights of the more relevant tax provisions that will affect you and/or your business. Consult with your tax and financial advisers about the potential impact of the legislation and your Ohio tax burden.
Michael J. Stefanek, CPA, is a partner at Skoda, Minotti & Co., a broad-based accounting, tax, strategic planning, litigation support, insurance and investment services firm. Stefanek is the firm’s state and local tax specialist. Reach him at (440) 449-6800 or email@example.com.