Gov. Taft signed a budget bill on June 30, 2005, that enacted major tax reform for the state of Ohio. The governor is hoping that Ohio tax reform will attract more businesses and make Ohio more competitive with the surrounding states.
But exactly what changes were enacted?
Commercial activity tax
The commercial activity tax (CAT) is a tax on a business’s gross receipts. The CAT tax replaces the corporate franchise tax and will be phased in over five years as the corporate franchise tax is phased out during the same time period.
All business entities (except financial institutions and dealers in intangibles), including subchapter S corporations, will be subject to the CAT tax of .26 percent. Any entity with gross receipts under $150,000 will not be subject to the CAT, and the first million of an entity’s gross receipts is exempt. The minimum CAT tax is $150.
Corporate franchise tax
With the enactment of the CAT, the corporate franchise tax will be phased out over five years. This change only impacts entities currently liable for the corporate franchise tax. A subchapter S corporation will continue to have to file its informational return until the phase-out is complete for the corporate franchise tax.
The machinery and equipment (M&E) credit is only available for purchases of machinery made by a manufacturer before June 30, 2005. Any equipment purchased that qualifies for the credit must be installed by June 30, 2006.
The budget bill changes the M&E credit to a grant program that businesses must apply to.
Personal income tax
The good news is that the tax reform lowers personal income tax rates by 21 percent over five years. This rate deduction is across the board for all income levels in Ohio.
Tax reform eliminated the tax deduction for tuition and fees paid for post-secondary education. Previously, Ohio permitted a deduction of up to $2,500 of unreimbursed tuition and fees for post-secondary education.
Also, the taxation of income from trusts became permanent with the governor signing the budget bill; it was scheduled to expire for trusts with years beginning in 2004.
Personal property tax
The taxation of personal property was eliminated by Ohio’s tax reform. All new machinery and equipment acquired in 2005 is exempt from personal property tax.
The remaining taxation of machinery and equipment and all other items subject to personal property taxation in Ohio will be phased out between 2006 and 2008. The enacted budget has provisions to compensate school districts for the loss of personal property tax dollars from the state.
The state piece of the sales tax rate dropped to 5.5 percent under the new budget bill. The current state rate is 6 percent, but this rate dropped to 5 percent on July 1, 2005. Depending on how you look at it, the state sales tax rate either dropped by .5 percent or increased by .5 percent. The discount rate remains at .9 percent.
Other tax provisions
In addition to the changes listed above, the tax reform eliminated the additional estate “sponge” and the estate tax deduction for family-owned businesses. There are other minor tax provisions that are part of the budget bill but this article highlights the important changes that impact everyone.
As part of the budget bill, Ohio will have an amnesty period beginning in January 2006. This amnesty period will be for any taxes due and payable before June 30, 2005.
Ohio’s new budget and new tax reforms took effect on July 1, 2005, and only time will tell if these changes attract new businesses and jobs to Ohio, as Gov. Taft is hoping.
MARY JO DOLSON is a manager in the specialty tax practice of Saltz, Shamis & Goldfarb, the tax and accounting division of SS&G Financial Services Inc. (www.SSandG.com). Reach her at MDolson@SSandG.com or at (330) 668-9696.