Ohio Estate Tax

The state of Ohio's Estate Tax has four parts: the basic tax, the additional estate tax, the generation-skipping tax, and the tax on nonresidents. Changes to the federal estate tax laws have affected the Ohio estate tax laws. The additional estate tax is equal to the maximum credit allowable by federal estate tax law for the paying of state estate taxes. In effect, this allows Ohio to collect more taxes without increasing the total state and federal taxes. The Economic Growth and Tax Relief Reconciliation Act of 2001 phases out the credit for paying state estate taxes. For estates of decedents dying after December 31, 2004, these credits no longer exist. However, unless congress changes the laws again they will reappear in 2011. The budget bill will effectively repeal the additional estate tax for decedents dying after the day the governor signs the bill. In addition, the bill grants a credit for the amount of the additional estate tax for estates for those who died after December 31, 2001 but before the governor signed the bill. Executors of larger estates of individuals who died after 2001 may consider amending their Ohio Estate Tax Returns.

The generation-skipping tax is also affected by the Economic Growth and Tax Relief Reconciliation Act of 2001. This is a tax on the transfer of property to a person who is two or more generations below the decedent, such as a grandparent to a grandchild. The federal credit is elimated for estates of decedents who die after 2004. The budget bill will effectively repeal this tax for taxpayers who die on or after the governor signs this bill. There is not a credit for taxpayers who die before the governor signs this bill.

Ohio allows a deduction for the value of a family-owned business or farm to the extent it is passed on to other family members and the deduction is claimed on the federal return. The Economic Growth and Tax Relief Reconciliation Act of 2001 suspends the deduction for taxpayers dying after 2003. For Ohio purposes, the suspension is effective on or after the governor signs the bill. This deduction will reappear in 2011 unless congress acts to change it.

The governor signed this legislation on June 30, 2005.

Ohio Franchise Tax

The Ohio budget bill HB66 phases out the Ohio franchise tax for corporations subject to the Commercial Activities Tax over five years beginning in 2006. In 2006 corporations will owe 80% of the calculated tax or 100% of the minimum tax, which ever is greater. If a nonrefundable credit is available. the carryover is calculated before the 80% is applied. If a refundable credit is available, the credit is not included in the 80% calculation. In 2007 corporations will use 60%. In 2008 corporations will use 40%. In 2009 corporations will use 20%. In 2010 and thereafter, corporations subject to the commercial activities tax will be exempt from the franchise tax. A credit for unused net operating losses in excess of $50,000,000 after 2010. Any entity that elects to be taxed as a corporation for federal purposes is a corporation for franchise tax purposes.

The credit for purchases of new equipment is changed. The equipment must be purchased prior to June 30, 2005 and installed no later than June 30, 2006. The budget bill requires that taxpayers file a notice to claim this credit by September 30, 2005 with the Department of Development. No credit or carryover may be claims for any taxable year ending after June 30, 2006. Any unused credit may be converted to a grant administered by the Department of Development. Taxpayers must apply this grant against tax liabilities after allowing for all nonrefundable credits but prior to refundable credits.

Ohio Property Taxes

The current 10% Rollback of Real Estate Taxes will not be allowed for real property used primarily in a business activity beginning in tax year 2005. The 2005 tax bills will start to be mailed in December, 2005. The budget bill specifically states that the following are not business activities and thus are still eligible for the 10% rollback: farming, leasing property for farming, leasing property with single-family, two-family, or three family dwellings, or holding land that will be used for farming or to develop single-family, two-family, or three-family dwellings.

The Personal Property Tax for personal property used in a trade or business will be phased out beginning in tax year 2006 and will be totally eliminated in 2009. All machinery and equipment that is first used by a taxpayer in manufacturing after 2004 is now exempt from taxation. Manufacturing Equipment includes machinery, equipment, tools, implements, patterns, jigs, dies, drawings and business fixtures used by a manufacturer (including property leased by a manufacturer). This does not include general office property. The budget bill provides that the exclusion from taxation of patterns, jigs, dies, and drawings that are held for use and not sale remains the same. A Manufacturing Facility is defined as a facility used for manufacturing, mining, refining, rectifying, or combining different materials with a view of making a gain or profit, including a portion of a facility to store or transport raw materials, work-in-process, or finished goods inventory, for the purpose of packaging, research, or testing for quality control, so long as manufacturing , mining, refining, rectifying, or combining is also performed at the facility. a manufacturing facility does not include any portion of a facility used primarily for making retail sales. All other personal property will be phased-out by using a listing % of 18.75% for 2006, 12.5% for 2007, 6.25% for 2008, and 0% for 2009 and thereafter.

Ohio Income Tax

The new budget bill for the state of Ohio reduces the Income Tax Rates in each bracket by 21%. This reduction is phased in over a 5 year period until in 2009 the entire reduction becomes effective. Starting in 2010 the bracket income amounts will be adjusted for inflation. It will be interesting to see if these adjustments will ever come to pass based on our legislature's track record for keeping its word.

The deduction for qualified tuition and fees for state universities and other postsecondary education located in Ohio will be eliminated for years after 2005.

A special nonrefundable credit for taxpayers with Ohio Taxable Income under $10,000 begins in 2005. This credit will effectively eliminate the Ohio income tax for taxpayers who have income under $10,000. If married Ohio taxpayers each earned $10,000 and file separate returns, their tax would b $-0-. If they file a joint return, the tax would be approximately $260.

Effective in 2005, the taxation of trusts become permanent.

Ohio Commercial Activity Tax

Ohio has created a new Commercial Activity Tax on business and other entities that generate business income effective July 1, 2005. This tax is imposed on "the privilege of engaging in any activity conducted for or resulting in gain, profit, or income." This tax is part of the price used in determining sales and use tax. The new law specifies the tax is only on the person receiving the gross receipts and may not be passed on as a separately stated item to the consumer. However, the price of the goods or services may be increased to cover this tax.

The tax applies to any legal person with more than $150,000 in annual taxable gross receipts except for the state and its agencies and political subdivisions, banks, financial companies, savings and loans, financial service companies and their affiliates. For the first six months of the tax, the $150,000 exclusion applies to all the receipts during 2005.

For 2006 and later, the tax is $175 on the first $1,000,000 of annual taxable receipts and 0.26% on the excess over $1,000,000. This tax is phased in. For 2005 the tax is $88 on the first $500,000 and 0.06% on the excess of $500,000.

Taxable gross receipts are the total receipts without any deductions reduced by any allowable exclusions. Gross receipts includes the fair market value of any property or service transferred and any debt transferred or forgiven. It includes any amounts received from the sale, exchange or disposition of property, any amount received for services, and any rental, leases, or payments for the use or possession of the taxpayer's property or capital.

Exclusions are as follows:

• Interest income not in the ordinary course of business, except credit card sales.
• Dividend income, distributions received from corporations and pass-through entities.
• Receipts from capital gains, except in the normal course of business.
• Receipts of principal payments of a loan, bond, mutual fund,certificate of deposit, or other marketable instrument.
• Principal amount received under a repurchase agreement of a loan.
• Contributions received by a retirement plan.
• compensation received by and employee or former employee including fringe benefits and expense reimbursements.
• Proceeds from the sale of the taxpayer's own stock, options, warrants, puts, or calls or the sale of treasury stock.
• Proceeds from life insurance policies.
• Damages in excess of amounts that, if received without litigation, would be gross receipts.
• Property, money and other amounts received by an agent in excess of the agent's commission.
• Receipts realized by a person engaged in selling securities in excess of the gain on those securities.
• Tax refunds and other tax benefit recoveries.
• Pension reversions.
• Contributions to capital.
• Sales and use taxes collected by vendors, including out of state vendors.
• Federal and state excise taxes on cigarettes, tobacco, liquor, alcoholic beverages,gasoline, diesel and other motor fuels.
• Receipts of an auto dealer from the sale to another dealer to meet the need of a specific customer's preference for a motor vehicle.
• Receipts for a loan or credit account management services provided to a financial institution, provided they are both at least 50% controlled by common owners.
• Receipts from selling accounts receivable, provided the receivable was included in the seller's taxable gross receipts.
• Receipts from administering anti-neoplastic drugs and other cancer chemotherapy, biologicals, therapeutic agents, and supportive drugs in a physician's office to cancer patients.
• From commissions of horse racing permit holders, any amounts that must be paid as a tax under horse racing law and amounts specified under that law that are required to be used as purse money.
• Amounts received by a professional employer organization from a client in excess of the administrative fee.
• Amounts received from the sale of tangible personal property that is delivered or shipped from a qualified foreign trade zone or a qualified intermodal facility.
• Funds received by a mortgage broker under a table-funded or warehouse-lending mortgage loan.
• Receipts of a real estate broker in excess of the fees retained by the broker and not paid to another broker or associated sales person.

After July 1, 2008, there will be allowed four credits to be applied against this tax. They are the refundable jobs creation credit, the nonrefundable jobs retention credit, the non refundable qualified research expenses credit, and the non refundable credit for research and development loan payments.

Everyone subject to the tax must register by November 15, 2005 or within 30 days of becoming subject to the tax. If you register on line, the one time fee is $15. If you register by paper the one time fee is $20. If you register on time the fee will be credited against the tax due. If a taxpayer registers late the penalty is up to $100 per month with a maximum penalty of $1,000. This penalty cannot be credited against the tax. If you do not begin business before December 1st or do not have more than $150,000 taxable gross receipts by this date are exempt from the fee.

Controlled groups may elect to pay the tax on a consolidated basis and thus exclude any intercompany transactions from taxable gross receipts. A controlled group is defined as having " at least 80% ownership interest or a more-than-50% ownership interest as chosen by the group." You may include all foreign corporations if you wish. You may included excluded entities if you wish.

Controlled groups that do not elect to pay the tax on a consolidated basis are required to file as a combined taxpayer group. The exemption for taxpayers having taxable gross receipts of $200,000 does not apply to combined taxpayers. Also, combined taxpayers may not exclude intercompany transactions from gross taxable receipts.

All taxpayers will calculate their tax on a calendar year period. Taxpayers with less than $1,000,000 in gross taxable receipts will file annual returns. Taxpayers with greater than $1,000,000 in gross taxable receipts will file quarterly returns and must file them electronically.

Taxpayers must file their final commercial activities tax returns within 15 days of quitting business or selling their business. The purchaser or successor must hold enough money in escrow from the purchase price to cover the final commercial activities tax obligation until the former owner produces a receipt showing the tax is paid or no tax is due. The purchaser will be liable for any unpaid tax due.

Ohio Sales Tax Update

Our hardworking, compassionate Ohio Legislature has almost kept it's promise to eliminate the TEMPORARY 1% increase of the sales tax rate that was due to expire on July 1, 2005. The new budget has now given us a PERMANENT 1/2% decrease effective July 1, 2005. It sure is comforting to know that Ohio politicians ALMOST keep their promises. What do we expect, when the same bunch of people gave us a TEMPORARY, 1%, PASSED IN THE GREAT DEPRESSION TO PROVIDE POOR RELIEF SALES TAX!

The sales tax discount rate for merchants will remain at 0.9%.

The requirement to collect sales tax for the district and rate the items are shipped to have once again been postponed for most merchants. Merchants with delivery sales in excess of $30 million in 2005 must change by May 1, 2006. Merchants within delivery sales in excess of $5 million in 2005 must change by May 1, 2007. All other merchants must change by January 1, 2008. Any vendor may change prior to these dates, but once they change they may not go back to their old method of collecting the rate of where the item was sold. Ohio vendors are now eligible for partial reimbursement for the costs of converting to the new system. If you wish to be reimbursed SAVE THE INVOICES THAT SHOW HOW MUCH IT COST YOU!

The statute of limitations for sales tax assessments has been extended to four years after the date the return was filed or should have been filed, which ever is later. This change is effective January 1, 2006.

The exemption from sales tax for DRUGS AND MEDICAL EQUIPMENT has been changed. Now, "sales of drugs for a human being that may be dispensed only pursuant to a prescription are exempt, and hospital beds and medical oxygen and medical oxygen-dispensing equipment when purchased by hospitals, nursing homes, or other medical facilities are exempt." People who use these items at home to stay alive are now subject to tax.

Sales of investment metal bullion and coins will now be subject to tax. That's right, the sale of money is now taxable! Investment coins are defined as "numismatic coins or other forms of money and legal tender manufactured of gold, silver, platinum, or other metal under the law of the United States or a foreign nation that have a fair market value greater than any statutory or nominal value."