Ohio Business Income Tax

Most states tax at least some types of business income derived from the state. As a rule, the details of how income from a specific business is taxed depend in part on the business's legal form. In most states, corporations are subject to a corporate income tax, while income from pass-through entities such as S corporations, limited liability companies (LLCs), partnerships, and sole proprietorships is subject to a state's tax on personal income. Tax rates for both corporate income and personal income vary widely among states. Corporate rates, which most often are flat regardless of the amount of income, generally range from roughly 4% to 10%. Personal rates, which generally vary depending on the amount of income, can range from 0% (for small amounts of taxable income) to around 9% or more in some states.

Currently, six states—Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming—don't have a corporate income tax. However, four of those states—Nevada, Ohio, Texas, and Washington—do have some form of gross receipts tax on corporations. Moreover, five of those states—Nevada, South Dakota, Texas, Washington, and Wyoming—as well as Alaska, Florida, and Tennessee currently have no personal income tax. Individuals in New Hampshire are only taxed on interest and dividend income.

Apart from taxing business income through a corporate income tax or a personal income tax, many states impose a separate tax on at least some businesses, sometimes called a "franchise tax" or "privilege tax." This is frequently justified as a tax simply for the privilege of doing business in the state. As with state taxes on business income, the specifics of a state's franchise tax often depend in part on the legal form of the business. Franchise taxes are generally either a flat fee or an amount based on a business's net worth.

How Ohio Business Income Tax Works

Ohio has a commercial activity tax (CAT) that applies to nearly every Ohio business and is based on gross receipts. Up to 2014, Ohio also had a corporation franchise tax. However, the latter tax was repealed and isn't covered here. Generally speaking, if you run an Ohio business, you will be subject to the commercial activity tax. In addition, if income from your business passes through to you personally, that income will be subject to taxation on your personal Ohio tax return.

The commercial activity tax, considered a tax on the privilege of doing business in Ohio, is computed based on your business's gross receipts, as follows:

• gross receipts less than $150,000 = no tax
• gross receipts from $150,000 to $1 million = $150 tax
• gross receipts over $1 million up to $2 million = $800 tax
• gross receipts over $2 million up to $4 million = $2,100 tax, and
• gross receipts over $4 million = $2,600 base tax + .26% of gross receipts.

Ohio has special online registration requirements for the commercial activity tax, as well as special rules about how often, and when, businesses must pay the tax. For example, businesses with over $1 million in gross receipts must pay this tax on a quarterly basis; the quarterly returns are due by the 10th day of the second month following each calendar quarterly tax period (May 10th, August 10th, November 10th, and February 10th).

While Ohio doesn't generally tax businesses based on their net income, it does tax individual income at marginal rates ranging from 2.765% up to 3.99%.

Here's a brief look at additional details for five of the most common forms of Ohio business: corporations (C corporations), S corporations, LLCs, partnerships, and sole proprietorships.

Corporations

With rare exceptions not covered here, Ohio corporations are subject to the commercial activity tax.

S Corporations

An S corporation is created by first forming a traditional corporation and then filing a special form with the IRS to elect S status. Unlike a traditional corporation, an S corporation generally is not subject to separate federal income tax. Rather, taxable income from an S corporation is passed through to the individual shareholders, and each shareholder is subject to federal tax on that person's share of that income. In other words, S corporations are pass-through entities. (Note that a shareholder's share of the S corporation's income need not actually be distributed to the shareholder in order for the shareholder to owe tax on that amount.) Ohio recognizes the federal S election with regard to income tax but nonetheless requires S corporations to pay the commercial activity tax. In addition, an individual S corporation shareholder will owe tax to the state on their share of the company's income.

Limited Liability Companies (LLCs)

Like S corporations, LLCs are pass-through entities and aren't required to pay federal income tax. But LLCs are required to pay Ohio's commercial activity tax on gross receipts. In addition, net income from an LLC is distributed to individual LLC members, who then must pay federal and state taxes on the amounts distributed to them.

Note that while by default LLCs are classified for tax purposes as partnerships (or, for single-member LLCs, disregarded entities), it is possible to elect to have your LLC classified as a corporation. However, because Ohio's commercial activity tax applies in the same manner to corporations, partnerships, and disregarded entities, your choice in this regard will not affect how your business is taxed by the state.

Partnerships

Income from partnerships is distributed to the individual partners, who then pay tax on the amount distributed to them on both their federal and state tax returns. Partnerships are also required to pay Ohio's commercial activity tax on gross receipts.

Sole Proprietorships

Income from your business will be distributed to you as the sole proprietor, and you will pay tax to the state on that income. In addition, your business is also required to pay Ohio's commercial activity tax on gross receipts.

Additional Information

For further guidance on Ohio's commercial activity tax, check the Department of Taxation website; a special FAQ page on that site is particularly helpful. For information on business-related taxes in other states, check Nolo's 50-State Guide to Business Income Tax. And, if you're looking for detailed guidance on federal income tax issues, check Tax Savvy for Small Business by Frederick Daily.