Did Ohio Municipal Tax Reform Really Simplify the Tax Process?

Ohio municipal income tax compliance can be onerous. When municipal tax reform was debated and ultimately approved, one of its main goals was to streamline the filing process and make the rules uniform across each of Ohio’s 600-plus cities with a municipal income tax. While many of the specifics of municipal tax compliance are now uniform (due dates, penalty rates, withholding rules), there is one area that still trips taxpayers up: S corporation (S corp) income.

Generally, residents of a municipality must pay municipal income tax on wages, Schedule C business, Schedule E rental and distributive shares of partnership income. If the city allows, the resident would then be able to take credit on any taxes paid to other municipalities on that income. Even though S corp income is reported in the same place on the federal return as partnership income (Schedule E, Page 2), it isn’t subject to tax in most cities.

In 2003 and 2004, Ohio allowed municipalities to have their residents vote as to whether or not S corp income would also be subject to tax in this manner. Over 100 municipalities voted in favor, whereas the income is not taxable in the remainder of municipalities. This means the cities differ on what income is taxable, but in terms of compliance, it at least means that in most cases, all of the Schedule E, Page 2 pass-through entity income is taxable. There’s no particular way of telling if a “certain type” of city voted to tax this income or not. For example, Cleveland taxes S corp income to its residents, while Columbus does not. See? Onerous.

Even though municipal tax reform was designed to simplify the municipal tax process, this issue of S corp distributive income being taxable in some places and nontaxable in others was not addressed. As such, any cities that previously taxed this income still tax it, and any cities that previously did not tax this income still are not permitted to. This becomes an issue is for individual taxpayers that previously did not report taxable S corp income in cities in prior years. Municipalities are becoming more aggressive in requiring taxpayers to attach copies of Federal Schedule E, such that they can double-check all income is being reported. Because the same income type was always taxable in those municipalities, they may contact taxpayers for detail of those prior years.

Are you confused by the new rules, or not sure if you are reporting the appropriate income? The state and local tax professionals at Marcum can put you at ease. For questions or to schedule a review of your tax situation, contact Josh Stein, Manager, Tax & Business Services