Business taxation is simple in Ohio which makes it easier for startups.
All businesses that operate in Ohio must pay state taxes, but the types of taxes vary depending on the type of business.
Commercial activity tax
The state of Ohio charges a commercial activity tax on nearly all businesses that operate within it. A commercial activity tax (CAT) is considered to be a tax on the privilege of conducting business in Ohio and it is based on gross receipts. If the income goes directly to the business owners, as is the case in sole proprietorships and partnerships, then the individuals are subject to the tax.
The commercial activity tax is calculated on the gross business receipts. Any gross receipts less than $150,000 are not taxed. Gross receipts between $150,000 and $1 million are charged $150. Gross receipts between $1 million and $2 million are charged $800. Gross receipts between $2 million and $4 million are charged $2,100. Gross receipts over $4 million are charged $2,600 plus 0.26% of the total receipts. Therefore, if a business has gross receipts of $5 million, it will pay a commercial activity tax of $15,600, i.e. $2,600 plus 0.26% of $5,000,000.
There are special requirements for online registration and special rules about when and how often businesses should file the commercial activity tax. For instance, businesses whose receipts exceed $1 million must file their taxes on a quarterly basis by the 10th of every second month following the end of every quarter.
Taxes on various business structures
In Ohio, businesses are not taxed on their net income. The following is an outline of how different business structures are taxed.
Corporations are subject to commercial activity tax, with very rare exceptions. They also pay federal taxes.
2. S Corporations
These are corporations created by filling a special form with the IRS that elevates them to S status. Such corporations are not subject to federal income tax. The income is passed through its shareholders who are then subjected to federal tax on their share of the income. Still, the S corporation pays commercial activity tax on its gross receipts and each shareholder pays state tax (CAT) on his/her share of net income.
3. Limited Liability Companies (LLCs)
LLCs are not subject to federal income tax but are required to pay commercial activity tax on gross receipts. The members are responsible for paying federal and commercial activity taxes on their shares of the income. The rate of taxation depends on each member’s taxable income.
It should be noted that an LLC that chooses to be taxed as a corporation has no tax advantage in Ohio since commercial activity tax is levied on all business structures.
First, the partnership pays commercial activity tax based on its gross receipts. Then the individual partners are expected to pay their federal and state taxes from the share they get after distribution of the business’ income.
5. Sole proprietorships
The sole proprietorship pays commercial activity tax on its gross receipts. Since the business owner gets the whole income generated by the enterprise, he/she is responsible for paying federal and state taxes.
6. Multistate businesses
Any business that operates in several states may be obliged to pay taxes in the other states in addition to the taxes paid in Ohio. A business that was formed or is located in another state but generates income in Ohio is likely going to pay taxes in Ohio. Taxation for multistate businesses is complicated and it is advisable to consult a tax professional.
Any person who wants to start a business in Ohio can get more information on the state’s commercial activity tax from the Department of Taxation website. TRUiC provides various guidelines for business startups which are quite useful for anyone who intends to start an Ohio LLC. Make an effort to visit their website for valuable information.