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Taxes on Business Income in Ohio

Filed under State Taxes. Fact checked on February 13, 2013.

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Ohio imposes a Commercial Activity Tax on corporations whose net receipts exceed $150,000 per year. Plus, certain corporations are liable for a "litter tax." If you operate your business as a sole proprietorship or via a pass-through entity, you must report your income on your personal return.

In Ohio, you're generally free to choose to operate your business as a C corporation, S corporation, partnership, limited liability company (LLC), or sole proprietorship. However, the entity type you select for your business may, in some cases, decide whether you or your business pays income taxes on the business income.

C Corporations Are Subject to Corporate Income Tax

Domestic corporations (corporations organized in Ohio) and foreign corporations (corporations organized in a state other than Ohio) are subject to the Commercial Activity Tax (CAT). This corporate income tax replaced the Ohio franchise tax which was phased out and completely eliminated in 2010.
Warning

Unlike most income taxes, CAT returns may need to be filed and the tax may need to be paid quarterly. You are liable for filing (and paying) quarterly if your business has taxable gross receipts in excess of $1 million during the calendar year. Taxpayers with $1 million or less in taxable gross receipts will be calendar year taxpayers unless they choose to file as quarterly taxpayers.

The CAT is computed as follows based upon the gross receipts of the business that are taxable in Ohio.

Gross Receipts Tax Due
Less that $150,000 No tax
$150,000 to $1 million $150
Over $1 million $150 plus 0.26% of the gross receipts

Beginning in calendar year 2013, calendar quarter taxpayers apply the full $1 million exclusion amount to the first calendar quarter return for that calendar year, and may carry forward and apply any unused exclusion amount to subsequent calendar quarters within that same calendar year. However, any unused exclusion amount from calendar year 2012 may not be carried forward into calendar year 2013.

S corporation Income Passes Through to Shareholders

If you meet the federal tax law requirements to operate as an S corporation, the IRS allows your business to "pass through" its income to the shareholders. This means that your business will not pay any federal corporate level income tax. However, you'll have to claim your entire share of the business income on your personal federal income tax return even if you did not take any money out of the business.

In Ohio, the law extends this favorable tax treatment to state corporate income tax liability and S corporations will not be subject to the corporate income tax.

Partnership Income Passes Through to Partners

If you operate your business as a partnership, your partnership will not be taxed on its net income. Instead, partners must include in their Ohio taxable adjusted gross income their distributive share of partnership income.

Limited Liability Companies are Taxed Based on Federal Election

Ohio law recognizes businesses operating as limited liability companies (LLCs). Domestic and foreign LLCs in Ohio are classified as either partnerships or corporations for Ohio tax purposes. LLCs follow the federal rules on how they will be taxed. Accordingly, if your LLC is treated as a partnership, it will not be taxed on its net income. Instead, members must include in their Ohio taxable adjusted gross income their distributive share of LLC income.

If a business is classified as an association taxable as a corporation for federal income tax purposes, it will also be taxable as a corporation for Ohio tax purposes.

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