What is the Ohio franchise tax

Ohio phased out its corporate franchise tax over several years, with the final franchise tax returns filed for the 2013 tax year (based on taxable year ending in 2012). The tax was replaced by the Commercial Activity Tax (CAT) for most businesses and the Financial Institutions Tax (FIT) for banks, which became effective in 2014. 

After eliminating the franchise tax, Ohio joined states like Washington, Nevada, and Wyoming as states without corporate income taxes. This cleanup was part of a broader tax makeover that began with Am. Sub. H.B. 66 in 2005. The franchise tax had earned the nickname "swiss cheese" because corporations could slip through its many loopholes. This reputation, paired with Ohio's quest for more predictable business taxation, led to its complete elimination.

What replaced the Ohio franchise tax: CAT and FIT

Ohio not only eliminated the franchise tax, but it also implemented an entirely new taxation framework. This transformation introduced two different systems: the Commercial Activity Tax (CAT) for most businesses and the Financial Institutions Tax (FIT) for banks and financial entities.

The Commercial Activity Tax (CAT)

Ohio's Commercial Activity Tax (CAT) taxes gross receipts, not profitability, affecting businesses regardless of their financial performance. While smaller businesses may be exempt due to exclusion thresholds, the CAT applies to nearly all business structures, unlike the franchise tax, which primarily targeted corporations.

The Financial Institutions Tax (FIT)

The FIT was designed to be revenue-neutral, targeting approximately $200-225 million annually while closing loopholes that allowed some large institutions to avoid taxes under the previous franchise tax system. This separate tax system acknowledges the unique operational models of financial businesses like banks and credit unions, which don't fit standard business taxation.

Major Differences from the Old System

With the introduction of the CAT and the FIT, there were significant changes in the taxing framework, including: 

• Tax Base Change: The franchise tax used net worth or net income with graduated rates, while CAT uses gross receipts with a flat rate.
• Simplified Structure: The new system eliminated many of the complex calculations and planning opportunities that characterized the franchise tax.
• Broader Business Impact: Many partnerships, LLCs, and sole proprietorships that never dealt with Ohio business taxes found themselves with new tax considerations.

For businesses registered in Ohio or considering foreign registration, this tax restructuring significantly changed compliance requirements. Companies with operations in Ohio should ensure their registered agent is informed about these tax obligations, as they affect both domestic and foreign-registered entities.

Who still needs to care about Ohio’s franchise tax?

Though Ohio's franchise tax ended in 2014, several important issues remain relevant for businesses that operated in Ohio before the repeal. These legacy matters require attention and proper management: 

• Amended returns: Federal income tax changes affecting pre-2014 tax years still trigger Ohio amended franchise tax return requirements. Failure to address these adjustments can result in penalties despite the tax no longer existing. 

• Refund claims: Businesses can still recover overpayments from pre-2014 years, subject to time limitations.
• Audit exposure: Ohio can still audit historical periods related to franchise tax filings.

• Outstanding liabilities: Unpaid pre-2014 franchise tax can create legal complications during business closures or restructuring. 
• Foreign registration status: Companies with unresolved franchise tax issues may face obstacles when updating their foreign registration status.
• Annual report complications: Legacy franchise tax problems can affect a company's good standing, potentially complicating annual report filings.

To ensure your business steers clear of potential issues, maintain pre-2014 tax records to address potential audits or compliance issues. Additionally, ensure your registered agent has access to historical information related to your Ohio business activities.

Businesses should consult with professional entity compliance services to address these legacy issues properly, especially before major organizational changes or when closing operations in Ohio.

FAQs about the Ohio franchise tax

What is the Ohio franchise tax? Does it still exist?

No, Ohio's franchise tax was completely repealed as of the 2014 tax year. It was replaced by:

• Commercial Activity Tax (CAT) for most businesses
• Financial Institutions Tax (FIT) for banks and financial institutions

Is Ohio's CAT the same as a franchise tax?

Not at all. They're completely different taxes. Franchise tax is based on either net income or net worth, while CAT taxes gross receipts regardless of profitability. This shifts the tax burden, as a profitable company with low sales might have paid more under the old system, while a high-volume, low-margin business could pay more under CAT.

Do I need to worry about franchise tax years before 2014?

Yes, for several reasons:

• Ohio can still audit tax years 2013 and prior
• You may qualify for refunds from overpayments for tax years before 2014 only if you file within the time limits set by Ohio tax law, typically four years from the due date or payment date
• Federal income tax return changes for those years might require amended Ohio returns

What replaced the franchise tax for LLCs?

LLCs that were subject to the franchise tax (those electing corporate taxation) are now potentially subject to the CAT if their Ohio gross receipts exceed current thresholds. Many smaller LLCs may fall below these thresholds entirely.

Can I get refunds for overpaid franchise taxes?

Yes, but within the statute of limitations. If you believe you overpaid franchise taxes for tax years 2013 or earlier, you may still be eligible to file for a refund; however, time limitations apply.

If my business wasn't subject to the franchise tax before 2014, do I need to worry about the CAT now?

Possibly. The CAT applies more broadly to businesses in Ohio than the franchise tax did. Nearly all business types with Ohio gross receipts above the threshold are subject to the CAT, regardless of their legal structure or whether they would have been subject to the franchise tax.

Streamline your entity’s compliance with Discern

Ohio's business compliance requirements have evolved significantly since the franchise tax repeal, creating ongoing administrative challenges for businesses. While the tax structure has changed, companies must still navigate various filing obligations with the Ohio Secretary of State.

Discern's comprehensive compliance platform helps Ohio businesses stay current with state requirements without getting bogged down in administrative tasks. Ready to automate your entity’s compliance operations? Book a free demo today and discover how Discern handles your compliance obligations efficiently.