The Ohio legislature passed House Bill 33 in July of 2023, and arguably the most significant piece of tax legislation was changes to the Ohio Commercial Activity Tax (CAT). In essence, while the changes do not eliminate the CAT, they effectively will result in most small businesses exempted from the tax over the next couple of years.
What is the CAT Tax?
The Commercial Activity Tax (CAT) is an annual privilege tax that is calculated based on a taxpayer’s Ohio based gross receipts. These receipts are referred to as “taxable gross receipts.”
Prior to being changed by House Bill 33:
- Taxpayers were subject to a .26% tax rate on Taxable Gross Receipts. However, each taxpayer was given a $1,000,000 annual exclusion (related or consolidated taxpayers have to share the exclusion). Thus, the .26% CAT was due on the excess of the taxpayer’s taxable gross receipts over $1,000,000.
- In addition to the CAT above, taxpayers became subject to a tiered annual minimum tax (AMT) schedule (based on the prior year receipts). So, even if your receipts were less than $1,000,000, you could still be subject to the annual minimum tax.
- Taxpayers that did not have taxable gross receipts in excess of $150,000 were exempt from the annual minimum tax, provided they did not have an active CAT account after May 10th of that same year. Therefore, taxpayers that had an active account because they filed for 2022 but expected to have less than $150,000 during 2023 had to cancel their account before May 10, 2023 to be exempt from the minimum tax (for 2023).
While there are no deductions allowed in the computation, there is a significant list of receipts that are excluded (i.e. are not “taxable”). In addition, certain credits, such as a research and development credit, can reduce the tax owed by a taxpayer.
Who is subject to CAT?
Aside from certain entities that are exempt from the CAT, the tax applies to anyone selling goods and services sourced to Ohio, regardless of their location, or the type or form of business, including sole proprietors. The most common entity exempt from the CAT are nonprofit organizations.
Related companies are required to file as a combined taxpayer unless they are eligible and elect to file as a consolidated elected taxpayer. In either case, they file as “single” taxpayer.
As briefly noted in the previous section, there is also a significant list of “receipts” that are not subject to the CAT, including all taxable receipts if they are below an annual threshold. In addition, there are special sourcing rules to determine if the receipt is an Ohio-based receipt. Just because your business is located in Ohio does not mean that all, or any, of your receipts are Ohio-based receipts.
What changes can we expect to the CAT in 2024?
Beginning with the 2024 calendar year:
- The annual minimum tax is eliminated.
- The annual exclusion used in the computation of the .26% tax increases from $1,000,000 to $3,000,000.
- The annual filing is eliminated. The last annual return that will be filed is the annual return for 2023 that is due on May 10, 2024.
- Quarterly filing will continue for those taxpayers that do not cancel their CAT account. For those who cancel their accounts for 2024, their last quarterly filing is the 4th quarter for 2023, which is due on February 12, 2024.
Are there also changes to the CAT coming in 2025?
Yes, beginning with the 2025 calendar year:
- The annual exclusion increases from $3,000,000 to $6,000,000.
- Quarterly filing will continue for those taxpayers that do not cancel their CAT account. For those who cancel their accounts for 2025, their last quarterly filing is the 4th quarter for 2024, which is due on February 10, 2025.
Should we cancel our CAT account with Ohio?
The Ohio Department of Taxation has advised that any taxpayer not excepting at least $3,000,000 of Ohio taxable gross receipts for the entire 2024 calendar year should cancel their account with an effective date of 12/31/23 before their first quarterly report for 2024 is due. Otherwise, they will have to file quarterly returns until the account is cancelled and could be subject to penalties for failure to do so.
If the taxpayer’s Ohio taxable gross receipts exceeds $3,000,000 later in 2024, at that point the taxpayer must re-activate their CAT account and resume filing for the appropriate quarter.
You can also cancel your account up to 1 year in advance. Therefore, those taxpayers that believe they will have more than $3,000,000 in Ohio taxable gross receipts in 2024 but will have less than $6,000,000 in Ohio taxable gross receipts in 2025, can cancel their CAT account for 2025 in advance. Taxpayers in this situation could cancel their account during 2024 with an effective cancellation date of 12/31/24. The same reactivation rules would apply if the receipts in 2025 later exceeded the $6,000,000 exclusion.
A CAT account should generally be cancelled through the Ohio Business Gateway (select CAT Cancel Account transaction), or by checking the cancellation box when filing their last return. The checkbox will be available on either the annual return for 2023 that is due 5/10/24 or the last quarterly return filed by the taxpayer (the box will be available on quarterly returns beginning with the 2023 4th quarter return due 2/12/24). If a taxpayer is unable to cancel their account using either of those methods, they may submit a Business Account Update Form indicating they want to cancel their account.
What else should we be considering before cancelling our CAT account?
As noted earlier – combined or consolidated taxpayers are “single” taxpayers. Thus, the increased exclusion amounts apply to the group as a whole. In other words, you cannot apply the exclusion amount to each member of the group separately. In the case of a consolidated elected taxpayer, it is unclear if the group will have to re-elect if their account is cancelled and they want to reactivate the accounts at a later date.
Each taxpayer has unique circumstances they play into determining the impact of the new changes. We recommend that you contact your AGP professional to discuss your situation before cancelling your account.