The CAT is an annual tax imposed on the privilege of doing business in Ohio, measured by taxable gross receipts from most business activities. “Gross receipts” means the total amount realized by a person, without deduction for cost of goods sold or other expenses. However, certain amounts, including cash discounts, returns and allowances, bad debts, and certain sales of accounts receivables, are excluded from gross receipts. Only taxable gross receipts sourced to Ohio are taxed.
The CAT applies to most businesses including but not limited to retail, wholesale, service, manufacturing, and other general businesses regardless of the type of business organization such business operates. For example, sole proprietorships, partnerships, LLCs, S corporations, corporations, disregarded entities (SMLLC, QSSS, etc.), trusts, and all other type of associations with taxable gross receipts of more than $150,000 in the calendar year are subject to the CAT.
The CAT is computed quarterly or annually based in both cases on a calendar year. There is minimum fee based on total gross receipts that must be paid by all taxpayers that have taxable receipts of $150,000 Additionally, taxable receipts over $1 million are taxed at 0.26%. Taxpayers whose liability is greater than the minimum fee should determine if there are any tax credits that they qualify for to reduce their tax liability.
Rule 5706-29-22 – Explanation of Commercial Activity Tax Credits
This rule provides for five different types of credits that taxpayer may apply for against their tax liability: (a) a nonrefundable jobs retention credit; (b) a nonrefundable credit for qualified research expenses; (c) a nonrefundable credit for a borrower’s qualified research and development loan payments; (d) a credit for unused franchise tax net operating loss deductions, and (e) a refundable jobs creation credit. In the event a taxpayer is entitled to claim more than one nonrefundable credit against its commercial activity tax liability, section 5751.98 of the Revised Code dictates the order in which such taxpayer must claim each credit. Today we will be focusing on the qualified research expense credit.
Qualified Research Expense Tax Credit
The qualified research expense “QRE” tax credit is based on the Federal Form 6765 Credit for Increasing Research Activities. If your business filed this form with the Federal tax return, the business may qualify for the QRE credit on their Ohio Commercial Activity Tax Return. The Ohio QRE credit is calculated by taking the total QRE reported on the Federal Form 6765 subtracting the average QRE for the prior three years and multiplying the result by 7%.
Sample Calculation:
Total QRE for the year 200,000
Average QRE for Prior 3 Years 133,333
OH Eligible QRE 66,667
OH Credit (@ 7%) 4,667
The QRE credit is available for use beginning with the 4th quarter of the year in which the expenses were incurred. For example, a 2020 credit could be claimed as early as 4th quarter 2020 and carryforward for 7 years. If the business could have taken a QRE credit for prior years, an amended return is required. Taxpayer’s are provided a 4-year statute of limitations on amending returns. Current open periods that can be amended to take advantage of the QRE credit are the 2017, 2018, 2019 and 2020 tax years.
For specific questions or to learn further details about the QRE and other credits available for use against the Ohio Commercial Activity tax contact Olivia Ringler at oringler@peasebell.com or a member of your service team.
