CAT Credit Transfers

   In recent years, the State of Ohio has reformed the way businesses are taxed.  As part of this reform, C-Corporations are no longer taxed on net income or net worth in the form of a franchise tax and the personal property tax will be completely phased out as of an assessment date of January 1, 2008. 

     In lieu of these aforementioned taxes, Ohio has replaced them with the Commercial Activity Tax, or CAT.  This tax is a gross receipts tax affecting all legal business entities doing business within Ohio.

     The Ohio Franchise Tax return (Form FT-1120) was phased out over a four year period with the final taxing calendar year ending December 31, 2007.  As part of this phase-out many C-Corporations began wondering what would happen to the various credits accumulated thus far.  The answer is twofold and not as straight forward as one might imagine.

     The State of Ohio has agreed upon five previously earned credits that may be applied against the commercial activity tax.  They are as follows:

      1)      a nonrefundable jobs retention credit,
2)      a nonrefundable credit for qualified research expenses,
3)      a nonrefundable credit for borrower's qualified research and development loan payments, 4)      a refundable jobs creation credit and
5)      a refundable or nonrefundable credit for unused franchise tax net operating loss deductions. 

     Please note, Ohio has not made a provision to allow the one-seventh  manufacturers' credit/ grant to be taken as a credit at this time.

     These credits are eligible to be taken for the CAT period beginning July 1, 2008, excluding the net operating loss credit which cannot be utilized until the tax year 2010.  The order in which these credits are allowed has also been defined under Ohio Revised Code section  5751.98. 

     The carryforward periods of these credits also varies from one to the other.  The job retention nonrefundable credit has a three year carryforward while this same refundable credit is only applicable in the first year.  The qualified research expense credit has an allowable carryforward of seven years.  The research and development loan payment credit has an unlimited life.  The carryforward period for the nonrefundable net operating loss credit is twenty years.

     It is important to note upon expiration of a particular credit, the unused portion of the credit is lost.

     In order to claim a net operating loss credit, the taxpayer must have filed a 2005 franchise tax report, either as a separate company or as a member of a combined group, with an accumulated net operating loss exceeding $50 million.  A qualifying taxpayer must have filed a report by June 30, 2006 disclosing the amortizable amount available.  This nonrefundable credit is only allowed ten percent per year for the first ten years switching to one hundred percent over the following ten years.  Upon expiration, this credit is transferred as a refundable credit in the year 2030.