Ohio Tax. Workshop DD. Major Developments in Ohio Pass-Through Entity & Personal Income Taxation. Wednesday, January 24, :00 a.m. to 12:30 p.m.

Transcription

1 27th Annual Tuesday & Wednesday, January 23 24, 2018 Hya Regency Columbus, Columbus, Ohio Ohio Tax Workshop DD Major Developments in Ohio Pass-Through Entity & Personal Income Taxation Wednesday, January 24, :00 a.m. to 12:30 p.m.

2 Biographical Information Julie Corrigan, State & Local Tax Ohio Practice Leader, Plante & Moran 1111 Superior Ave., Suite 1250, Cleveland, Ohio Fax Julie is an Associate with Plante & Moran PLLC and serves as the State and Local Tax Ohio Practice Leader. She has more than thirty years of experience and specializes in multistate tax consulting services related to sales and use tax, income and franchise taxes, property taxes, gross receipts taxes, and business credit and incentives. She has served clients in the manufacturing, consumer products, and service industries with a focus on solutions to minimize overall state taxes and to provide audit assistance and defense. Julie is a member of the Ohio Chamber of Commerce Tax Committee, American Institute of CPAs, Ohio Society of CPAs, and the Tax Club of Cleveland. Julie has written articles on state and local taxation topics and served on the Ohio CPA Voice Advisory Board for over 10 years. Julie has presented pertinent tax topics at the Ohio Tax Conference for several years as well as presented other topics for outside organizations. Julie received her BBA in Accounting from the University of Cincinnati. Jeffrey P. Sherman, Assistant Legal Counsel, Regional Income Tax Agency (R.I.T.A.) 760 Lakeview Drive, Suite 400, Worthington, OH , Ext jsherman@ritatohio.com R.I.T.A. Assistant Legal Counsel Jeffrey Sherman is a certified public accountant (inactive status) and admitted to the practice of law in New York and in Ohio. Previously legal counsel for the Ohio Dept. of Taxation s Income Tax Division and before that a senior tax manager with one of the Big Four accounting firms, he is also currently is an instructor for the Becker CPA Review Course. A frequent presenter at the yearly Ohio Tax Conference, at various state bar association conferences, and at Ohio Society of Certified Public Accountants presentations, he has also taught undergraduate and graduate business courses at The Ohio State University. Earning his undergraduate degree from Miami University in Oxford, Ohio, he received his law degree with honors from The Ohio State University. He has published in national tax journals articles regarding constitutional nexus, Ohio s bright line domicile law, and Ohio s anti-passive investment company ( anti -PIC ) tax law. Matthew Dodovich, Division Counsel, Income, Pass-Through Entity & Withholding Taxes Ohio Department of Taxation, 4485 Northland Ridge Blvd., Columbus, OH matthew.dodovich@tax.state.oh.us Fax: Matt Dodovich currently serves as a Division Counsel at the Ohio Department of Taxation in the Office of Chief Counsel and specializes in the individual income, school district income, passthrough entity, and employer withholding taxes. Matt joined the Department in April 2012 as an administrative hearing officer in the Tax Appeals Division. He later served as an attorney for the Department s Appeals Management Division. Matt earned a B.S. with honors in Economics from The Ohio State University, and his J.D. from the Michael E. Moritz College of Law. He is currently pursuing an A.A. in Accounting and licensure as an Ohio Certified Public Accountant.

3 Biographical Information Stephen K. Hall, JD, LLM, Member, Zaino Hall & Farrin, LLC 41 South High Street, Suite 3600, Columbus, OH Fax: Steve provides state and local tax services, legal business counsel, and lobbying services to clients in multiple states and local jurisdictions. He leads the Firm's Real Estate Tax Practice Group, representing real property owners in valuation matters and exemption matters. He has represented clients in all types of state and local income tax, sales and use tax, excise tax, public utility tax, personal and real property tax, and gross receipts tax matters. Steve s practice focuses on tax controversy and tax policy at the state and local level, including representation of clients before County Boards of Revision, Local Income Tax Boards of Review, the Ohio Board of Tax Appeals, Ohio state courts, and state and local tax agencies across the country. He also frequently represents clients before Ohio s General Assembly, the Ohio Department of Taxation, and other state and local government agencies, both in tax controversy and lobbying matters. Earlier in his career, he served as Assistant Counsel to the Ohio Tax Commissioner, where he was a policy and technical advisor to the Tax Commissioner, the Ohio Governor s Office, and the Ohio Department of Development, while representing the Ohio Department of Taxation before the Ohio General Assembly. He has spent significant time drafting tax legislation and lobbying for the implementation of tax law changes both while in the Tax Commissioner s office and on behalf of clients while in private law practice Steve is a frequent speaker on technical state and local tax matters, state and local tax policy, and national tax policy matters addressing multistate taxation. He is actively involved in lobbying Ohio's General Assembly and participates in various Ohio Bar Association committees addressing Ohio tax policy and procedure. He is the chair of the Ohio State Bar Association subcommittee on municipal income tax matters.

4 Julie Corrigan, State & Local Tax Ohio Practice Leader Plante Moran PLLC, Cleveland Matthew Dodovich, Division Counsel, Income/ PTE/ Withholding Taxes Ohio Department of Taxation, Columbus Stephen K. Hall, Member Zaino Hall & Farrin LLC, Columbus Jeffrey Sherman, Assistant Legal Counsel Regional Income Tax Agency, Worthington

5 Agenda Legislative Updates Tax Bracket Reduction Wages Paid by a PEO Residency Affidavit Post-Cunningham 2 Federal Income Tax Changes Impacting Ohio Partnership Audit Changes Federal Tax Cuts and Jobs Act

6 Agenda Audit & Appeals Issues Stock Options & Compensation Allocation Residency The Business Income Deduction Pass-through Entity Withholding for Indirect C Corporations Ohio IT K-1 3 Tax Amnesty Municipal Income Tax Update

7 4 Legislative Updates OHIO LEGISLATIVE TAX CHANGES

8 Individual Income Tax Brackets 5 Lowest two income tax brackets are removed Previous inflation indexing has been codified Tax brackets were indexed again in August for this year

9 Individual Income Tax Brackets 6 Please note, taxpayers with more than $10,650 in Ohio taxable nonbusiness income will still pay tax on their first $10,650 in income Former third bracket (now the first bracket) will start at $79.08 (which is $10,650 times %) Employers must still withhold on an individual s first $10,650 Individuals with $10,650 or less are encouraged to file income tax returns for refund purposes

10 Individual Income Tax Credits 7 Low Income Credit is Repealed (R.C ) For prior tax years, the low income credit zeroed out the tax liability on a return with Ohio adjusted gross income less exemptions of ten thousand dollars or less Now, those with Ohio adjusted gross income, less exemptions and taxable business income of $10,650 or less owe no tax This threshold is now indexed for inflation along with the income tax table amounts

11 PEO Compensation Reclassification 8 R.C (A)(7) Currently Reads: For the purposes of Chapters and of the Revised Code, guaranteed payments or compensation paid to investors by a qualifying entity * * * shall be considered a distributive share of income of the qualifying entity. Division (A)(7) of this section applies only to such payments or such compensation paid to an investor who at any time during the qualifying entity's taxable year holds at least a twenty per cent direct or indirect interest in the profits or capital of the qualifying entity.

12 PEO Compensation Reclassification 9 Statute discusses a payment from a PTE to an investor that owns 20% or more of the PTE. Professional Employer Organization pays wages using PEO FEIN In most cases, the payee did not own 20% of the PEO Statute did not permit wage reclassification

13 PEO Compensation Reclassification 10 PEOs advocated for a clarifying law change Investor needs to own 20% of the entity paying the wage or own 20% of the entity utilizing the PEO to pay the wage Senate and House both passed bills Language was incorporated into SB 8 as an amendment SB 8 was subsequently passed Law change applies to tax years 2013 and after

14 Legislative Developments post- Cunningham 11 HB 292, passed Ohio House, pending in Senate Proposes changes to affidavit of nondomicile Filing due date will be changed from April 15 to October 15 of each year Taxpayer would be irrebuttably presumed to be a full-year nonresident if: The taxpayer files the affidavit timely; The taxpayer avers to the items listed on the next slide; and The taxpayer does not make a false statement on the affidavit

15 Legislative Developments post- Cunningham 12 HB 292, passed Ohio House, pending in Senate Taxpayer must now swear that the following are true for the entire tax year: Taxpayer had an abode outside Ohio for which s/he did NOT claim depreciation deduction under Section 167 No valid Ohio driver s license or ID card No Ohio real estate tax reduction under homestead provision Any tuition charged is not based on Ohio abode

16 Cunningham v. Testa, 2015-Ohio Case deals with the Department s ability to challenge a taxpayer s affidavit as false Supreme Court Holds: [w]hile R.C has set forth certain presumptions and burdens with respect to domicile, it has not altered the basic concept of what constitutes a domicile. Taxpayer s statement verifying non-ohio domicile can be false if it is not supported by common law of domicile. For more information see the Department s Information Release IT

17 14 Federal Income Tax Changes AND THEIR IMPACT ON OHIO S INCOME TAX

18 Federal Partnership Audit Changes 15 Under TEFRA Federal audits are initiated at the partnership level Adjustments are made and investors are identified Changes pass through to those investors, who then need to amend their prior year return ODT would pick up adjustments made to individual investors and contact them to file amended returns

19 Federal Partnership Audit Changes 16 Bipartisan Budget Act of 2015 Major reform to the audit of PTEs at the federal level IRS may now assess and collect from partnerships at entity level for 1065 and K-1 issues TEFRA procedures are repealed ODT is working to identify the impact to Ohio and address any accompanying issues

20 Federal Income Tax Reform 17 Tax Cuts and Jobs Act of 2017 Makes major changes to federal corporate and income taxes Many have no impact on Ohio s income tax Itemized Deductions Tax Rates Alternative Minimum Tax Again, ODT is working to identify the impact to Ohio and address any accompanying issues

21 Audit & Appeals Issues 18

22 Taxation of Stock Options 19 What is a stock option? Allows recipient to buy stock at a set price regardless of the actual value of the stock on the purchase date Generally, there is a period of time between when the options are granted and when the recipient can exercise them Why do companies grant stock options? Create incentive for workers to cause the company s stock price to rise

23 Taxation of Stock Options Facts 20 Workman, an Ohio resident, worked for an Ohio-based company Company grants Workman stock options In the following years, Workman performs services for the company both inside and outside Ohio Workman retires from the company and moves to another state Workman, now a nonresident of Ohio, exercises the stock options

24 Taxation of Stock Options Law 21 R.C levies the income tax in all individuals earning or receiving income in Ohio R.C (B)(1) allocates, to Ohio, compensation paid to a nonresident individual for personal services performed in Ohio Hillenmeyer v. Cleveland Bd. Of Rev., Ohio-1623 Days Worked comports with due process and ensures that the tax collected is not disproportionate to the income received for work performed

25 Taxation of Stock Options Application 22 Stock options are compensation for performing personal services Ohio law specifically allocates to Ohio all items of compensation paid to a nonresident for services performed in Ohio The days worked method is an acceptable method to allocate compensation among states

26 Taxation of Stock Options Calculation 23 Stock option income is allocated using the days-worked method Taxpayers are presumed to have 260 total days worked for each tax year The allocation is represented by a ratio Total days worked in Ohio for the issuing company versus Total days worked everywhere for the issuing company Ratio calculation might span multiple years

27 Ohio Residents Working Abroad Facts 24 Taxpayer takes a work assignment in another country The duration could span/ include multiple tax years Taxpayer remains a citizen of the US Obtains a temporary work visa to work in foreign country Maintains an Ohio abode on which s/he claims the owneroccupancy property tax reduction, a driver s license, vehicle registration, etc.

28 Ohio Residents Working Abroad Law 25 Generally an individual is presumed to be a resident of Ohio (R.C (C)) Onus is on individual to rebut the presumption of domicile Ohio domicile must be abandoned to establish a new domicile To abandon an Ohio domicile, individual must establish actual residence in a new location with a clear intent to establish a new principal and permanent residence An individual can have only one domicile at any given time Most individuals retain their domicile throughout the taxable year, even if they spend all or a portion of the year away from that domicile

29 Ohio Residents Working Abroad Application 26 Physical presence is not, in and of itself, a determinative factor for the purposes of domicile Foreign presence and employment is not sufficient to abandon an Ohio domicile Individual still receives benefits from Ohio that are exclusively available to its domiciliaries, such as: An Ohio driver s license; Ohio vehicle registration; Voting privileges; Property tax reduction; and In-state tuition

30 Ohio Residents Working Abroad Application 27 What about the opposite situation? Individual is a resident of a foreign country, but comes to work in Ohio for some period of time Can this person be an Ohio resident? Is s/he subject to Ohio tax? Remember, Ohio s income tax is levied on income earned or received in Ohio Ohio can tax the foreign individual s income that was earned in Ohio However, the individual is probably not an Ohio resident Individual cannot permanently reside in Ohio based on temporary nature of work visa

31 The Business Income Deduction TREATMENT OF INCOME AS BUSINESS INCOME R.C (A)(31) & (B) 28

32 Guaranteed Payments 29 Issue: Is a guaranteed payment to a 1% partner of a partnership business income under Ohio law If business income, then eligible for the business income deduction and 3% flat tax ODT s position: The 20% test must be met for guaranteed payments to qualify for the BID Some practitioners have asserted that the guaranteed payment is business income in the first instance, so the 20% test is not needed.

33 Guaranteed Payments 30 If the guaranteed payment is business income then the practitioners should be correct If the guaranteed payment is not business income, then ODT should be correct that the 20% threshold must be met Is this merely a presentation issue?

34 Sale of an Interest In an Entity 31 Is the sale of an interest of an entity business or nonbusiness income? Relevant for business income deduction and 3% flat tax Corrigan v. Testa, 2016-Ohio-2805 An ownership interest in an entity is an intangible asset The income from the sale of an ownership interest in an entity is a capital gain Capital gains from intangible assets are generally nonbusiness income Nonbusiness income is allocable to the taxpayer s state of domicile

35 Sale of an Interest In an Entity 32 But remember R.C (B): Business income includes income from real property, tangible property, and intangible property if the acquisition, rental, management, and disposition of the property constitute integral parts of the regular course of a trade or business operation. What about 338(h)(10) elections?

36 PTE Tax- Indirect Investor Refund 33 C Corporation is an indirect investor in an operating PTE C Corp owns a PTE that owns the operating PTE Operating PTE is required to file with Ohio Withholds at 8.5% for its PTE investor (R.C ) PTE would not be required to withhold for the C Corp if a direct investor Withholding rate for direct corporate owners of PTEs was phased down to 0%

37 PTE Tax- Indirect Investor Refund 34 Corporation C John 99% 1% Mary PTE 2 (Intermediate) 30% 70% PTE 1 (Operating)

38 PTE Tax- Indirect Investor Refund 35 How does indirect C Corporation get a refund of the errant withholding? Operating PTE should file an amended return, within the applicable statute of limitation, to request a refund PTE should include statement that it has an indirect exempt investor in its ownership chain PTE should include an organization chart and Ohio K-1s to show the flow of ownership from the Operating PTE to the exempt investor

39 PTE Tax- Indirect Investor Filing 36 How does indirect C Corporation avoid the errant withholding? And thus not need to request a refund Operating PTE should utilize either R.C or R.C allows the Operating PTE to withhold on behalf of its deemed investors at their applicable rate if the intermediate PTE is an investment pass-through entity R.C allows the Operating PTE to not withhold if the intermediate PTE agrees to file and withhold, as appropriate, on behalf of its investors Provision does not apply where intermediate entity is an investment pass-through entity

40 37 Ohio IT K-1 USES IN PRACTICE & FREQUENTLY ASKED QUESTIONS

41 38 Many taxpayers and practitioners had suggested a form that allowed for the tracking of PTE payments and credits: From entity to entity(/ies) From entity to individual(s)

42 Ohio IT K-1 39 The new Ohio IT K-1 should be used in place of any selfgenerated Ohio K-1 equivalents K-1 should be prepared by PTE and provided to investor Investor would submit a copy of the IT K-1 with their IT 4708, IT 1041, or IT 1040 Entities that are not required to file can still generate the Ohio IT K-1 and provide it to their investors Provides for more simplified tracking of information between multi-tiered PTE structures

43 Useful in situations where you have a PTE paying tax, but an intermediate PTE that does not have a filing requirement Corporation C 99% 1% John 40 IT 1040 Mary PTE 2 No Filing: IT K-1 30% 70% PTE 1 (Operating) IT 4708

44 Ohio IT K-1 41 Question 1: Who is required to fill out the IT K-1? Answer: No one. Presently, the form is not required. However, the IT K-1 is the only form endorsed by the ODT, and thus is the only form that we will certify has all information needed to process our filings Question 2: Do I have to prepare an IT K-1 for resident investors? Answer: Since the IT K-1 is not mandatory for anyone, the answer is no. However, the IT K-1 is useful to a resident investor in a PTE

45 Ohio IT K-1 42 Question 3: Do I have to send in copies of the IT K-1s with my entity filing? Answer: No. The IT K-1 is for the investor s benefit. The form should be provided to the PTE s investor(s), who should include the IT K-1 with their filing. However, you may include them with your filing for convenience. Question 4: Can I use the IT K-1 for any tax year? Answer: Yes. The IT K-1 is not meant to be year specific. It can be used for any tax year, past, present, or future.

46 Ohio IT K-1 43 Question 5: Does Pass-Through Entity Type refer to the investor or the filing entity? Answer: Pass-through entity type refers to the filing entity. This has been clarified in a newer version of the form. Question 6: Should Ohio Taxable Income match federal, entity income? Answer: No. This line should only include the total amount of the investor s income apportionable to Ohio.

47 44 Tax Amnesty JANUARY 1 THROUGH FEBRUARY 15, 2018

48 What Is Amnesty & How Does It Work 45 Amnesty is a limited time opportunity that allows taxpayers to come forward and pay certain delinquent tax obligations Eligible Taxes are those due and payable as of May 1, 2017 for the following: Individual Income and School District Income Tax Employer Withholding and School District Withholding Tax Pass-Through Entity Tax ODT is authorized to forgive 100% of the penalty, and 1/2 of the interest

49 What Is Required To Apply for Amnesty 46 Taxpayer must complete and sign the appropriate amnesty application Taxpayer will need to submit return(s)/worksheet Taxpayer will need to submit payment in full with applicable interest Note: If you are a business and have never registered with the Department you will need to submit a registration form as well.

50 Amnesty Application Process 47 Application, payment, and return(s) must be sent to the following address: Ohio Department of Taxation Tax Amnesty Program P.O. Box Columbus, Ohio

51 Useful Links 48 ODT Forms: Tax Amnesty Website: Ohio General Assembly Legislation: Ohio Tax Law (Revised Code): Ohio Tax Rules (Administrative Code): Supreme Court of Ohio Cases:

52 49 Ohio Municipal Income Tax Update RITA REGULATION SECTION 6: RESIDENT CREDIT COMPUTATIONS PTE TAX

53 RITA Regulation Section 6: Resident Credit Computations PTE Tax 50

54 RITA Regulation Section 6: Resident Credit Computations PTE Tax In the following examples the residence municipality ( City R ) imposes a 2% income tax and... allows a full, nonrefundable credit (up to 2% tax rate) for municipal income taxes paid to, and/or withheld for, other municipalities. Furthermore, the T/P s losses are not subject to (i) basis limitations, (ii) at-risk limitations, and (iii) PAL limitations. IMPORTANT: If the residence city does not tax S corp. owners on their share of income from S corps., then the PTE is not an S corp.

55 Example #1 FACTS Resident s distributive share of income from PTE #1 doing business only in City A: $10,000. Resident s share of income tax which that PTE paid to City A: $200. Resident has no other income. 52

56 Example #1 (continued) RESULTS Resident s municipal taxable income ( MTI ) is $10,000. Resident s municipal income tax before credits is $200: $10,000 MTI X.02 tax rate. Resident s municipal income tax after credits is -0- : $200 resident city tax before credits - $200 credit with respect to City A. 53

57 Example #2 FACTS Resident s distributive share of income from PTE #2 doing business only in a township: $10,000. Resident s share of income tax which that PTE paid to that township: -0-. Resident has no other income. 54

58 Example #2 (continued) RESULTS Resident s municipal taxable income ( MTI ): $10,000. Resident s municipal income tax before credits: $200. Resident s municipal income tax after credits: $200; there is no credit. 55

59 Example #3 FACTS Resident s distributive share of income from PTE #1 doing business only in City A: $10,000. Resident s share of income tax which PTE #1 paid to City A: $200. Resident s distributive share of income from PTE #2 doing business only in a township: $10,000. Resident has no other income. 56

60 Example #3 (continued) RESULTS Resident s municipal taxable income ( MTI ) is $20,000: $10,000 from PTE #1 + $10,000 from PTE #2. Resident s municipal income tax before credits is $400: $20,000 MTI X.02 tax rate. Resident s municipal income tax after credits is $200: $400 tax before credits $200 credit with respect to City A. 57

61 Example #4 FACTS Resident s distributive share of income from PTE #1 doing business only in City A: $10,000. Resident s share of income tax which PTE #1 paid to City A: $200. Resident s distributive share of income from PTE #2 doing business only in a township: $20,

62 Example #4 FACTS (continued) Resident s distributive share of income from PTE #3 doing business only in City B which imposes income tax: -$10,000. Resident has no other income. 59

63 Example #4 (continued) RESULTS Resident s municipal taxable income ( MTI ) is $20,000: $10,000 from PTE #1 + $20,000 from PTE #2 - $10,000 from PTE #3. Resident s municipal income tax before credits is $400: $20,000 MTI X.02 tax rate. Resident s municipal income tax after credits: $400 or $200 or some other amount? 60

64 ISSUE Example #4 (continued) Should the -$10,000 loss from PTE #3 first apply to the $10,000 income from PTE #1 (which generated for the resident a tentative nonrefundable credit of $200) so that the $20,000 of income from PTE #2 (only in a township) is the only net MTI taxed by the resident city, and... thus, there is no City A credit available to the resident taxpayer? 61

65 ISSUE (continued) Example #4 (continued) Alternatively, should the -$10,000 loss from PTE #3 first apply to the $20,000 income from PTE #2 (the township PTE ) so that only $10,000 of PTE #2 income is taxed by the city, and the entire, $10,000 portion of the PTE #1 is taxed by the resident city, and... thus, the entire $200 City A credit from PTE #1 is available to the resident taxpayer? 62

66 Example #4 (continued) ANSWER RITA regulation section 6 sets forth an equitable answer to this issue: Apportion the -$10,000 loss from PTE #3 against the (i) $10,000 income from PTE #1 and (ii) the $20,000 income from PTE #2. So, apportioned to PTE #1 will be -$3, of PTE #3 s -$10,000 loss: -$10,000 PTE #3 s loss X [$10K PTE #1/($10K + $20K)] PTE #1 PTE #2

67 Example #4 (continued) ANSWER (continued) Thus, the City A credit from PTE #1 will be $133.33: [$10K PTE #1 income - $3, of PTE 3 s loss apportioned to PTE #1] X.02 City A tax rate. So, the resident city tax after credits will be $266.67: $400 tax before credits - $ allowed credit from City A. (Recall that the resident s share of income tax which PTE #1 paid to City A is $200.)

68 RITA Regulation Section 6: Resident Credit Computations PTE Tax NOTE: Section 6 applies only if the residence municipality provides, in whole or in part, a credit for municipal income tax paid to, and/or withheld for, at least one municipality and... The taxpayer s residence municipal taxable income includes either an entity net loss from at least one taxing jurisdiction OR... an overall net loss from a nontaxing jurisdiction (note: all nontaxing jurisdictions are treated as one, single nontaxing jurisdiction). 65

69 RITA Regulation Section 6 General Procedure 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. 66

70 RITA Regulation Section 6 General Procedure (continued) 3. Add together the net number for each jurisdiction having, per step #1, above, a net positive number. The total will be used in the computation in step #4, below. 4. To determine the tentative credit attributable to a jurisdiction having a net positive number (see step #1, above), divide the taxpayer s net positive number for that jurisdiction by the amount determined in step #3, above. The resulting quotient will be used in step # 5, below.

71 RITA Regulation Section 6 General Procedure (continued) 5. Multiply the taxpayer s municipal taxable income -- other than qualifying wages -- by the number obtained in step #4, above. The resulting product will be used in step #6 below. 6. Multiply that jurisdiction s tax rate by the product obtained in step #5, above. The resulting product is the tentative credit attributable to that jurisdiction. 68

72 RITA Regulation Section 6 General Procedure and Example #4 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. $10K profit for City A; $20K profit for the township. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. -$10K loss for City B. 69

73 RITA Regulation Section 6 General Procedure and Example #4 (continued) 3. Add together the net number for each jurisdiction having, per step #1, above, a net positive number. The total will be used in the computation in step #4, below. $10K + 20K = $30K. 4. To determine the tentative credit attributable to a jurisdiction having a net positive number (see step #1, above), divide the taxpayer s net positive number for that jurisdiction by the amount determined in step #3, above. The resulting quotient will be used in step # 5, below. Quotient for City A: $10K City A profit/$30k from step #3 = 1/3.

74 RITA Regulation Section 6 General Procedure and Example #4 (continued) 5. Multiply the taxpayer s municipal taxable income -- other than qualifying wages ( Q. W. ) -- by the number obtained in step #4, above. The resulting product will be used in step #6, below. [$20K MTI 0 Q. W.] X 1/3 from step #4 = $6, Multiply that jurisdiction s tax rate by the product obtained in step #5, above. The resulting product is the tentative credit attributable to that jurisdiction..02 City A tax rate X $6, = $ credit from City A.

75 RITA Regulation Section 6 General Procedure and Example #4 (continued) Example #4 s MTI : $20K Times: Resident city tax rate: X.02 Tax before credits: $ Less: Nonrefundable credit per step # * Tax due to resident city $ ====== * Not $

76 RITA Regulation Section 6: Resident Credit Computations PTE Tax NOTE: Section 6 applies only if the residence municipality provides, in whole or in part, a credit for municipal income tax paid to, and/or withheld for, at least one municipality and... The taxpayer s residence municipal taxable income includes either an entity net loss from at least one taxing jurisdiction OR... an overall net loss from a nontaxing jurisdiction (note: all nontaxing jurisdictions are treated as one, single nontaxing jurisdiction). 73

77 Example 5 FACTS T/P share of profit from partnership #1 doing business solely in City A: $10,000. T/P share of City A tax (@ 2%) on that profit: $200. T/P share of loss from partnership #2 doing business solely in City A: -$25,000. T/P Sch. C or F or E (page 1) profit in City A: $12,000. T/P tax timely paid to City A: $240. T/P Sch. C or F or E (either page) from a nontaxing jurisdiction: $206,000. Residence credit with respect to City A will be -0- (because the T/P s net profit with respect to City A is -0-). 74

78 Example 5 (continued) MTI: $10K - $25K + $12K + $206K $203K TIMES: Residence city tax rate X.02 Residence city tax before credits $4,060 Less: City A tax credit (not $200 + $240) -0-_ Net tax due to resident city $4,060 ===== 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. City A: -$3K; Nontaxing jurisdiction: $206K. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. For City A the net number is a negative $3K; so, no credit.

79 FACTS Example 5A T/P share of profit from partnership #1 doing business solely in City R (rather than in City A): $10,000. T/P share of City R tax (@ 2%) on that profit: $200. T/P share of loss from partnership #2 doing business solely in City R (rather than in City A): -$25,000. T/P Sch. C or F or E (page 1) profit in R (rather than in City A): $12,000. T/P Sch. C or F or E (either page) from a nontaxing jurisdiction: $206,000. Residence credit with respect to City A will be -0- (because the T/P s net profit with respect to City A is -0-). 76

80 Example 5A (continued) MTI: $10K - $25K + $12K + $206K $203K TIMES: Residence city tax rate X.02 Residence city tax before credits $4,060 Less: City R tax credit (not $200) -0-_ Net tax due to resident city $4,060 ===== 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. City R: -$3K; Nontaxing jurisdiction: $206K. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. For City R the net number is a negative $3K; so, no credit.

81 Example 6 FACTS T/P share of profit from partnership #1 doing business solely in City A: $10,000. T/P share of City A tax (@ 2%) on that profit: $200. T/P share of loss from partnership #2 doing business solely in City A: -$25,000. T/P Sch. C or F or E (page 1) profit in City A: $100,000. T/P tax timely paid to City A: $2,000. T/P Sch. C or F or E (either page) from a nontaxing jurisdiction: $200,000. Residence credit with respect to City A will be -0- (because the T/P s net profit with respect to City A is -0-). 78

82 Example 6 (continued) MTI: $10K - $25K + $100K + $200K $285K TIMES: Residence city tax rate X.02 Residence city tax before credits $5,700 Less: City A tax credit (not $200 + $2,000) - 1,700 Net tax due to resident city $4,000 ===== 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. City A: $85K; Nontaxing jurisdiction: $200K. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. N/A

83 RITA Regulation Section 6 General Procedure and Example #6 (continued) 3. Add together the net number for each jurisdiction having, per step #1, above, a net positive number. The total will be used in the computation in step #4, below. $85K + 200K = $285K. 4. To determine the tentative credit attributable to a jurisdiction having a net positive number (see step #1, above), divide the taxpayer s net positive number for that jurisdiction by the amount determined in step #3, above. The resulting quotient will be used in step # 5, below. Quotient for City A: $85K City A profit/$285 K from step #3 =

84 RITA Regulation Section 6 General Procedure and Example #6 (continued) 5. Multiply the taxpayer s municipal taxable income -- other than qualifying wages ( Q. W. ) -- by the number obtained in step #4, above. The resulting product will be used in step #6, below. [$285K MTI 0 Q. W.] X from step #4 = $85, Multiply that jurisdiction s tax rate by the product obtained in step #5, above. The resulting product is the tentative credit attributable to that jurisdiction..02 City A tax rate X $85,000 = $1,700 credit from City A.

85 Example 6 (continued) MTI: $10K - $25K + $100K + $200K $285K TIMES: Residence city tax rate X.02 Residence city tax before credits $5,700 Less: City A tax credit from step #6-1,700* Net tax due to resident city $4,000 ===== * Not the sum of $200 + $2,

86 FACTS Example 7 T/P share of profit from partnership #1 doing business solely in City A: $10,000. T/P share of City A tax (@ 2%) on that profit: $200. T/P share of loss from partnership #2 doing business solely in City A: -$250,000. T/P Sch. C or F or E (page 1) profit in City B: $100,000. T/P tax timely paid to City B (@ 1%): $1,000. T/P Sch. C or F or E (either page) from a nontaxing jurisdiction: $300,000. Residence credit with respect to City A will be -0- (because the T/P s net profit with respect to City A is -0-). 83

87 Example 7 (continued) MTI: $10K - $250K + $100K + $300K $160K TIMES: Residence city tax rate X.02 Residence city tax before credits $3,200 Less: Tax credit of $400 (not $200 + $1,000) Net tax due to resident city $2,800 ===== 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. City A: -$240K; City B: $100K; Nontaxing jurisdiction: $300K. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. Because City A is a negative number, no credit from City A. 84

88 RITA Regulation Section 6 General Procedure and Example #7 (continued) 3. Add together the net number for each jurisdiction having, per step #1, above, a net positive number. The total will be used in the computation in step #4, below. $100K City B + 300K Nontaxing jurisdiction = $400K. 4. To determine the tentative credit attributable to a jurisdiction having a net positive number (see step #1, above), divide the taxpayer s net positive number for that jurisdiction by the amount determined in step #3, above. The resulting quotient will be used in step # 5, below. Quotient for City B: $100K City B profit/$400 K from step #3 =.25.

89 RITA Regulation Section 6 General Procedure and Example #7 (continued) 5. Multiply the taxpayer s municipal taxable income -- other than qualifying wages ( Q. W. ) -- by the number obtained in step #4, above. The resulting product will be used in step #6, below. [$160K MTI 0 Q. W.] X. 25 from step #4 = $40, Multiply that jurisdiction s tax rate by the product obtained in step #5, above. The resulting product is the tentative credit attributable to that jurisdiction..01 City B tax rate X $40,000 = $400 tax credit from City B.

90 Example 7 (continued) MTI: $10K - $250K + $100K + $300K $160K TIMES: Residence city tax rate X.02 Residence city tax before credits $3,200 Less: City B tax credit from step #6-400* Net tax due to resident city $4,000 ===== * Not the sum of $200 from City A + $1,000 from City B. 87

91 Example 8 FACTS T/P share of profit from partnership #1 doing business solely in City A: $30,000. T/P share of City A tax (@ 2%) on that profit: $600. T/P share of loss from partnership #2 doing business solely in City A: -$30,000. T/P Sch. C or F or E (either page) from a nontaxing jurisdiction: $90,

92 Example 8 FACTS T/P share of profit from partnership #1 doing business solely in City A: $30,000. T/P share of City A tax (@ 2%) on that profit: $600. T/P share of loss from partnership #2 doing business solely in City A: -$30,000. T/P Sch. C or F or E (either page) from a nontaxing jurisdiction: $90,000. Residence credit with respect to City A will be -0- (because the T/P s net profit with respect to City A is -0-).

93 Example 8 (continued) Residence credit with respect to City A will be -0- (because the T/P s net profit with respect to City A is -0-) For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. City A: $-0-; Nontaxing jurisdiction: $90K. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. Because the net profit from City A is -0-, no credit from City A. 90

94 Example 9 FACTS T/P share of profit from partnership #1 doing business solely in City A: $30,000. T/P share of City A tax (@ 2%) on that profit: $600. T/P share of loss from partnership #2 doing business solely in an Ohio township: - $30,000. T/P Sch. C or F or E (page 1) profit solely in another state (no municipal income tax): $90,

95 Example 9 FACTS T/P share of profit from partnership #1 doing business solely in City A: $30,000. T/P share of City A tax (@ 2%) on that profit: $600. T/P share of loss from partnership #2 doing business solely in an Ohio township: - $30,000. T/P Sch. C or F or E (page 1) profit solely in another state (no municipal income tax): $90,000. Residence credit with respect to City A will be $

96 Example 9 (continued) MTI: $30K - $30K + 90K $ 90K TIMES: Residence city tax rate X.02 Residence city tax before credits $1,800 Less: Tax credit Net tax due to resident city $1,200 ===== 1. For each jurisdiction determine the net profit or loss for all business activity within that jurisdiction. Note: all nontaxing jurisdictions are treated as a single jurisdiction. City A: $30K; nontaxing jurisdiction: $60K. 2. If the net number for any jurisdiction is -0- or negative, no credit is available with respect to that jurisdiction. N/A 93

97 RITA Regulation Section 6 General Procedure and Example #9 (continued) 3. Add together the net number for each jurisdiction having, per step #1, above, a net positive number. The total will be used in the computation in step #4, below. $30K City A + $60K Nontaxing jusrisdition = $90K. 4. To determine the tentative credit attributable to a jurisdiction having a net positive number (see step #1, above), divide the taxpayer s net positive number for that jurisdiction by the amount determined in step #3, above. The resulting quotient will be used in step # 5, below. Quotient for City A: $30K City A profit/$90 K from step #3 =

98 RITA Regulation Section 6 General Procedure and Example #9 (continued) 5. Multiply the taxpayer s municipal taxable income -- other than qualifying wages ( Q. W. ) -- by the number obtained in step #4, above. The resulting product will be used in step #6, below. [$90K MTI 0 Q. W.] X from step #4 = $30, Multiply that jurisdiction s tax rate by the product obtained in step #5, above. The resulting product is the tentative credit attributable to that jurisdiction..02 City A tax rate X $30,000 = $600 tax credit from City A.

99 Example 9 (continued) MTI: $30K - $30K + 90K $ 90K TIMES: Residence city tax rate X.02 Residence city tax before credits $1,800 Less: Tax credit - 600* Net tax due to resident city $1,200 ===== * No limitation because no entity net loss in at least one taxing jurisdiction and... no overall net loss in any nontaxing jurisdiction (note: all non-taxing jurisdictions are treated as one, single jurisdiction).

100 RITA Regulation Section 6: Resident Credit Computations PTE Tax NOTE: Section 6 applies only if the residence municipality provides, in whole or in part, a credit for municipal income tax paid to, and/or withheld for, at least one municipality and... The taxpayer s residence municipal taxable income includes either an entity net loss from at least one taxing jurisdiction OR... an overall net loss from a nontaxing jurisdiction (note: all nontaxing jurisdictions are treated as one, single nontaxing jurisdiction). 97

101 RITA Regulation Section 6: Resident Credit Computations PTE Tax Questions? 98

102 RITA REGULATION SECTION 6 Effective for post-2015 years. CREDIT FOR TAX PAID TO OTHER MUNICIPALITIES. (A)(1) The credit, if any, provided to residents for municipal tax paid elsewhere on the same income taxable under this municipality s ordinance is as stated in this municipality s income tax ordinance. (2) The credit allowed to resident individuals for the taxable net profits (if any), on business income for taxable years 2016 and later shall be calculated as follows: (a) Annual profits and losses from business activities owned by the taxpayer and earned in this municipality and/or outside of this municipality (collectively known as jurisdictions ) shall be netted (i.e. offset) in order to calculate the resultant amount of current year taxable net profits to this municipality. If this municipality provides a residence tax credit and the results of (A)(2)(a) produced a positive resultant amount of current year taxable net profits, then proceed to section (A)(2)(b) to compute the allowable credit. If the result is negative, no credit is allowed under this section. (b)(i) Add the current year business net profits from each jurisdiction that had taxable current year net profits. Do not include in this total a jurisdiction with current year business activities that resulted in a net loss for that jurisdiction. (ii) If the taxpayer has multiple business activities in the current year within one jurisdiction, those business activity current year profits and losses must be offset to determine that jurisdiction s resultant current year taxable business net profits, if any. If the offsetting results in positive taxable income, that jurisdiction is deemed to have taxable current year net profits. This offset calculation must be done for each jurisdiction in which the taxpayer has multiple business activities. (iii) Each jurisdiction which has taxable current year net profits (either from a single business activity within the jurisdiction, or after application of (A)(2)(b)(ii)) shall divide that jurisdiction s taxable current year net profits by the sum of all jurisdictions current year taxable net profits determined in (A)(2)(b)(i) and (ii) to determine that jurisdiction s percentage of the total. (c) The resultant amount of current year taxable net profits determined in (A)(2)(a) shall be multiplied by each jurisdiction s percentage share calculated in (A)(2)(b)(iii), and that result shall be multiplied by the respective jurisdiction s tax rate, if any, to determine the amount of tax paid to that jurisdiction that may be eligible for credit from this municipality. (d) This municipality shall then apply the credit rate (whether 100% or a reduced credit) and any credit limit, as stated in this municipality s ordinance, to the amount calculated in (A)(2)(c) for each jurisdiction to determine the amount of credit this municipality shall allow 1

103 for purposes of this section. (B) This municipality shall grant a credit against its tax on income to a resident of this municipality who works in a joint economic development zone created under Section or a joint economic development district created under Section , , or of the ORC to the same extent that it grants a credit against its tax on income to its residents who are employed in another municipal corporation (C) If the amount of tax withheld or paid to the other municipality is less than the amount of tax required to be withheld or paid to the other municipality, then for purposes of division (A) of this section, the income, qualifying wages, commissions, net profits or other compensation subject to tax in the other municipality shall be limited to the amount computed by dividing the tax withheld or paid to the other municipality by the tax rate for that municipality. (D) Intentionally left blank. This indicates that this municipality does not give credit for county income taxes. 2