2016 Regional Income Tax Agency Municipal Income Tax Seminar - PowerPoint PPT Presentation

“First - Ups” Cont.: 2016 Estimates:   Individual / Net Profit -- Quarterly estimated payments are not required unless the estimated tax liability for the year is $200 or more (after withholding and credits).  New estimated payment due dates.  1 st quarter due April 15 th  2 nd quarter due June 15 th  3 rd quarter due September 15 th  4 th quarter due December 15 th  Safe Harbors.  90% of current year tax liability;  100% of prior year tax liability (assuming a full year); or  The taxpayer was not domiciled in the municipal corporation on January 1st of the taxable year.

“First - Ups” Cont.:  Minimum Thresholds:  Individual / Net Profit Returns -- No remittance of tax is required with the return if the amount shown to be due is $10 or less.  Refunds -- Will not be issued for $10 or less.  If taxpayer is unable to get a refund due to threshold, RITA will carryforward as a credit.  Postmark:  Returns and payments are timely if post-marked on or before the due date.

“First - Ups” Cont.:  Lottery / Gambling:  Includes lottery, sweepstakes, gambling and sports winnings, winnings from games of chance, and prizes and awards.  No threshold.  Professional gamblers (for federal tax purposes) may deduct losses and expenses.  Residential? Non-residential / point of sale? Both?  Ex. Cleveland’s Ordinance: On all income derived from prizes, awards, gaming, wagering, lotteries or other similar games of chance by a resident from whatever source and from anywhere derived and by a nonresident from whatever source when the prize, award, gaming, wagering, lottery or other similar game of chance takes place in the City . For purposes of this statute, the purchase of a lottery ticket or similar instrument shall be deemed to occur in the City when said instrument is purchased in the City.

“First - Ups” Cont.:  Penalty/ Interest Rates:  Non-payment of Tax Penalty.  Flat 15% of the unpaid tax for individuals and net profit filers (includes unpaid estimated tax).  Flat 50% penalty for employer withholding.  Late Filing Penalty.  $25 per month for each failure to timely file, up to $150 (for all returns except estimated taxes).  Non-payment of Tax Interest Rate.  Federal short-term rate, plus 5% (individual, net profit and withholding).  The same rate of interest is payable to taxpayers on late-issued refunds.  Makes all penalties discretionary.

H.B. 5 Assessments:  “Assessment” defined: A written finding by a municipal tax administrator that commences a taxpayer’s time to appeal to the local board of tax review.  AND – additional requirements:  “ASSESSMENT” printed at the top in all capital letters;  Advises taxpayer of appeal rights and how to appeal.

H.B. 5 Assessments:  Examples of Assessments:  Full or partial denial of refund requests on amended returns.  Denial of taxpayer’s request to use a method other than the statutorily prescribed method for allocating net profits to a municipality, or tax administrator’s requirement.  Requiring net profit filers to make a consolidated filing.

H.B. 5 Assessments:  Assessments are NOT :  Billing statements;  Requests for additional information;  Informal notices denying refund request on originally filed returns;  Notifications of math errors; or  Other general correspondence.

EMPLOYER WITHHOLDING AND THE OCCASIONAL ENTRANT RULE – Employers and Employees Be Aware! Presented by: Amy Arrighi 43

House Bill 5 Changes to the Occasional Entrant Rules  Extends from 12 to 20 the number of days an employee must be working in a municipality before tax must be withheld.  Requires withholding from the 21 st day forward, not back to the first day.  Defines a “day” for purposes of determining when an employee has reached 20 days working in a municipality.  Shifts much of the tracking burden to the employee.  Exceptions for “small employers”. 44

Withholding – Small Employers  The small employer withholding rules:  A small employer is an employer whose gross receipts the previous year totaled less than $500,000.  Gross receipts are from all sources, including intangible income, grants, and expense reimbursements (so payments made to a common paymaster to cover the related party’s payroll are included in gross receipts).  Hospitals, universities, governments cannot be a small employer.  To qualify for the small employer withholding rules, the employer must have a fixed location in Ohio. 45

Withholding – Small Employers  The rule:  A small employer with a fixed location in Ohio withholds municipal income tax as if all of the wages of all employees were earned for work performed at the fixed location. 46

Withholding – Small Employers  The small employer withholding rules (example 1):  Joe’s Plumbing’s only location in Ohio is in Cleveland.  Joe’s Plumbing’s gross revenue from all sources last year was $325,000.  Joe’s Plumbing employs seven full -time employees who unclog drains in Cleveland, Cleveland Heights, Beachwood, Parma, and Rocky River.  Each employee worked 40 days in each of the above municipalities. 47

Withholding – Small Employers  The small employer withholding rules (example 1):  Joe’s Plumbing withholds Cleveland tax on all qualifying wages of all employees.  Because the wages of Joe’s employees are not subject to withholding in Cleveland Heights, Beachwood, Parma and Rocky River those wages are exempt from tax in these communities UNLESS an employee receives a refund from Cleveland.  If an employee obtains a “days out” refund from Cleveland, tax is due to the other communities on all wages earned there. 48

Withholding – Small Employers  The small employer rules (example 1)  Joe’s Plumbing employs Matt.  Joe’s Plumbing withholds Cleveland tax on all of Matt’s wages.  The wages Matt earned performing work on 40 days in Cleveland Hts., 40 days in Beachwood, 40 days in Parma and 40 days in Rocky River are exempt from tax in those communities BUT  If Matt receives a days out refund from Cleveland for the 160 days he worked outside of Cleveland, he now owes tax to those communities for ALL days he performed work in these communities (20 days is not a factor). 49

Withholding – Small Employers  The small employer withholding rules (example 2):  Joe’s Plumbing’s only location in Ohio is in Richfield Township.  Joe’s Plumbing’s gross revenue from all sources last year was $325,000.  Joe’s Plumbing employs six full -time employees who unclog drains in Brecksville, Broadview Heights, North Royalton, Peninsula and Macedonia (each imposing a 2% tax).  Each of the six employees worked 30 days in each of the above municipalities. 50

Withholding – Small Employers  The small employer withholding rules (example 2):  Joe’s Plumbing withholds municipal tax as if all work performed by all employees was in Richfield Township (thus, Joe’s Plumbing does not withhold workplace tax). 51

Withholding – Small Employer  The small employer withholding rules (example 2)  Joe’s employee Matt is a resident of Garfield Heights. Garfield Heights imposes a 2% income tax on residents and allows a 100% credit for tax paid to other municipalities, up to 2%.  Matt’s wages earned performing work in Brecksville, Broadview Heights, North Royalton, Peninsula and Macedonia are exempt from tax in those communities but are subject to tax in his residence community.  Matt suddenly has no workplace withholding beginning in 2016 due to the small employer withholding rules. 52

Withholding – Small Employers  The small employer withholding rules (example 2):  If Matt earns $38,000 as a plumber he will owe Garfield Hts. $760 when he files his TY 2016 return.  Failure to pay this when due could subject Matt to a penalty of $114 (15% of the tax due).  Possible solutions -  Matt may ask Joe’s Plumbing to withhold residence tax for him. Joe’s Plumbing can say “no”.  Matt should establish and pay an estimate to Garfield Heights to avoid this situation. 53

Withholding – Small Employers  The small employer withholding rules (example 3):  MegaSecurity is the world’s largest provider of on - site security guards.  MegaSecurity has only one fixed location in Ohio which is within the city limits of Sandusky.  MegaSecurity’s 2015 gross revenue was in the billions.  MegaSecurity has 257,492 employees worldwide. 54

Withholding – Small Employers  The small employer withholding rules (example 3):  MegaSecurity employs 7,847 employees in Ohio.  Only 123 of MegaSecurity’s employees work in Sandusky at the company’s fix location and at various client sites.  The remaining 7,724 employees work mostly in Cleveland, Columbus, Toledo and Cincinnati and most have never set foot in the Sandusky office. 55

Withholding – Small Employers  The small employer withholding rules (example 3):  Effective January 1, 2016, for the legitimate business purpose of liability management, MegaSecurity incorporates a subsidiary, MegaSecurity Ohio and transfers all of its Ohio employees to MegaSecurity Ohio.  MegaSecurity Ohio, a separate legal entity, takes over the Sandusky fixed location.  MegaSecurity Ohio had gross revenue in 2015 of $0 (it didn’t exist in 2015). 56

Withholding – Small Employers  The small employer withholding rules (example 3):  Is MegaSecurity Ohio with its 7,847 employees a small employer?  Does MegaSecurity Ohio have a fixed location in Ohio?  How does MegaSecurity Ohio withhold under the small business withholding rules as written? 57

Withholding – 20 Day Rule  The basic Occasional Entrant Rule:  Extends from 12 to 20 the number of days an individual must perform services in a municipality before the employer is required to withhold tax.  If the threshold is not exceeded, the employer withholds only for the employee’s “principal place of work” if that location is within a municipality.  If the 20-day threshold is exceeded, the employer is not responsible for the withholding for the first 20 days.  Exceptions exist for small employers, certain “worksite locations” and “presumed worksite locations”. 58

Withholding – 20 Day Rule  The basic Occasional Entrant Rule (example 1):  So if John’s principal place of work is in Grove City, and he works 7 days in Columbus, and his employer correctly withholds Grove City tax on his wages earned in Columbus, and  John is a Bexley resident, then  John’s wages earned in Columbus are exempt income as far as Columbus is concerned unless John requests a refund of the Grove City tax withheld on those wages earned in Columbus. 59

Withholding – 20 Day Rule  The basic Occasional Entrant Rule (example 1):  Because John is a Bexley resident, John owes Bexley tax on all of his qualifying wages including those qualifying wages earned in Columbus that were exempt income as far as Columbus is concerned.  Bexley’s normal rules for granting residents credit for taxes paid to another municipality would apply. 60

Withholding – 20 Day Rule  The basic Occasional Entrant Rule (example 2):  However, if Jane’s principal place of work is in Prairie Township, and she works 7 days in Columbus, and her employer correctly withholds no tax on her wages earned in Columbus, and  Jane is a Bexley resident, then  Jane’s wages earned in Columbus are exempt income as far as Columbus is concerned. 61

Withholding – 20 Day Rule  The basic Occasional Entrant Rule (example 2):  Because Jane is a Bexley resident, she owes Bexley tax on all of her qualifying wages, even those wages that were exempt from Columbus withholding under the Occasional Entrant Rule. 62

Withholding – 20 Day Rule  The nuts and bolts of the Occasional Entrant Rule:  What is an employee’s “principal place of work”?  The fixed location in Ohio to which the employee is required to report for duty on a regular and ordinary basis.  If no fixed location applies, then it’s the Ohio “worksite location”, such as a construction site or temporary job site, to which the employee is required to report for duty on a regular and ordinary basis. 63

Withholding – 20 Day Rule  The nuts and bolts of the Occasional Entrant Rule:  What is an employee’s “principal place of work”?  If no fixed location applies and no worksite location applies, then the principal place of work is the location in Ohio at which the employee spends the greatest number of days in a calendar year performing services for the employer. 64

Withholding – 20 Day Rule  The nuts and bolts of the Occasional Entrant Rule:  For purposes of counting days for the Occasional Entrant Rule, an employee works in only one municipality each day.  The municipality in which the employee was deemed to have spent the most time working compared to other municipalities is the municipality in which the employee worked that day for purposes of counting up to 20 days. 65

Withholding – 20 Day Rule  The nuts and bolts of the Occasional Entrant Rule:  Time spent traveling to and from job sites and picking up goods or making deliveries is considered time spent working at the employee’s principal place of work.  However, if the employee delivers and installs goods (i.e. “affixes to real property”), then the time spent installing the goods is time spent working in the municipality where delivery was made. 66

Withholding – 20 Day Rule  An exception to the Occasional Entrant Rule:  Employees working at a “Presumed Worksite Location”  If the employer can reasonably expect to be providing services at a jobsite in a municipality for more than 20 days during the year, the employer must withhold on all qualifying wages earned by employees working at that jobsite, even on those wages earned by employees whom the employer knows will work less than 20 days in the municipality. 67

Withholding and the Occasional Entrant Rule  Municipalities and employers may enter into agreements to simplify withholding.  Nothing in H.B . 5 will “undo” existing agreements between municipalities and employers to simplify withholding.  Employers can elect to withhold where the work is actually being performed for all days that it is being performed. 68

Withholding and the Occasional Entrant Rule  Takeaways (Employees):  When preparing your individual clients’ TY 2015 returns ask to see a few paystubs for 2016.  Has anything changed? Does the client still have withholding? Has the municipality of withholding changed?  How will any change in withholding impact the client’s TY 2016 tax situation at the municipal level? Should an estimate be declared for TY 2016 in the resident community?  It is up to your clients as employees to track their work locations if “days out” refunds will be sought.  Understand that a days out refund from one community may result in tax due to another. 69

Withholding and the Occasional Entrant Rule  Takeaways (Employers):  The law is supposed to make withholding easier for employers – and shifts much of the tracking burden to employees. HOWEVER, employers still are required to certify days out refund requests.  Understand how, if at all, your withholding obligations may be different now.  Consider withholding residence tax if a change in withholding will cause a significant change in your employees’ residence tax obligations.  Understand that you can elect to not follow the occasional entrant rules and withhold where the tax is actually due. 70

Withholding Under House Bill 5 Questions 71

NEW STATE MANDATES: Net Operating Loss Carryforwards and Phase-in Provisions Individual Schedule Income & Loss Offsets Presented by: Robert G. Meaker, Chief of Tax Operations RITA

AGENDA  Net Operating Loss Carryforward (“NOL CF”) Requirements  NOL CF Phase-ins  Municipal Income Tax Net Operating Loss Review Committee  Schedule Income Offsets for Residents

NOL CF Requirements  HB 5 provides for a state ‐ wide five year carryforward for NOLs incurred in taxable years beginning after 2016.  Applies to losses incurred in taxable years beginning on or after January 1, 2017, and then carried forward to future taxable years.  NOL CFs apply to: 1) Business Net Profits 2) Schedule C, E, & F income of Non-residents earned in taxing municipalities 3) All Schedule income of Residents of taxing municipalities.

NOL CF Requirements  NOL CFs do not include unutilized losses resulting from basis limitations, at ‐ risk limitations, or passive activity loss limitations.  Losses that are not reportable on Federal Schedule E Part II are not included in current year taxable income or allowed to be carried forward.  Applies to Partners and S Corporation shareholders.  NOL CFs may not be used to offset qualifying wages.

NOL CF Requirements  NOL CF Provision is phased in:  Taxpayers may only claim 50% of the available NOL carryforward during years 2018 through 2022.  100% utilization of NOL CFs delayed until tax year 2023.  TPs may carry forward any “unutilized” NOLs for 5 years.  From technical clarification in State Budget Bill (HB 64) on how unutilized NOL CFs are handled in regards to the bill’s NOL CF phase - in provisions.  See “declining balance method” examples below  Phase-in provisions also apply to NOL CF related to Schedule income of residents and non-residents

NOL CF Requirements  Pre ‐ 2017 NOLs are permitted to be carried forward to the extent already allowed by municipalities.  The 50% phase-in limitation does not apply to pre ‐ 2017 NOLs.  Pre ‐ 2017 NOLs must be utilized before utilizing new NOLs generated after tax year 2016.  Post 2016 NOL carry ‐ forwards are calculated and applied on a pre ‐ apportionment basis.

NOL CF - Pre HB5 vs. Post HB5

NOL CF Phase-in Examples Example 1 – Muni Currently Does Not Allow NOL CF

NOL CF Phase-in Examples Example 2 – Muni Currently Allows NOL CF

NOL CF Phase-in Examples Example 3 – Muni Currently Allows NOL CF

NOL CF Phase-in Examples Example 4 – Muni Currently Allows NOL CF 40% of TP's Income is Apportionable to Muni Each Yr Step 1 Step 2 Actual 2016 2017 2018 2019 2019 2019 2020 2021 2022 2023 Total Net Profit (Loss) for Tax Year - Pre Apportionment -$25,000 -$4,000 $20,000 $8,000 $3,000 $8,000 -$45,000 $90,000 $2,000 $16,000 Net Profit (Loss) for Tax Year - Post Apportionment 40% -$10,000 Utilized Post 2016 NOL CF from Tax Year 2017 -$2,000 -$2,000 -$1,000 -$500 -$16,000 Utilized Post 2016 NOL CF from Tax Year 2020 -$22,500 -$1,500 Please refer to (50% Limitation Applies for NOLs incurred post 2016) spreadsheet handout in Pre Apportionment Muni Taxable Income $0 $0 $20,000 $8,000 $1,000 $6,000 $0 $66,500 $0 $0 Apportionment % 40.00% 40.00% 40.00% 40.00% $8,000 $3,200 $2,400 $26,600 Pre-2017 NOL CF Available -$8,000 -$2,000 -$2,000 your folder. Municipal Taxable Income $0 $1,200 $400 $26,600 Unutilized 2017 NOL CF -$4,000 -$4,000 -$2,000 -$2,000 -$1,000 -$500 * -$5 ,0 00 Unutilized 2020 NOL CF -$45,000 -$22,500 -$21,000 -$10,000 -$10,000 -$2,000 Amount of Unutilized 2017 NOL CF Available for Next Tax Year -$2,000 -$2,000 -$1,000 -$1,000 -$500 * Amount of Unutilized 2020 NOL CF Available for Next Tax -$5 ,0 00 Year -$22,500 -$11,250 -$21,000 * 5-year CF period expired in 2022 for Tax Yr 2017 NOLs

Municipal Income Tax NOL Review Committee Municipal Income Tax Net Operating Loss Review Committee Purpose:  Evaluate and quantify the potential fiscal impact to municipalities of the NOL carryforward provisions contained in HB 5.

Municipal Income Tax NOL Review Committee 11 Committee members:  2 from House, appointed by the Speaker of the House;  2 from the Senate, appointed by Senate President;  3 representing municipal income taxpayers, appointed by Speaker;  3 representing municipal corporations that levy an income tax in 2016 (at least 2 of which do not allow NOLs), appointed by Senate President.  1 appointed by the Governor; appointee will chair the Committee. Members shall be appointed not later than March 1, 2015 (?)

Municipal Income Tax NOL Review Committee Evaluate and quantify the potential fiscal impact to municipalities of the NOL carryforward provisions contained in HB 5. Quantifying the potential fiscal impact: On or before November 30, 2015 (?) the Committee shall provide a  method that municipalities will use to estimate actual/projected municipal tax revenue for tax years 2012 – 2018. (Committee not formed yet) Municipalities will then estimate actual/projected municipal income tax  revenue for tax years 2012 – 2018 that would have resulted if a 5-year NOL had existed during those years for losses incurred in tax years 2011 – 2013. “Each municipal corporation that levies an income tax in 2011, 2012, or  2013 shall report…” their revenue findings to the Committee on or before September 30, 2016.

Municipal Income Tax NOL Review Committee Written report due on or before May 1, 2017  If the Municipal Income Tax NOL Review Committee (Committee) receives information from a “representative sample” of taxing municipalities, then they will review the info submitted.  The report shall be submitted specifically to the Speaker and Minority Leader of the House, and the President and Minority Leader of the Senate.  The Committee shall cease to exist on May 1, 2017.

Municipal Income Tax NOL Review Committee “Representative sample” consists of :  At least 3 or more cities with more than 250,000 population.  5 cities/villages with higher ratio of business taxpayers to resident individual taxpayers, relative to the state average.  5 cities/villages with higher ratio of resident individual taxpayers to business taxpayers, relative to the state average.  After reviewing the information, the Committee will calculate the total revenue effects reported by the “representative sample”.  The Committee’s report will contain recommendations to address revenue shortfalls.

Resident Schedule Income & Loss Offsets  Allows for current year offsetting of all Schedule income and losses of residents of taxing municipalities only for residence tax purposes.  i.e. All Schedule Income & Losses are in “one bucket” for offsetting purposes.  Includes Schedule C, E & F owned by the resident.  Includes pass-through income & losses of the resident.  S Corporation limitations for residence tax purposes still apply – Income or losses of S corporations do not flow to an owner unless the owner lives in a municipality that voted in 2003 or 2004 to permit taxation of S corporation owners.

Resident Schedule Income & Loss Offsets  Net “Schedule Bucket Losses” cannot offset Qualifying Wages.  NOL CF & Phase- in Provisions apply when net total “Schedule Bucket” is loss.  NOL CF cannot offset Qualifying Wages.  Does not apply to Schedule income earned by non- residents in non-resident municipality.  Non-residents must file and pay on Schedule C, E & F income in municipality where income is earned.  NOL CF & Phase-in Provisions apply.

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Tax Year 2015 “Two Bucket Method” Unapportioned Schedule Activity - “Bucket 1” Cleveland Heights Resident  Schedule C loss in Cleveland Heights – ($10,000)  Township Schedule E rental income - $25,000  Florida Partnership distributive share loss - ($6,000) = Total Unapportioned income of $9,000

Resident Schedule Income & Loss Offsets Example 1 – RITA Resident Tax Year 2015 Apportioned Schedule Activity - “Bucket 2” Cleveland Heights Resident  Taxing Muni A Partnership – $15,000  Taxing Muni B Rental – ($22,000)  Taxing Muni C Rental – $4,000 = Total Apportioned Loss of ($3,000)

Resident Schedule Income & Loss Offsets Example 1 Continued – RITA Resident Tax Year 2015 “Two Bucket Method” Residence Non-taxing Total Taxing Muni Taxing Muni Taxing Muni Total Muni Locations Unapportioned A B C Apportioned Cleveland Heights $(10,000) $ (10,000) Township A $ 25,000 $ 25,000 Florida $ (6,000) $ (6,000) Total Unapportioned ("Bucket 1") $ 9,000 Taxing Muni A $ 15,000 $ 15,000 Taxing Muni B $ (22,000) $ (22,000) Taxing Muni C $ 4,000 $ 4,000 Total Apportioned ("Bucket 2") $ (3,000) Net Unapportioned Schedule Income Subject to Res Tax $ 9,000 Apportioned Loss Subject to CH's Current 5-Yr NOL CF $ (3,000 )

Resident Schedule Income & Loss Offsets Example 1 Continued – RITA Resident Tax Year 2015 Cleveland Heights Resident  Total Taxable Residence Schedule Income = $9,000

Resident Schedule Income & Loss Offsets Example 2 – RITA Resident Under HB 5 “One Bucket Method” Tax Year 2016 Cleveland Heights Resident  Schedule C loss in Cleveland Heights – ($10,000)  Township Schedule E rental income - $25,000  Florida Partnership distributive share loss - ($6,000)  Taxing Muni A Partnership – $15,000  Taxing Muni B Rental – ($22,000)  Taxing Muni C Rental – $4,000 =Net Total of $6,000 Subject to Residence Tax

Resident Schedule Income & Loss Offsets Example 2 Continued – RITA Resident Under HB 5 “One Bucket Method” Tax Year 2016 Residence Non-taxing Taxing Muni Taxing Muni Taxing Muni Total Muni Locations A B C Cleveland Heights $(10,000) $ (10,000) Township A $ 25,000 $ 25,000 Florida $ (6,000) $ (6,000) Taxing Muni A $ 15,000 $ 15,000 Taxing Muni B $ (22,000) $ (22,000) Taxing Muni C $ 4,000 $ 4,000 Net Total Schedule Income Subject to Residence Tax $ 6,000

Non-resident Pass-through Income & Losses  Some municipalities currently permit nonresident owners to file tax returns that offset income and losses of multiple Pass- through entities (“PTEs”) operating in the municipality.  In most instances, such municipalities do not permit a carryforward of NOLs.  Under HB 5, PTEs must file and pay municipal income tax at the entity level for Ohio municipalities.  Each of those PTEs will be permitted to carryforward any NOLs for five years.

QUESTIONS???? Thank you!

RITA Website Updates Effective Filing Season 2016 --- Speaker--- Alicia Kline