Legislative Developments post- 12 Cunningham 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
Cunningham v. Testa , 2015-Ohio-2744 13 Case deals with the Department’s ability to challenge a taxpayer’s affidavit as false Supreme Court Holds: “[w]hile R.C. 5747.24 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 2015-02
14 Federal Income Tax Changes AND THEIR IMPACT ON OHIO’S INCOME TAX
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
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level IRS may now assess and collect from partnerships at entity level for 1065 and K-1 issues TEFRA procedures are repealed ODT is working to identify the impact to Ohio and address any accompanying issues
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
18 Audit & Appeals Issues
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
20 Taxation of Stock Options – Facts 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
21 Taxation of Stock Options – Law R.C. 5747.02 levies the income tax in all individuals earning or receiving income in Ohio R.C. 5747.20(B)(1) allocates, to Ohio, compensation paid to a nonresident individual for personal services performed in Ohio Hillenmeyer v. Cleveland Bd. Of Rev., 2015- Ohio-1623 Days Worked “comports with due process and ensures that the tax collected is not disproportionate to the income received for work” performed
22 Taxation of Stock Options – Application 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
23 Taxation of Stock Options – Calculation 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
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 owner- occupancy property tax reduction, a driver’s license, vehicle registration, etc.
Ohio Residents Working Abroad – Law 25 Generally an individual is presumed to be a resident of Ohio (R.C. 5747.24(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
Ohio Residents Working Abroad – 26 Application 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
Ohio Residents Working Abroad – 27 Application 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
28 The Business Income Deduction TREATMENT OF INCOME AS BUSINESS INCOME R.C. 5747.01(A)(31) & 5747.01(B)
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.
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 ?
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
Sale of an Interest In an Entity 32 But remember R.C. 5747.01(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?
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. 5733.41) 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%
PTE Tax- Indirect Investor Refund 34 Co rpo ra tio n C Jo hn 99% 1% PT E 2 (I nte rme dia te ) Ma ry 30% 70% PT E 1 (Ope ra ting )
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
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. 5733.402 or 5747.401 R.C. 5747.401 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. 5733.402 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”
37 Ohio IT K-1 USES IN PRACTICE & FREQUENTLY ASKED QUESTIONS
38 Many taxpayers and practitioners had suggested a form that allowed for t he tracking of PTE payments and credits: From entity to entity(/ies) From entity to individual(s)
Ohio IT K-1 39 The new Ohio IT K-1 should be used in place of any self- generated “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
40 Useful in situations where you have a PTE paying tax, but an intermediate PTE that does not have a filing requirement IT 1040 Jo hn Co rpo ra tio n C 1% 99% Ma ry No Filing: IT K-1 PT E 2 30% 70% PT E 1 IT 4708 (Ope ra ting )
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
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.
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.
44 Tax Amnesty JANUARY 1 THROUGH FEBRUARY 15, 2018
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
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.
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 183050 Columbus, Ohio 43218-3050
Useful Links 48 ODT Forms: https://www.tax.ohio.gov/Forms.aspx Tax Amnesty Website: http://ohiotaxamnesty.gov/ Ohio General Assembly Legislation: https://www.legislature.ohio.gov/legislation/search-legislation?1 Ohio Tax Law (Revised Code): http://codes.ohio.gov/orc/57 Ohio Tax Rules (Administrative Code): http://codes.ohio.gov/oac/5703 Supreme Court of Ohio Cases: http://www.sconet.state.oh.us/ROD/docs/
49 Ohio Municipal Income Tax Update RI T A RE GUL AT I ON SE CT I ON 6: RE SI DE NT CRE DI T COMPUT AT I ONS – PT ET AX
RITA Regulation Section 6: Resident Credit Computations – PTE Tax 50
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.
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
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
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
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
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
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
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: $20,000. 58
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
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
Example #4 (continued) ISSUE 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
Example #4 (continued) ISSUE (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
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 -$3,333.33 of PTE #3’s -$10,000 loss: -$10,000 PTE #3’s loss X [$10K PTE #1/($10K + $20K)] PTE #1 PTE #2
Example #4 (continued) ANSWER (continued) Thus, the City A credit from PTE #1 will be $133.33: [$10K PTE #1 income - $3,333.33 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 - $133.33 allowed credit from City A. (Recall that the resident’s share of income tax which PTE #1 paid to City A is $200.)
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
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
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.
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
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
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.
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 = $6,666.66 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 $6,666.66 = $133.33 credit from City A.
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: $400.00 Less: Nonrefundable credit per step #6 - 133.33* Tax due to resident city $266.67 ====== * Not $200. 72
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
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
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.
Example 5A FACTS 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
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.
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
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
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 = .2982456.
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 . 2982456 from step #4 = $85,000. 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 $85,000 = $1,700 credit from City A.
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 + $2,000. 82
Example 7 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: -$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
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 -0- + $400 (not $200 + $1,000) - 400 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
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.
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 = $40,000 . 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. .01 City B tax rate X $40,000 = $400 tax credit from City B.
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
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 . 88
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-) .
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-) . ------------------------ 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: $-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
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. 91
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 $600. 92
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 ===== 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
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 = .333333.
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 .33333 from step #4 = $30,000. 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 $30,000 = $600 tax credit from City A.
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).
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
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