Ohio Tax Major Developments in Ohio Pass-Through Entity & - - PDF document

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, 2018 11:00 a.m. to 12:30 p.m.

Biographical Information Julie Corrigan, State & Local Tax Ohio Practice Leader, Plante & Moran 1111 Superior Ave., Suite 1250, Cleveland, Ohio 44114 Julie.Corrigan@plantemoran.com 216.274.6509 Fax 248.233.8853 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

• verall 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 43085 866-721-7482, Ext. 3586 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

• ne 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 43229 matthew.dodovich@tax.state.oh.us 614.728.6759 Fax: 614.387.2165 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, pass- through 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.

Biographical Information Stephen K. Hall, JD, LLM, Member, Zaino Hall & Farrin, LLC 41 South High Street, Suite 3600, Columbus, OH 43215 shall@zhftaxlaw.com 614-349-4812 Fax: 614-754-6368 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.

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

Agenda

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

2

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
• Tax Amnesty
• Municipal Income Tax Update

3

Legislative Updates

OHIO LEGISLATIVE TAX CHANGES

4

Individual Income Tax Brackets

• Lowest two income tax brackets are removed
• Previous inflation indexing has been codified
• Tax brackets were indexed again in August for this year

5

Individual Income Tax Brackets

• 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 0.7425%)

• 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

6

Individual Income Tax Credits

Low Income Credit is Repealed (R.C. 5747.056)

• 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

7

PEO Compensation Reclassification

R.C. 5733.40(A)(7) Currently Reads:

• For the purposes of Chapters 5733. and 5747. 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.

8

• 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

9

PEO Compensation Reclassification

• PEOs advocated for a clarifying law change
• Investor needs to own 20% of the entity paying the wage
• r 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

10

PEO Compensation Reclassification

Legislative Developments post- Cunningham

• 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

11

Legislative Developments post- 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

12

Cunningham v. Testa, 2015-Ohio-2744

• 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

13

Federal Income Tax Changes

AND THEIR IMPACT ON OHIO’S INCOME TAX

14

• 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

15

• 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 Partnership Audit Changes

16

• 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

Federal Income Tax Reform

17

Audit & Appeals Issues

18

Taxation of Stock Options

• 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

19

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
• ptions

20

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

21

• 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

Taxation of Stock Options – Application

22

• 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

Taxation of Stock Options – Calculation

23

• 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-
• ccupancy property tax reduction, a driver’s license, vehicle

registration, etc.

Ohio Residents Working Abroad – Facts

24

• 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

25

Ohio Residents Working Abroad – Law

• 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

26

Ohio Residents Working Abroad – 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

27

Ohio Residents Working Abroad – Application

The Business Income Deduction

TREATMENT OF INCOME AS BUSINESS INCOME R.C. 5747.01(A)(31) & 5747.01(B)

28

• 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

29

• 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 ?

30

Guaranteed Payments

• 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

31

Sale of an Interest In an Entity

• 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

• peration.”
• What about §338(h)(10) elections?

32

Sale of an Interest In an Entity

• 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%

33

PTE Tax- Indirect Investor Refund

Co rpo ra tio n C Jo hn PT E 2 (I nte rme dia te ) PT E 1 (Ope ra ting ) Ma ry

99% 1%

30% 70%

34

PTE Tax- Indirect Investor Refund

• 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

35

PTE Tax- Indirect Investor Refund

• 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

• f its investors
• Provision does not apply where intermediate entity is an “investment

pass-through entity”

36

PTE Tax- Indirect Investor Filing

Ohio IT K-1

USES IN PRACTICE & FREQUENTLY ASKED QUESTIONS

37

• 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)

38

Ohio IT K-1

• 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

39

Jo hn PT E 2 PT E 1 (Ope ra ting ) Ma ry

1%

30% 70%

40

Useful in situations where you have a PTE paying tax, but an intermediate PTE that does not have a filing requirement

IT 4708

No Filing: IT K-1

IT 1040

Co rpo ra tio n C

99%

Ohio IT K-1

• 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
• nly 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

41

Ohio IT K-1

• 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.

42

Ohio IT K-1

• 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.

43

Tax Amnesty

JANUARY 1 THROUGH FEBRUARY 15, 2018

44

What Is Amnesty & How Does It Work

• 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

45

What Is Required To Apply for Amnesty

• 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.

46

Amnesty Application Process

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

47

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/

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

49

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

• nly 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

• nly 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

• nly in a township: $20,000.

58

Example #4

FACTS (continued)

Resident’s distributive share of income from PTE #3 doing business

• nly 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).

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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

RITA Regulation Section 6: Resident Credit Computations – PTE Tax

Questions?

98

1

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

2

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 715.691 or a joint economic development district created under Section 715.70, 715.71, or 715.72 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.