ohio municipal reform update

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Ohio Municipal Reform Update

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Ohio Municipal Reform

September 17, 2015

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• Overview of Municipal Reform

• Employer Withholding Issues

• Business Tax Changes

• Individual Tax Changes

• Pending Law Changes

MUNICIPAL REFORM

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• The Good, The Bad and The Ugly of Municipal Reform

The Good – net operation loss provisions

The Bad – still potential for multiple income tax filings

The Ugly – withholding provisions

MUNICIPAL REFORM

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– THE UGLY• This will be the area that impacts your business the most

Employee withholding provisions

There are some good provisions but there are definitely some ugly provisions

You need to know where your employees are working if they travel through-out the state.

A tracking mechanism might be necessary

MUNICIPAL REFORM

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BACKGROUND• 33 different organizations in Ohio worked together to

arrive at some municipal reform

• Conversations about municipal reform started back in 2011

• HB 5 was passed in December, 2014

• Many individuals believe current reform did not go far enough to simplify Ohio’s municipal system

• There are some pending corrections that are under consideration

MUNICIPAL REFORM

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MUNICIPAL REFORM GOALS• Align local tax systems to federal and state tax systems

Adopts NOL provisions

Adopted

‒ Taxpayer Bill of Rights

‒ Offer in Compromise

• Reduce compliance costs for taxpayers PTE owners subject to tax only in resident city

• Substantial revenue neutrality to the overall local tax system – the intent is not to reduce the tax burden itself. Gains/loss offset not permitted for non-residents

Occasional Entrant Rule expanded but withholding almost always required

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MUNICIPAL REFORM• What reform did not accomplish

No uniform tax rate

No requirement for a mandatory 100% tax credit for taxes paid to other cities

No centralized collection of the tax – RITA and CCA continue to exist

No change to the current law’s Throwback provisions

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MUNICIPAL REFORM• Generally provisions of municipal reform are effective

January 1, 2016

• The net operating loss provisions are effective for taxable years beginning after 2016

Not completely phased in until 2023

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OCCASIONAL RULETWENTY DAY

• Currently, Ohio cities operate under the 12 day rule to determine withholding requirements for employees

• Twelve day rule – a city is not entitled to tax the compensation paid to a non-resident employee for services performed in the city for twelve or fewer days in a calendar year

• The 12 day rule does not apply to professional athletes or entertainers

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• Under the current 12 day rule

Most cities take the position that once an employee exceeds the 12 days, an employer must retroactively go back and withhold from the first day of entering the city.

Most cities also claim that the rule only applies to qualifying wages

Any portion of the day counts towards the 12 days


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• Under municipal reform 12 days is now 20 days

• The rule is an employer need not withhold tax for a city if the employee is working in the city for 20 or fewer days

• Instead the employer must withhold for the Principal Place of Work city


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• The key is now to determine where the employee worked for the day

• The current definition of day is An employee can only be considered to be in any one city during

a day

The new law introduces the concept of the “preponderance of a day”

‒ An employee is considered to have spent a day working in a city if the employee spent the majority of his day performing services in one city versus another city. The city with the most time spent is considered the city where the employee spent his day and will count towards the 20 day rule.


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• In examining an employee’s work day you consider the Principal Place of Work city

• What does this mean?

Time during an employees day is considered time spent in the Principal Place of Work city

Time spent traveling from Principal Place of Work city to the first work city

Time spent traveling between work assignments is considered time spent in the Principal Place of Work city

Traveling from last place of work for the day back to the Principal Place of Work city


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• Other time that is considered time spent in the Principal Place of Work city

Traveling from any location to another location in order to pick up or load, for the purpose of transportation or delivery, property that has been purchased, sold, delivered, assembled or improved by the employer.

Transporting or delivering property described above provided that, upon delivery of the property, the employee does not temporarily or permanently affix the property to the real estate owned, used or controlled by a person other than the employee’s employer.


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• Principal Place of Work – must utilize a cascading test to determine what city is the principal place of work

The fixed location to which an employee is required to report for work on a regular basis

‒ Fixed location – permanent place of doing business in Ohio, such as an office, warehouse, store front or similar that is owned or controlled by the employer

‒ Cannot be outside of Ohio

‒ Cannot be a location owned by a customer


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• Principal Place of Work

If no fixed location exists, then the Principal Place of Work means the worksite location to which the employee is required to report for employment duties on regular basis

A worksite location is a construction site or other temporary worksite in Ohio at which the employer provides services on more than 20 days during the calendar year

‒ A worksite location cannot include the employee’s residence

‒ A worksite location cannot include a location outside of Ohio


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• Principal Place of Work

If no fixed location or worksite location, Principal Place of Work means the location in Ohio at which the employee spends the greatest number of days in the calendar year performing services for the employer.

‒ If there is a tie between two or more cities - an employee spends the equal amount of time in two or more cities during a calendar year, the employer must allocate the employees wages among those cities for withholding purposes.

‒ Any allocation method can be utilized as long as fair and reasonable


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• Presumed Worksite Location – is a construction or other temporary worksite in Ohio at which the employer provides services that can be expected to last more than twenty days in a calendar year.

• Services can be expected to last more than twenty days if either of the following apply: The nature of the services are such that it will require more than

20 days, or

The agreement between the employer and its customer requires the employer to perform services at the location for more than 20 days.


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• The 20 days would result in a zero tax being paid in the following scenario:

The Principal Place of Work is in a non-taxing city

The employee is a resident of a non-taxing city


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• Once an employee exceeds 20 days, the employer must withhold tax for the city for each additional day.

Retroactive withholding is not required under the 20 day rule

Employer can elect to do retroactive withholding to day one and seek a refund for withholding for Principal Place of Work withholding

An employer can enter into an agreement with a city to bypass the 20 day rule


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• Exceptions: The twenty day rule does not apply if:

The employer’s Principal Place of Work is located in the same city

The employee performed services at multiple worksite locations

The employee is a resident of a city and requested the employer to do withholding from their wages

The employee is professional athlete or entertainer


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• Sole Proprietors

Only applies to “qualifying wages” – compensation paid to non-resident individual for work performed in a city.

There is a provision to exempt compensation earned by a non-resident sole proprietor for work performed in a city for 20 or fewer days.

‒ This doesn’t apply if sole proprietors base of operations is in the city

‒ Also does not apply if the individual is a professional athlete or entertainer


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• Small Business Exception to 20 day rule

• A small employer only is required to do withholding for the city where the employer has a fixed location.

• Fixed location – permanent place of doing business in Ohio. This would be a store, warehouse, office and/or similar location.

• Small Employer – employer that has less than $500,000 of revenue during the proceeding year.

Ohio is thinking 90% of employers will fit into this rule


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EXAMPLE #1• Employee A works in Fairlawn for 18 days, Principal

Place of Work is Twinsburg and resides in Stow. All of these cities have an income tax.

Employer must withhold Twinsburg tax for the 18 days worked in Fairlawn

No withholding is due for Fairlawn and the employee is not required to file in Fairlawn

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EXAMPLE #2• Principal Place of Work is Akron

• Employee works 200 days a year 185 days in Akron

15 days in Stow

Domicile is Twinsburg

All 200 days subject to Akron withholding

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30 days in Stow (not a worksite location)


Withholding must be done for 190 days in Akron and 9 days in Stow

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10 days each in five different cities (Stow, Copley, Hudson, Mayfield Village and Tallmadge)


All 200 days are subject to Akron withholding

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EXAMPLE #5• Principal Place of Work is a Township

• Employee works 200 days a year 10 days each in twenty different cities


Employer is not required to do any withholding

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EXAMPLE #6• Principal Place of Work is a Township

• Employee works 200 days a year 10 days each in twenty different cities

Domicile in a Township

No withholding is required

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• Withholding straightforward if have a Principal Place of Work, if no Principal Place of Work where is withholding required.

• Potentially the withholding can change weekly

• Do you need to go back and adjust withholding every week?

• Do you need to adjust to the beginning of the year?

PLACE OF WORKNO PRINCIPAL

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• Out-of-state employer (is not a small employer)

• Has no fixed location in Ohio

• Has no worksite location in Ohio

• Employee works in Ohio 5 days in Solon during first quarter

7 days in Akron during second quarter

13 days in Mayfield during third quarter

19 days in Twinsburg during the fourth quarter

WHAT WITHHOLDING IS REQUIRED AND WHERE?


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• Assume employee paid once a month.• First Quarter - Withholding would be required to be done for Solon.

Withholding would be required from the first day worked in Solon until the last day worked. Solon is considered the Principal Place of Work.

• Second Quarter - Once the employee begins working in Akron this would become the new Principal Place of Work and withholding would now be due for Akron.

• Third Quarter - Mayfield becomes the new Principal Place of Work and withholding is required now for Mayfield.

• Fourth Quarter - withholding would change to Twinsburg since this would now be considered the Principal Place of Work.

Technically, to be in compliance should adjust withholding each time a new Principal Place of Work is established.


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PLACE OF WORK• Out-of-state employer (is not a small employer)








NO PRINCIPAL

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• Assume employee paid once a month.• First Quarter - Withholding would be required to be done for Solon.

Withholding would be required from the first day worked in Solon until the last day worked. Solon is considered the Principal Place of Work.

• Second Quarter – Solon withholding would still be required because Solon would still be considered the employee’s Principal Place of Work location since the employee has spent the most time in Solon. Since not over 20 days in Akron, no Akron withholding would be required.

• Third Quarter - Mayfield becomes the new Principal Place of Work and withholding is required now for Mayfield.

• Fourth Quarter - withholding would change to Twinsburg since this would now be considered the Principal Place of Work.

Technically to be in compliance should adjust withholding each time a new Principal Place of Work is established.


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• Out-of-state employer (is not a small employer)









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Pass-Through Entities• No change in S Corporations

Taxed at the entity level

Owners not taxed in majority of municipalities unless the municipality voted in 2002 or 2004 to tax S Corporation income

• Other PTEs Taxed at the entity level

Also taxed at individual level for residents only

BUSINESS TAX CHANGES

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Net Operating Losses (NOL)• Conformity with 5 year carryforward for NOLs incurred in

taxable years beginning after 2016.

• Can only claim 50% of NOL during 2018 through 2022 Applies even to cities that had an NOL provision

• May carryforward any “limited” NOLs 5 years

• NOLs applied on a pre-apportionment basis

• Pre-2017 NOLs are carryforward based on existing municipality rules 50% limitation does not apply Must first use pre-2017 NOLs before new NOLs


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Example of NOL for city that did not previously allow NOLs


2016 2017 2018 2019

Net Profit ($15,000) ($15,000) $80,000 $100,000

NOL Available (50% applies)

n/a n/a ($7,500) ($3,750)

Taxable Income ($15,000) ($15,000) ($72,500) $96,250

NOL Available for CF $0 ($15,000) ($7,500) ($3,750)

Note: will never fully utilize 2017 loss

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Throwback Rule for Apportionment• Current rule stays in place

Not a “true” throwback rule For throwback not to apply, employee must solicit regularly at the

location of delivery Solicitation by affiliate employees does not apply

• Example: Mayfield Ohio business has employees solicit sales in Nevada. Nevada has no income tax. Goods are shipped from Mayfield Under “true” throwback, the sales would be considered a

Mayfield sale Under city rules, sales are considered Nevada sales


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Consolidated Returns• Corporate taxpayers can file a consolidated return if they

file a consolidated federal return

Binding for five years

To opt out after five years an election must be made in the 1st year following the last year of the five year rule

• Nexus combined returns are not allowed under new law

Does not negate agreements entered into before 2016


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Consolidated Returns• Affiliated Pass-Through Entities – Corporate groups

making the consolidated election may choose to include or exclude 80% or more owned PTEs

• Forced Combination – a municipality may force a taxpayer to file a consolidated return if they file a consolidated federal return. The forced combination can occur if No arms-length intercompany transactions AND

There is a distortive allocation of profit


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Gains/Losses Offsets• Gains/losses from a resident’s PTE (except S

Corporations) and gains/losses generated by the taxpayers own efforts may offset each other

S corporation do not flow to resident unless they live in a municipality that established the taxation of S corporation income in 2002 or 2004.

• Business losses may not offset wages

INDIVIDUAL TAX CHANGES

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Gains/Losses Offsets - Example

Bill is a Madison Village resident, 1% tax rateBill has the following income/loss:PTE #1 Income $15,000PTE#2 Loss $20,000Wages $10,000

Tax due is $100 ($10,000 *1%) - loss from PTE #2 will offset Income from PTE#1, but cannot be used to offset any wages


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Gains/Losses – Nonresidents

Gains/losses generated by more than one PTE cannot offset for a nonresident individual

Municipality can only tax nonresident individual on their portion of direct profit or loss in a municipality


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Resident or Nonresident?

Can you be a nonresident of OH but a resident of an Ohio municipality?

Did not adopt Ohio’s bright-line test but said the individual is a resident if:

• The individual was domiciled in the municipality on the last day of the immediately preceding tax year or

• The tax administrator reasonably concludes residency

• Individual can rebut presumption of residency


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Resident or Nonresident?

25 Factors used to determine residency – no other factors are considered. All factors need not be present.

Examples:- Location of abodes and employment- Driver’s license - Voter records- Location of banks- Location of doctors- Domicile proclaimed in a will- Location of 25% or more of owned business ventures


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Income and Deductions• Unreimbursed business expenses – deductible to the extent

deducted on federal return

• Gambling losses deductible if qualify as professional gambler

• Exempt Income – New law provides 19 types of exempt income.

• Intangible income remains exempt unless municipality taxed intangible income on March 29, 1988 and approved by its voters November 8, 1988 it may continue to do so

• Minors – based on decision of municipality – may exempt wages of those under 18


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• Returns are due on the same date that applies for personal income tax – April 15 (for calendar year taxpayers) Applies to both individuals and net profit tax returns

• Federal extension automatically extends municipality return – no notice is required to the city NOTE – if no federal extension there is no provision to provide a

municipality extension• Payment of tax – no payment is required with return if the

amount due is $10 or less• Considered timely based on “Mailbox rule” – must be

postmarked by the due date

MISCELLANEOUS

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• Estimated Taxes – required if annual tax will exceed $200• Safe Harbors

90% of current year tax liability, or 100% of prior year tax liability, or The taxpayer was not domiciled in municipality as of January 1 of

tax year• Statute of Limitations – to collect

3 years after the tax was due or the return was filed (whichever later), or

1 year after any appeal of an assessment is finalized• Statute of Limitations – to refund

3 years after the tax was due or paid (whichever later)

MISCELLANEOUS

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• There are still significant items from a withholding perspective that need to be worked out

• RITA and CCA are addressing but that does not mean that all cities will comply

• Subscribe to Skoda Minotti’s blog for more information on Municipal Reform

CONCLUSION

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• An entire section of Ohio Revised Code was inadvertently removed from H.B.5 when Municipal Reform was enacted; will be put back into the code section

• Currently, as the law was written, City Administrators can be personally liable and the change would remove this potential liability

• All returns are due April ‘15 – it does not matter if the taxpayer had a fiscal year filing or not. The legislation would correct this issue to address the due date of a city return for a fiscal year taxpayer.

CONCLUSION

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PENDING CHANGES• Under legislation there were no provisions for a taxpayer

to request an extension unless a federal extension was requested.

• The provision would provide for a city extension even if no federal extension was obtained.

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• All cities must enact new regulations adopting the provisions of H.B.5.

• Both RITA and CCA are working to develop these uniform regulations that the cities can then adopt.

PENDING CHANGES

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CONTACT USMary Jo Dolson, CPAPartner(440) [email protected]

Amy J. Gibson, CPAPrincipal (440) [email protected]