The Kentucky Red Tape Reduction Initiative: Top 3 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

Governor Matt Bevin’s Kentucky Red Tape Reduction Initiative, formally announced on July 6, 2016, is further evidence that Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors. This is third article in this Biz&TaxHax series focused on key Kentucky-based programs, initiatives, credits, and incentives that benefit Kentucky small businesses, start-ups, entrepreneurs, and investors. Our prior posts in this series summarized the Top 5 Benefits of the Kentucky Small Business Tax Credit and the Top 5 Benefits of the Kentucky Angel Investment Tax Credit. In addition to those tax credit programs, Governor Bevin’s Red Tape Reduction Initiative is a strong pro-business step that Kentucky companies and business owners have desired for decades. This Kentucky Red Tape Reduction Initiative aims to provide the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. Review, Identify, and Remove Burdensome Kentucky Business Regulations.

Governor Bevin began the Kentucky Red Tape Reduction Initiative by commissioning cabinet secretaries to begin a thorough review of Kentucky regulations currently in place, and has also asked Kentucky companies to weigh-in with their thoughts as to which regulations may be overly burdensome or unnecessary. Through the process, the state has determined that there are over 4,700 regulations currently on the books in Kentucky. In fact, Governor Bevin recently cited a report of findings in a study of the number and breadth of Kentucky administrative regulations, which shows that Kentucky administrative regulations increased by 250% between the years 1975 and 2015. This statistic is further proof of the problem that Governor Bevin is trying to remedy – that Kentucky has been one of the most highly regulated states in the U.S.

As a breath of fresh air for Kentucky small businesses, start-ups, entrepreneurs and investors, the Red Tape Reduction Initiative has already generated over 14,000 visits to the program’s website and over 500 suggestions from business owners to be evaluated. This is in addition to the review work that the Governor’s own staff members are conducting. By all outward appearances, it seems the Governor and his administration are committed to reducing the regulatory burden that has plagued Kentucky entrepreneurs, start-ups, and business owners for too long. This is a strong step in the right direction, and we’ll look forward to continuing updates that hopefully demonstrate progress in eliminating unnecessary and over-burdensome government regulation in Kentucky.

  1. Transform Government Regulators into Regulation Managers with an Attitude of Efficiency and Effectiveness.

The Governor’s above-noted call to current action for review, identification, and removal of unnecessary and over-burdensome Kentucky regulation was not his only directive. Governor Bevin is also encouraging regulators that are part of his Kentucky government administration to adopt a more pro-business attitude. Through this instruction, the administration hopes to create an environment of regulation managers who are focused more on the intent, efficiency, and effectiveness of Kentucky’s various regulatory frameworks and individual regulations as practically applied to the real here-and-now Kentucky businesses and issues they face. This is a key positive aspect of the Kentucky Red Tape Reduction Initiative. If Kentucky regulators maintain a pro-business attitude in the future, it will certainly help Kentucky entrepreneurs and start-ups get off the ground and small businesses expand, and should encourage investors to offer more capital, more frequently, to Kentucky companies.

  1. Encourage Job Creation and Investment.

A key stated purpose of the Kentucky Red Tape Reduction Initiative is to spark investment in existing Kentucky companies as well as new Kentucky business ventures, bringing additional jobs to the Commonwealth. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. Along with the Kentucky Small Business Tax Credit and Kentucky Angel Investment Tax Credit, the Red Tape Reduction Initiative provides additional incentive for: (i) Kentucky entrepreneurs, start-ups, and small businesses to expand their ventures and hire new employees in Kentucky; and (ii) investors to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses. Not only should these initiatives and credits increase business growth and profits, but they should also lead to reduced costs to consumers, who often times pay increased rates for goods and services as a result of companies passing-through their internal costs of compliance with over-burdensome state regulations.

As always, for investors, entrepreneurs, start-ups, and small businesses dealing with Kentucky regulations, it is best to consult an experienced Kentucky business attorney. A Kentucky business lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky regulatory compliance and planning needs.

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College Tax Credits: Parent & Student Primer

Parents and students, by now, you’re certainly in the full chaos of the academic year – spending that hard-earned money to help your child get the education necessary to pursue a great future career. Before too long, you’ll also be working through the challenges of gathering information and documents for tax return filing season – and by then you’ll be keenly aware of just how much you’re spending to obtain that all-important college degree. Likewise around tax filing time, you will probably be searching for and considering what summer jobs, internships, or other opportunities may be available to help pay for or defray some of the cost of college now, or at least help bolster your child’s prospects for future employment to repay college debt.

While the cost of college education can definitely be burdensome, and tax season is a drag for most, there are some federal tax provisions that can help relieve some of that burden and make you excited (ok, maybe just less anxious!) about tax season. That’s why this article is dedicated to summarizing the most useful information regarding available college tax credits for parents and students.

Biz&TaxHax Tip: Biz&TaxHax hopes this article proves useful in your quest to save money on, and make the most of, your education. In that spirit, we also want to be sure to introduce you to our friends and colleagues at Nunan Vogel Rowe (NVR), who are experts in career coaching, especially college-to-career coaching. Biz&TaxHax likes to team with like-minded professionals to bring you the most relevant, useful information to help you plan and find solutions to your challenges. NVR is certainly a golden resource for students and their parents navigate the key planning and decision-making that makes all the difference in future career prospects. To do this, NVR’s leaders draw on their experiences as big-company executives with strong backgrounds in identifying, recruiting, evaluating, and developing the best talent in industry. Simply put, they’ve been there and done that one-thousand times over, and can help you tremendously.

Available College Tax Credits & General Requirements

There are two college tax credits available, these are the:

  1. American Opportunity Tax Credit; and
  1. Lifetime Learning Credit.

Each of these education tax credits has its own specific requirements, but both share the following general requirements:

  1. You, your dependent or a third party paid qualified education expenses during the tax year for,
  1. An eligible student who was enrolled at an eligible educational institution, and
  1. You, your spouse, or a dependent listed on your tax return is the eligible student.

Generally, these education tax credits exist for eligible students attending an eligible college, university, or vocational school, and the amount of credit allowed is limited based on the amount of eligible expenses and taxpayer’s income level. Although a particular taxpayer will often qualify for both the American Opportunity Tax Credit and the Lifetime Learning Credit, a taxpayer may only claim one of these credits for a given tax year.

 American Opportunity Tax Credit (AOTC)

The American Opportunity Tax Credit is available to any taxpayer who pays qualified expenses for an eligible student. A taxpayer, the taxpayer’s spouse, or the taxpayer’s dependents can all be eligible students, and the American Opportunity Tax Credit allows a credit for each eligible student. A substantial number of taxpayers who are eligible for the American Opportunity Tax Credit will qualify for the $2,500 maximum credit amount, which is a per year, per student maximum. But, it is important to keep in mind that a taxpayer can only claim this credit for four tax years for each eligible student, and only for eligible students who have not completed their first four years of college education prior to 2016.

Biz&TaxHax Tips: In considering whether you may be able to claim the American Opportunity Tax Credit, the following are important points to keep in mind, but you should always contact an experienced tax attorney or tax consultant to fully discuss your facts and circumstances and help make this determination:

  1. Qualified Education Expenses: Tuition, fees, and certain other expenses that are required for enrollment or attendance at an eligible educational institution constitute qualified education expenses. Common other expenses that qualify are expenses for books, supplies, and equipment that are needed for a course of study. Some types of expenses that do not qualify are: insurance, medical expenses (including student health fees), room and board, transportation, or similar personal, living, or family expenses.
  1. Credit Amount: To claim the full $2,500 tax credit, your qualified expenses for an eligible student must be $4,000 or more (and you must not be limited by income-level).
  1. 40% Refundable: The American Opportunity Tax Credit is 40% refundable, meaning that even if you owe no federal income tax, you may be able to claim up to $1,000 in refund for each eligible student (again, subject to income-level limits and the amount spent on qualified educational expenses).
  1. Income Limits: For 2016, single taxpayers with a modified adjusted gross income (MAGI) of $80,000 or less, and married taxpayers filing jointly with a MAGI of $160,000 or less, may claim the full $2,500 credit (again, assuming enough qualified educational expenses to support it). This credit phases out as the various types of taxpayers’ incomes rise above these levels, and the credit vanishes when MAGI is $90,000 (single, head of household, some widows and widowers) or $180,000 (married filing jointly).

Lifetime Learning Credit

Undergraduate and graduate students alike are eligible for the Lifetime Learning Credit, which provides a tax benefit of up to $2,000 per tax return (rather than per student, like the AOTC). Another important distinction between the Lifetime Learning Credit and the AOTC is that the Lifetime Learning Credit is not refundable, meaning that a taxpayer with no tax liability will not receive a refund for the amount of this tax credit that he or she is eligible to claim. But, one positive difference with the Lifetime Learning Credit is that a student need not be a half-time student at the eligible educational institution to qualify; rather, the student can be pursuing a course of study part-time to maintain or improve job skills or as part of a degree program at an eligible educational institution.

Biz&TaxHax Tips: If you are evaluating whether you may qualify to claim the Lifetime Learning Credit, these are some helpful tips to discuss with a tax lawyer or tax consultant, who can help you analyze eligibility and claim the credit:

  1. Qualified Education Expenses: Qualified education expenses include tuition and fees required for enrollment or attendance at the eligible educational institution, and other fees required for coursework there. Any additional expenses do not qualify.
  1. Credit Amount: The maximum amount of the credit is $2,000, and the credit is calculated as a percentage (20%) of eligible expenses for all eligible students listed on the return. So, to claim the maximum credit, a taxpayer must have paid at least $10,000 in qualified expenses for the year.
  1. Income Limits: Single taxpayers with MAGI of $55,000 or less, and married couples filing jointly having a MAGI of $111,000 or less, may claim the full Lifetime Learning Credit for 2016. The credit diminishes as income levels rise, and it vanishes at $65,000 (single, head of household, some widows and widowers) and $131,000 (joint filers) of MAGI.

Other Education-Related Tax Benefits

Even if you do not qualify for one of the college tax credits, you may be able to benefit from one of the following other education-related tax benefits:

  1. Grants for Scholarship and Fellowship, which are usually tax-free if they are used to pay for tuition, required fees, books, and other course materials, but are taxable if applied to room, board, research, travel, or other expenses.
  2. Deduction for Tuition and Fees
  3. Deduction for Student Loan Interest (up to $2,500/year, depending on amount of interest paid and income level).
  4. College Savings Bonds, the interest on which is generally tax-free depending on the taxpayer’s income level, the time of purchase, and taxpayer’s age at the time of purchase.
  5. QTPs (Qualified Tuition Programs) such as a 529 Plan.

As always, for parents and students considering eligibility for college tax credits like the American Opportunity Tax Credit and Lifetime Learning Credit, or other education-related tax benefits, as well as related planning, reporting and payment obligations, it is best to consult an experienced tax attorney or tax consultant. A tax lawyer or tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your tax compliance and planning needs.

The Kentucky Angel Investment Tax Credit (KAITC): Top 5 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

As noted in Biz&TaxHax’s prior article, outlining the Top 5 Benefits of the Kentucky Small Business Tax Credit, Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. The second of this series, this article highlights the top 5 benefits the Kentucky Angel Investment Tax Credit provides for Kentucky investors, entrepreneurs, start-ups, and small businesses. The Kentucky Angel Investment Tax Credit has wide-ranging application, offering the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. The KAITC Incentivizes Investment in Kentucky Start-Ups and Small Businesses.

The stated purpose of the Kentucky Angel Investment Tax Credit is to encourage qualified individual investors to make capital investments in Kentucky small businesses, create additional jobs, and promote the development of new products and technologies in Kentucky. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. The KAITC provides additional incentive for investors, both in Kentucky and those in other states, to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses.

  1. Broad Eligibility: The Requirements for a Qualifying Investor, Qualified Investment, Qualified Small Business, and Qualified Activity Encompass a Wide Base.

The KAITC is available to Qualified Investors making Qualified Investments in Qualified Small Businesses that are conducting Qualified Activities. That sounds like a lot of qualifiers. But, in reality, the definitions of the terms are not overly restrictive. Below is a summary of the relevant qualifiers:

Qualified Investor: (1) an individual, accredited investor according to Reg. D of the U.S. Securities and Exchange Commission, who (2) holds no more than 20% ownership in and is not employed by the Qualified Small Business prior to making a Qualified Investment in the business, (3) is not the parent, spouse, or child of someone who would fail to satisfy requirement # 2, (4) seeks a financial return on the Qualified Investment, and  (5) has become a Kentucky Economic Development Finance Authority (KEDFA) certified Qualified Investor.

Qualified Investment: (1) a minimum cash investment of $10,000 made by a Qualified Investor in a Qualified Small Business, (2) offered and executed in compliance with all applicable state and federal securities laws and regulations, (3) in exchange for equity interest in the Qualified Small Business, (4) having been pre-approved by the KEDFA as a Qualified Investment.

Qualified Small Business: (1) a legal entity registered and in good standing with the Kentucky Secretary of State and otherwise maintaining all state licenses and other permits required, (2) comprised of 100 or fewer full-time employees, (3) actively and primarily conducting (or planning to conduct upon receiving a Qualified Investment) a Qualified Activity within Kentucky, (4) maintaining more than 50% of its assets, operations, and employees within Kentucky, that (5) either (a) has a net worth of $10 million or less, or (b) has had $3 million or less in net income after federal income taxes for each of the two preceding fiscal years, which (6) has not received investments qualifying for more than $1 million in total angel investor tax credits, and (7) has been pre-certified as a Qualified Small Business by the KEDFA.

Qualified Activity: A knowledge-based activity related to the Office of Entrepreneurship focus areas that include, but are not limited to: Bioscience; Materials Science and Advanced Manufacturing; Environmental and Energy Technology; Information Technology and Communications; and Health and Human Development.

If you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there is a good chance your company could become a Qualified Small Business eligible to receive a Qualified Investment from a Qualified Investor. An experienced Kentucky tax lawyer or Kentucky tax consultant can help you navigate the process of applying to become a Kentucky Qualified Small Business, opening your company up to a larger pool of capital sources. Additionally, if you are an investor wishing to invest in Kentucky small businesses, a Kentucky tax attorney or Kentucky tax consultant can help you apply to become a Qualified Investor and take advantage of the Kentucky Angel Investment Tax Credit.

  1. Generous Credit Rate and Up to $200,000 in Credit Each Year.

The Kentucky Angel Investment Tax Credit provides Qualified Investors a credit of up to 50% (in enhanced incentive counties) or up to 40% (all other counties) of their Qualified Investments. Depending on the amount of the Qualified Investment and the location of the Qualified Small Business, the KAITC can provide up to $200,000 of tax benefit per calendar year.

  1. Carryforward of Unused Credits.

A credit approved under the KAITC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the Qualified Investor may carry forward the remaining amount of credit to offset against tax due for up to the next 15 years. This is important, as often times entrepreneurs, start-ups, and small businesses may not have significant taxable income and tax liability in initial years. This 15 year carry forward enables a Qualified Investor in a Kentucky Qualified Small Business to recognize the benefit of the Kentucky Angel Investment Tax Credit in later years when their investment may be generating more taxable income and thus the investor may have more tax liability.

Biz&TaxHax Tip: The KAITC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to 15 years.

The KAITC is transferrable for out-of-state investors, meaning investors who are located outside Kentucky, who may not have Kentucky tax liability, can still reap the benefit of this tax credit. To do so, a nonresident/out-of-state Qualified Investor may sell its Kentucky Angel Investment Tax Credit to a Kentucky taxpayer and that Kentucky taxpayer may use the credit to offset Kentucky tax liability.

Biz&TaxHax Tip: A nonresident Qualified Investor who wishes to transfer the KAITC to a Kentucky taxpayer must follow certain procedures outlined by the Kentucky Department of Revenue. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper transfer of the Kentucky Angel Investment Tax Credit.

As always, for investors, entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Angel Investment Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.

The Kentucky Small Business Tax Credit (KSBTC): Top 5 Benefits to Kentucky Entrepreneurs, Start-Ups, and Small Businesses

Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. This article, focused on the Kentucky Small Business Tax Credit, is the first in a series of Biz&TaxHax articles that will outline some of the key benefits that exist in Kentucky for entrepreneurs, start-ups, small businesses, and investors. The Kentucky Small Business Tax Credit has broad application to Kentucky companies, providing the following top five benefits to Kentucky small businesses, start-ups, and entrepreneurs:

  1. Broad Eligibility: Many Companies Can Qualify for the Kentucky Small Business Tax Credit.

Assuming other requirements are met, the KSBTC is available to for-profit companies with 50 or fewer full-time employees. Additionally, this tax credit includes businesses in the retail, service, construction, manufacturing, and wholesale industries. This means that if you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there’s a good chance you could qualify for the Kentucky Small Business Tax Credit.

  1. Rewards Investment in New Kentucky Jobs and New Kentucky Equipment and Technology.

Entrepreneurs and start-ups that are on their way to becoming established small businesses, and small businesses that are growing into larger ones, are continuously purchasing additional technology and equipment and hiring new team members. The good news is, the Kentucky Small Business Tax Credit rewards Kentucky entrepreneurs, start-ups, and small businesses for those very actions: hiring new employees and buying new technology and equipment.

Biz&TaxHax Tip: It is great the KSBTC focuses on rewarding expenses that Kentucky companies are already incurring, but it is important to note that there are specific requirements and thresholds for qualification relating to: (1) eligible employees hired (must be new, full-time position; certain requirements for wages paid and hours worked); (2) qualifying equipment and technology (does not include real property, consumable supplies, or inventory (generally); expenditure of at least $5,000); and (3) the timing of the new hires and equipment/technology expenses (generally, a company must have hired an employee for at least one new full-time position and invested at least $5,000 in qualifying new equipment or technology in the past 24 months), to name a few. An experienced Kentucky tax attorney or Kentucky tax consultant can help navigate these specific requirements to determine if your company is eligible for the Kentucky Small Business Tax Credit.

  1. Up to $25,000 in Credit Each Year.

The KSBTC provides a credit against tax liability for each calendar year that a Kentucky entrepreneur, start-up, or small business qualifies. Depending on the number of eligible new positions created and the amount of investment in qualifying technology or equipment, the Kentucky Small Business Tax Credit ranges from $3,500 up to $25,000 per calendar year.

Biz&TaxHax Tip: Given the timing requirements noted in the tip to #2 above, it is a good idea to discuss your hiring and investment plans with your business attorney or tax lawyer early and often. If your timing for hiring and investment is flexible from a business standpoint, your tax attorney or business lawyer can help you plan for maximizing the Kentucky Small Business Tax Credit in a particular year or over a period of years.

  1. Carryforward of Unused Credits.

A credit approved under the KSBTC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the taxpayer may carry forward the remaining amount of credit to offset against tax due for up to the next five years. This is important for entrepreneurs, start-ups, and small businesses, as often times in the initial years they are in expenditure and growth mode, and may not have significant taxable income and tax liability. This five year carry forward enables small businesses, start-ups and entrepreneurs to recognize the benefit of the Kentucky Small Business Tax Credit in later years when they may generate more taxable income and have more tax liability.

Biz&TaxHax Tip: The KSBTC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to five years.

  1. Broad Applicability to Different Tax Liabilities.

The KSBTC may be used by a taxpayer to offset tax liability on a Kentucky individual income tax return, limited liability entity tax return, or corporation income tax return. So, the KSBTC’s broad applicability benefits a wide range of taxpayers, from entrepreneurs and pass-through entity owners who may be primarily concerned with the individual income tax and limited liability entity tax, to small businesses that may be subject to the corporation income tax.

Biz&TaxHax Tip: Depending on a particular taxpayer’s structure (such as sole proprietor, partnership, limited liability company, S corporation, C corporation) and other factors, the taxpayer may be subject to one or more of the taxes noted in #5 above. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper tax compliance and utilization of the Kentucky Small Business Tax Credit.

As always, for entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Small Business Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.

Should My Small Business Accept Credit Cards? What Can I Do to Offset the Credit Card Processing Fee the Network Charges?

Generally, your small business should accept credit card payments; it just makes business sense.

Many small business owners and entrepreneurs ask the question: “Should my small business accept credit cards?” Generally, from a pure business/financial standpoint, the answer is yes, for these reasons:

  1. Don’t Lose Business – By not accepting credit card payments, a business risks losing customers. A customer who wants to pay by credit card may not want or be able to pay by any other method. Perhaps the customer doesn’t carry cash or checks, or just deems paying by credit card more convenient or secure. It simply does not make sense to turn away a would-be paying customer, just because the credit card company will charge a fee to process the transaction.
  2. Convenience = ^ Sales – Second, those same customers who value the convenience of paying by credit card are likely to buy more, and/or more often from your company.
  3. Recurring/Automatic Payments – Related to the second reason, accepting credit cards enables setting customers up for recurring/automatic payments if they use your company’s goods or services regularly.
  4. Cash Flow – From a cash flow standpoint, a credit card payment is immediate like cash, but doesn’t carry the risk of a personal check that could bounce for insufficient funds. Also, as noted above, not all customers carry cash or want to use cash, and many will buy more if they can use credit.
  5. Accounting & Record-keeping – Credit card payments can be easily integrated and synchronized with your bookkeeping software, increasing accuracy and ease of accounting and documentation while minimizing costs for additional labor to do so.

In some instances, credit card processing fees can be strategically offset or recouped.

Often, despite the above reasons, small business owners and entrepreneurs remain hesitant to accept credit card payments because of their aversion to paying the transaction fee to the credit card network. This concern has led many start-up founders and small business owners to consider what they can do to offset the credit card processing fees that the network charges. To do so, numerous small businesses have creatively tried to pass the credit card processing fees along to the customer. But, are small businesses allowed to pass credit card fees along to the customer?

Currently, there is no federal prohibition, but 10 states have laws prohibiting a merchant from charging customers a surcharge to pay by credit card (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX). In California and New York, court orders have enjoined the state from enforcing the prohibition laws, but those cases remain on appeal. In Florida, an appeals court reversed a trial court order that upheld Florida’s law limiting surcharges, but that case remains subject to further litigation. So, what can a small business owner do to offset or recoup credit card surcharge fees?

Biz&TaxHax Tip:

If you are an entrepreneur or small business owner considering charging your customers a fee for paying by credit card, following is some guidance for minimizing the effect of credit card transaction fees to your business:

  1. Review Credit Card Network Agreements – Although there is no federal prohibition, and your state may not be one that prohibits imposing a surcharge for credit card users, companies should review their agreements with the various credit card networks to determine whether a contractual prohibition or limitation exists. Agreements with the credit card networks may prohibit or otherwise limit or restrict the merchant from charging the transaction processing fee to the customer. So it is important to review all agreements with credit card networks before imposing any surcharge on credit card users to avoid potentially breaching those agreements.
  2. Review Applicable Law for Specifics – Even if your business operates in a state where there is a prohibition on imposing a “surcharge” to credit card users, these laws may be drafted such that the company can avoid the prohibition by simply offering a discounted price to cash (non-credit card) payers. In other words, the company could simply set the price for its products or services at a particular amount that would cover the credit card processing fee cost, and then advertise to customers that if they pay by cash, they get a discount from the regularly stated price. Of course, if your company operates in a state with a surcharge prohibition, you should review the particular statutory/regulatory language before using this discounted price method, to ensure that this method would not also violate the law.
    • Read Credit Card Network Agreements Again & Clearly Post Discounted Prices for Cash Payments – Note, this practice may still violate some credit card network agreements, so it’s important to read the agreements carefully. Also, be careful to clearly and conspicuously post the discounted price for customers paying by cash to avoid any possible concerns with consumer protection/deceptive trade practices laws.

As always, it’s important to consult an attorney familiar with your company’s specific facts and circumstances and the applicable law before making any decision or taking any action that may affect contractual or regulatory compliance obligations of your company. An experienced lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your business compliance and planning needs.

What is the Ohio Financial Institutions Tax (FIT)? The Top 10 Things You Need to Know.

Effective January 1, 2014 forward, all for profit financial institutions doing business in Ohio or otherwise having nexus with Ohio under the U.S. Constitution must report and pay the Ohio Financial Institutions Tax. The Ohio FIT is a tax on the privilege of doing business, similar to the Ohio Commercial Activity Tax (CAT), but is focused directly on financial institutions. Below are the top ten things you should know when considering a potential Ohio FIT issue.

  1. How Did the Ohio FIT Originate and Did the Ohio FIT Change Any Other Ohio Tax?

Amended Substitute House Bill 510 (the Bill) made the Ohio FIT effective January 1, 2014. Interestingly, the Bill repealed both the former Ohio Dealer in Intangibles Tax (DIT) and Corporation Franchise Tax (CFT) for tax years beginning January 1, 2014 and continuing. Now, taxpayers that qualify as dealers in intangibles (stockbrokers, mortgage lenders, securities dealers, finance and loan companies) are subject to the Ohio FIT, provided they fall under the FIT’s definition of a taxpayer. If such a taxpayer does not meet the FIT definition, that taxpayer is likely subject to the Ohio CAT.

  1. Who is Subject to the Ohio FIT?

There are three types of taxpayers that are generally subject to the Ohio FIT:

  • Bank Organizations;
  • Holding Companies of Bank Organizations; and
  • Nonbank Financial Organizations.

Under the FIT, a Bank Organization includes: (i) a national bank organized and operating under the National Bank Act; (ii) a federal savings association or federal savings bank chartered under 12 U.S.C. 1464; (iii) a bank, banking association, trust company, savings and loan association, savings bank, or other banking institution organized or incorporated under the laws of the U.S., any state, or a foreign country; (iv) any corporation organized and operating under 12 U.S.C. 611 (and following provisions); (v) any agency or branch of a foreign bank, as defined in 12 U.S.C. 3101; or (vi) an entity licensed as a small business investment company under the Small Business Investment Act of 1958.

The Ohio FIT defines Nonbank Financial Organizations as persons or entities, other than bank organizations or holding companies, which are engaged in business primarily as Small Dollar Lenders. A Small Dollar Lender is a person or entity that: (i) primarily loans to individuals; (ii) loans amounts of $5,000 or less; (iii) issues loans with terms of 12 months or less; and (iv) is not a Bank Organization, credit union, or captive finance company.

  1. Who is Not Subject to the Ohio FIT?

The following is a list of taxpayers that are generally not subject to Ohio FIT:

  • Insurance companies;
  • Captive finance companies;
  • Credit unions;
  • Institutions organized exclusively for charitable purposes;
  • Diversified savings and loan holding companies;
  • Grandfathered unitary savings and loan holding companies, any entity that was a grandfathered unitary savings and loan company on January 1, 2012, or any entity that is not a Bank Organization or owned by a Bank Organization and that is owned directly or indirectly by an entity that was a grandfathered unitary savings and loan holding company on January 1, 2012;
  • Institutions organized under the Federal Farm Loan Act or a successor of such an institution;
  • Companies chartered under the Farm Credit Act of 1933 or a successor of such a company;
  • Associations formed pursuant to 12 U.S.C. 2279c-1.
  1. What is the Tax Base for the Ohio FIT?

The Ohio FIT is imposed upon a taxpayer’s Ohio Equity Capital. Ohio Equity Capital is the taxpayer’s Total Equity Capital in proportion to the taxpayer’s gross receipts sitused in Ohio. A taxpayer’s Total Equity Capital is the sum of the following items for the taxable year: (i) common stock at par value; (ii) perpetual preferred stock and related surplus; (iii) other surplus not related to perpetual preferred stock; (iv) retained earnings; (v) accumulated other comprehensive income; (vi) treasury stock; (vii) unearned employee stock ownership plan shares; (viii) other equity components.

Biz&TaxHax Tip: For Ohio FIT purposes, a taxpayer may obtain its Total Equity Capital from the FR Y-9 (a financial statement that a financial institution holding company must file with the Federal Reserve Board) or from its Call Report (a consolidated report of condition and income that a bank organization must file with its federal regulatory agency). Alternatively, if the taxpayer does not have a FR Y-9 or Call Report, it must calculate its Total Equity Capital in accordance with GAAP.

Once a taxpayer has identified or calculated its Total Equity Capital for the taxable year, it multiplies that amount by its Ohio FIT Apportionment Factor for the taxable year to calculate Ohio Equity Capital. The Apportionment Factor for Ohio FIT is equal to the ratio of Ohio Gross Receipts for the tax year to Gross Receipts Everywhere for the tax year.

  1. How Does the Ohio FIT Situs/Source Gross Receipts?

The Ohio FIT situses/sources Gross Receipts based on the:

  • Location of benefit to the customer; or
  • Location of the taxpayer’s regular place of business.

So, Gross Receipts become Ohio Gross Receipts for purposes of Ohio FIT if either: (i) the taxpayer’s customer receives the benefit of the taxpayer’s services or funds provided in Ohio; or (ii) the taxpayer’s regular place of business is located in Ohio. The taxpayer’s Ohio Gross Receipts identified under this situsing/sourcing method are used as the numerator for the Apportionment Factor.

  1. What is the Tax Rate for the Ohio FIT?

Ohio FIT is imposed at the following rates, by Ohio Equity Capital:

  • First $200 million of Ohio Equity Capital: 0.008 (0.8%);
  • Ohio Equity Capital > $200 million, but < $1.3 billion: 0.004 (0.4%);
  • Ohio Equity Capital > $1.3 billion: 0.0025 (0.25%).
  1. Is there a Minimum Tax Amount for Ohio FIT?

Yes. Ohio FIT taxpayers must pay a minimum tax of $1,000.

  1. How Does an Ohio FIT Taxpayer File a Return and Pay the Tax?

Before filing any Annual Report or Estimated FIT Report, a taxpayer must register as a FIT taxpayer by:

  • Registering under the reporting person/entity and listing all of the consolidated members; and
  • If two or more entities are consolidated for purposes of filing a FR Y-9 or Call Report, the financial institution for FIT consists of all entities included in the FRY-9 or Call Report.

Taxpayers are required to file any Ohio FIT Annual Report or Estimated FIT Report and make any payment electronically through the Ohio Business Gateway (OBG).

  1. When are Ohio FIT Returns and Payments Due?

The Ohio FIT Annual Report is due October 15th of the tax year, with no available extension. The Tax Year is the Annual Report year in and for which the tax is paid. The Taxable Year is the calendar year preceding the year in which the Annual Report is filed and the tax paid. The taxpayer’s tax base (Total Equity Capital, Ohio Equity Capital, Apportionment Factor) is calculated from the activity/capital existing during the Taxable Year.

An Ohio FIT taxpayer must make estimated quarterly payments on the dates listed below, and as follows:

  • January 31st – 1/3 of the tax or minimum tax of $1,000, whichever is greater;
  • March 31st – 1/2 of the remaining balance of tax due;
  • May 31st – second 1/2 of the remaining balance of tax due.
  1. How Can a Taxpayer Obtain a Refund for Overpayment of Ohio FIT?

To claim a refund for Ohio FIT, file Form FIT REF Application for Financial Institutions Tax Refund.

Biz&TaxHax Tip: A taxpayer does not need to file Form FIT REF if the original Annual Report reflects the overpayment of tax. But, if a taxpayer must file an Amended Annual Report and it shows a refund due, the taxpayer must file Form FIT REF also to claim the refund.

Based on the above, there are a couple other important considerations relating to Ohio FIT: (1) Ohio FIT has a broader nexus standard (it looks a lot like economic nexus) than the predecessor Corporation Franchise Tax, meaning it will likely apply to more taxpayers; and (2) some entities (such as small dollar lenders or community banks) may be mistakenly paying Ohio CAT instead of Ohio FIT.

As always, in considering your potential Ohio FIT reporting and payment obligations, as well as any planning, it is best to consult an experienced Ohio tax attorney or Ohio tax consultant. An Ohio tax lawyer or Ohio tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Ohio FIT compliance and planning needs.

What is the Ohio Commercial Activity Tax (CAT)? The Top 10 Things You Need to Know.

Rather than imposing an income tax on taxpayers’ business activities in Ohio, such as a corporate income tax, the State of Ohio levies the Commercial Activity Tax (CAT). The Ohio Commercial Activity Tax is an annual tax imposed on taxable gross receipts from business activities conducted in Ohio. Below are the top ten things you need to know when faced with a potential Ohio CAT issue.

  1. Who is a Taxpayer for Ohio CAT?

A taxpayer for Ohio CAT purposes includes all types of business entities, such as partnerships, joint ventures, limited liability companies, trusts, and corporations, as well as individuals/sole proprietors. Notably, however, there are some specific exclusions from CAT related to certain types of business entities, such as financial institutions, insurance companies, and some public utilities. An individual or entity does not need to be located in Ohio to be subject to CAT; whether an out-of-state individual or entity is subject to CAT depends on the amount and type of business contacts with the state, further discussed in the Nexus section. A person or entity who has sufficient contacts (nexus) with the state, and who generated more than $150,000 of taxable gross receipts for the calendar year will be a taxpayer for CAT purposes.

  1. What Constitutes Nexus for Ohio CAT?

An out-of-state taxpayer having more than $150,000 in Ohio taxable gross receipts during the calendar year is required to register for, file and pay CAT if the taxpayer has bright-line presence in Ohio. A taxpayer has bright-line presence if at any point during the calendar year any of the following are true:

  1. The taxpayer owns at least $50,000 of property in Ohio; or
  2. The taxpayer has payroll of at least $50,000 in Ohio; or
  3. The taxpayer has at least $500,000 of taxable gross receipts sitused to Ohio; or
  4. 25% of the taxpayer’s total property, payroll, or gross receipts is within Ohio; or
  5. The taxpayer is domiciled in Ohio. 
  1. What are Taxable Gross Receipts for Ohio CAT?

Gross receipts potentially subject to CAT are defined broadly to include most types of revenues from sale of property or performance of services. Some types of gross receipts are excluded from CAT, such as: interest (other than from installment sales), dividends, capital gains, wages reported on a Form W-2, or gifts (this is not an all-encompassing list). If gross receipts are of a type that is potentially subject to CAT, the taxpayer must evaluate whether they are properly sitused to Ohio and therefore constitute “taxable gross receipts” that will be subject to CAT. Generally, gross receipts from sale of property are only considered taxable gross receipts subject to CAT if the property is delivered within Ohio. Conversely, gross receipts from the sale of services are generally sitused to Ohio in the proportion that the purchaser’s benefit in Ohio bears to the purchaser’s benefit everywhere. In making this determination, the physical location where the purchaser ultimately uses or benefits from the service is most important. Sourcing (situsing) services can be a complex, fact-intensive analysis, so it is important to consult an experienced Ohio tax attorney or Ohio tax consultant for a proper review. 

  1. How do I Register to File and Pay Ohio CAT?

A taxpayer who has more than $150,000 of taxable gross receipts (gross receipts sitused to Ohio, as explained above) and is domiciled in Ohio or otherwise has bright-line nexus for the calendar year must register for CAT with the Ohio Department of Taxation. The taxpayer should register for CAT electronically through the Ohio Business Gateway. All taxpayers must file and pay CAT electronically through Ohio Business Gateway.

  1. When do I File and Pay Ohio CAT? 

Ohio CAT recognizes two different types of filers: Annual CAT filers, and Quarterly CAT filers.

Annual CAT Taxpayers

Annual CAT filers are those with taxable gross receipts between $150,000 and $1 million in a calendar year. Annual CAT filers must file the annual return and pay the Annual Minimum Tax (AMT) by May 10th of the current tax year. The annual return reports taxable gross receipts for the taxpayer’s activity during the previous year and prepays the AMT for the current calendar year.

Quarterly CAT Taxpayers

Taxpayers with over $1 million of taxable gross receipts must file and pay returns quarterly, these are the Quarterly CAT filers. Quarterly CAT filers must pay AMT for their taxable gross receipts up to $1 million. Additionally, Quarterly CAT filers must pay tax at the current CAT rate on taxable gross receipts above $1 million. Quarterly CAT filers must file the first quarter return and pay the AMT by May 10th of the current year. Quarterly CAT filers then file the remaining returns and pay tax by August 10th, November 10th, and February 10th. 

  1. What is a Combined Taxpayer Group, or Consolidated Elected Taxpayer Group for Ohio CAT?

 Combined Taxpayer Group

A group of taxpayers having the required Ohio nexus/contacts, which are more than 50% commonly owned or controlled and do not elect to be consolidated, must file as a combined taxpayer group. There are a couple important points with regard to a combined taxpayer:

  1. Only members that have the required contacts/nexus with Ohio must be included in the combined CAT group; and
  2. A combined taxpayer group cannot eliminate/exclude receipts from intercompany transactions from taxable gross receipts for CAT.

Consolidated Elected Taxpayer Group

A group of commonly owned taxpayers may elect to be a consolidated elected CAT group under either an 80% or 50% consolidation test. Under the 80% test, the group elects to include all members of the group that have at least 80% of the value of their ownership interest owned by common owners during all or any portion of the tax period. Alternatively, for the 50% test, the group elects to include all members of the group that have at least 50% of the value of their ownership interest owned by common owners during all or any portion of the tax period. Additionally, the group can elect to include all entities that are not incorporated or formed under the laws of a State or of the United States and that meet the chosen ownership test (80% or 50%) as part of the consolidated CAT group.

A major benefit of the consolidated election for CAT is that the taxpayer may eliminate/exclude receipts between group members from taxable gross receipts. Conversely, when evaluating whether to make the consolidated election for CAT, a taxpayer will want to consider that:

  1. The group must agree to file as a consolidated elected group for at least the next two years (eight calendar quarters) following the election, so long as two or more of the members meet the requirements; and
  2. The election requires entities meeting the chosen 50% or 80% test to be included in the consolidated group even if those entities do not otherwise have enough Ohio contacts/nexus to be otherwise/independently subject to CAT.

Biz&TaxHax Tip

It is important to note that some entities in a business organization’s overall structure may not be included in that organization’s 80% consolidated elected CAT group (for instance, because they don’t meet the 80% common ownership test). In that instance, those entities may (assuming they meet the taxable gross receipts threshold and have Ohio nexus) nonetheless be required to:

  1. File as separate CAT taxpayers; or
  2. File as a combined CAT group (if they are over 50% commonly owned or controlled). 
  1. What is the Tax Rate for Ohio CAT?

For tax periods beginning after March 31, 2009, the Ohio CAT rate is 0.26%.

  1. How Much is the Annual Minimum Tax for Ohio CAT? 

For tax periods beginning on January 1, 2014 and after, the AMT is a tiered fee corresponding to a taxpayer’s overall commercial activity. To determine the AMT, a taxpayer looks to its taxable gross receipts for the prior year, using the below table:

Taxable Gross Receipts Annual Minimum Tax CAT
≤ $1 million $150 No Additional Tax
> $1 million, ≤ $2 million $800 0.26% x (TGR – $1 million)
> $2 million, ≤ $4 million $2,100 0.26% x (TGR – $1 million)
> $4 million $2,600 0.26% x (TGR – $1 million)

 

  1. What is the Annual $1 Million Exclusion?

 Each taxpayer may exclude the first $1 million of taxable gross receipts for the calendar year (this began in calendar year 2013). Quarterly CAT filers must apply the full $1 million exclusion to the first calendar quarter return for that calendar year, and may carry forward and apply any unused portion to subsequent quarters in that year. In the event a taxpayer becomes subject to and registers for CAT after the first quarter return is due, the taxpayer should claim all taxable gross receipts for the calendar year-to-date, as well as the $1 million exclusion, on the second quarter return. Annual CAT filers claim the $1 million exclusion on the annual return.

  1. How Do I Resolve Prior Ohio CAT Filing and Payment Noncompliance?

The Ohio Department of Taxation offers a Voluntary Disclosure Program to resolve prior CAT noncompliance. By voluntarily disclosing liabilities and entering a Voluntary Disclosure Agreement (VDA) with the Department, a taxpayer may avoid failure to file and failure to pay penalties related to CAT. A taxpayer is eligible for the CAT Voluntary Disclosure Program if the taxpayer requests to enter a VDA prior to any contact from the Department through audit, compliance, or criminal investigation personnel.

As always, in considering your potential Ohio CAT reporting and payment obligations, as well as any planning, it is best to consult an experienced Ohio tax attorney or Ohio tax consultant. An Ohio tax lawyer or Ohio tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Ohio CAT compliance and planning needs.

IRS Issues Retirement Planning Reminder: Required Minimum Distributions

This week the Internal Revenue Service (IRS) issued Information Release 2016-48 (IR 2016-48) as a notice to retirees who turned 70½ years old during 2015.  IR 2016-48 reminds taxpayers who reached 70½ years old during 2015 that, in most instances, they must begin drawing Required Minimum Distributions (RMDs) from their Individual Retirement Accounts (IRAs) and employer retirement plans (such as: 401(k), 403(b), and 457(b) plans) by Friday, April 1, 2016. This April 1 deadline applies to retirees who hold traditional (SEP and SIMPLE) IRAs (but not Roth IRAs), and normally to employer retirement plan participants.

Notably, the April 1 deadline is only applicable to the RMD for the first year after a taxpayer attains age 70½; for years following, the taxpayer must draw the RMD from his or her retirement account by December 31. For example, a taxpayer who turned 70½ in 2015 (born after June 30, 1944 and before July 1, 1945) must draw the first RMD by April 1, 2016, but must also draw another RMD by December 31, 2016. Further, IR 2016-48 provides additional detail about how to calculate the RMD, utilizing the retiree’s life expectancy and retirement account balance as of a certain date. Finally, IR 2016-48 notes other considerations relating to retirees with certain facts or circumstances. For instance, generally employees who have reached age 70½ but continue to work can wait until April 1 of the year after their retirement to begin drawing the RMD.

Biz&TaxHax Tip

As noted in IR 203016-48, now is a good time for retirees to think about their retirement plan. For federal tax purposes, retirees may have received Form 5498 IRA Contribution Information. Box 12b of the Form 5498 should contain the RMD amount that the retiree must draw by the applicable deadline to meet federal requirements. Additionally, as always, retirees should consider state and local tax implications related to their retirement plan distributions. For example, retirees who move from one state to another will want to consider whether their retirement income is taxable in the state where they formerly lived as well as the state to which they moved. In particular, former Ohioans who retire outside of Ohio should read our prior article titled Are Nonresident Pension/Retirement Benefits Taxable in Ohio?, which also summarizes an interesting case related to local taxation of nonresident retirement income.

It is important for Ohio retirees, including former Ohioans who have retired (or those considering retiring) outside Ohio to consult an experienced Ohio tax attorney or consultant to ensure proper tax planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in: determining taxability of particular items of income (such as retirement or pension benefits) for federal, state, and local tax purposes;  evaluating your specific facts and circumstances to support proper state domicile under common law; and gathering documentation to support the appropriate tax results.

Are Nonresident Pension/Retirement Benefits Taxable in Ohio?

As noted in our prior article regarding Disclaiming Ohio Tax Domicile for Income Tax Purposes, former Ohio residents who move outside Ohio for retirement or otherwise often seek to maintain some contact with Ohio – perhaps retaining a home or business here. But, what happens when retirees leave Ohio to settle elsewhere for their golden years, yet continue to receive a pension or retirement income from their prior work in Ohio? Generally, the answer is that nonresident retirement benefits are not taxable for Ohio income tax purposes, so long as they qualify as a covered type of “retirement income.” This article will provide a brief overview of this exclusion for Ohio state income tax purposes, while also noting some potential risk with respect to Ohio local income tax relating to nonresident pension benefits.

Nonresident Retirement Benefits Excluded from Ohio Income Taxation

Federal law prohibits a State (including any political subdivision of a State) from imposing an income tax on any retirement income of an individual who is not a resident or domiciliary of that State (as determined under the laws of that State). 4 U.S.C. Sec. 114(a), (b)(3). For purposes of the federal prohibition, “retirement income” is defined at 4 U.S.C. Sec. 114(b)(1)(A) through (I). Instructively, in 1996 the Ohio Department of Taxation (ODT) issued Information Release No. 3/11/1996 (later revised and superseded in May 2007) (the Information Releases) in response to the above-noted federal prohibition.

The Information Releases provide fairly detailed guidance as to the circumstances under which a nonresident retiree’s retirement benefits may become subject to Ohio tax/tax withholding despite the federal prohibition. The circumstances are limited, but as always it is best to consult your tax attorney or consultant to fully review your facts and circumstances along with applicable guidance to determine taxability of any income.

Ohio Localities Taxing Nonresident Retirement Benefits

The Ohio Board of Tax Appeals (OBTA) in Nationwide Mut. Ins. Co. et. al. v. City of Columbus Board of Tax Appeals et. al., Ohio BTA No. 2010-1590, May 12, 12015, 2015 WL 2338054 (Nationwide) considered a taxpayer challenge to a municipal income tax on retirement benefits of a nonresident. As noted, this differs from the initial question presented in that it was a challenge to Ohio municipal income tax as opposed to Ohio state income tax, but it is worth reviewing as it indicates a different result for local income taxability of nonresident retirement income.

Interestingly, the OBTA upheld the City of Columbus Municipal Board of Tax Appeals’ (MBTA) decision finding that the employers were required to withhold municipal income tax on the nonresidents’ retirement benefits. Among other arguments, the taxpayers contended that:

  1. The Columbus income tax ordinance required withholding by employers from employees’ income only, such that once the employment relationship terminated, no further withholding could be required. The OBTA rejected this argument as too restrictive a reading of the ordinance.
  1. The Columbus income tax ordinance did not tax pension income. The OBTA recognized that the income/benefits from the retirement plan at issue constitute a pension benefit, but rejected the taxpayers’ argument stating “we find no support in the city ordinances for [the taxpayers’] claim that the city does not tax pensions . . . .” The taxpayers had cited the Columbus income tax instructions in support of this claim, but the OBTA noted it found no similar reference in the Columbus ordinances.
  1. Federal law (4 U.S.C. Sec. 114) prohibited the city from taxing the nonresidents’ retirement benefits and the MBTA’s decision otherwise was error. In reviewing this argument, the OBTA stated that this federal prohibition relates to imposition of tax based upon a state’s statutory scheme. Thus, the OBTA stated that because there is no Ohio state law preventing the municipalities from imposing tax on nonresident retirement income, the OBTA did not need to address the federal prohibition.

Summary & Biz&TaxHax Tip:

The OBTA’s decision in Nationwide appears to be an incorrect analysis of the federal law prohibiting State taxation of nonresident retirement income, and which clearly includes “political subdivisions of a State” (such as cities, townships, villages) in the prohibition. All of this discussion aside, Nationwide doesn’t affect the federal prohibition as it relates to Ohio income tax on nonresident retirement income. It is important for former Ohioans (or those considering retiring outside Ohio) to consult an experienced Ohio tax attorney or consultant to ensure proper tax domicile review and planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in: determining taxability of particular items of income (such as retirement or pension benefits), evaluating your specific facts and circumstances to support non-Ohio domicile under common law, and filing the Affidavit to obtain the appropriate tax results.

 

Ohio Supreme Court Adds Difficulty for Out-of-State Retirees or Executives Seeking to Disclaim Ohio Domicile for Income Tax Purposes

Establishing Domicile Outside Ohio: Affidavit and Statutory Presumption Pre-March 23, 2015

When former Ohio residents decide to move outside Ohio, they often seek to maintain some contact with Ohio, yet establish tax domicile in their new state of residence. There are a few common (often interrelated) reasons that Ohioans decide to leave the state, such as:

1. Retirement (often to Florida, to avoid cold, snowy Ohio winters);

2. Work (as part of a transfer, or perhaps an executive who performs most of his/her duties outside Ohio); and

3. Obtaining a lower (or zero) state income tax rate (often high or fixed income individuals, such as executives or retirees).

Until recently, a retiree or executive moving his or her primary residence from Ohio to another state could more easily maintain some contact with Ohio, while also establishing tax domicile outside Ohio. This way, the taxpayer could obtain an income tax benefit (or at least avoid having tax reporting and payment obligations in both the new state and Ohio), and keep some ties with his/her former home state.

To ensure tax domicile outside Ohio and obtain the above-noted benefits, the taxpayer could file an Affidavit of Non-Ohio Domicile with the Ohio Department of Taxation, attesting that during the tax year he/she was not domiciled in Ohio because he/she had:

1. Fewer than 213 (effective 3/20/2015; previously, fewer than 183) Ohio contact periods; and

2. An abode in a state outside Ohio.

Under Ohio law, as long as the taxpayer’s Affidavit did not contain a false statement, this filing created an irrebuttable presumption that the taxpayer was not domiciled in Ohio during the tax year. See R.C. 5747.24(B)(1).

March 23, 2015 Forward: Ohio Supreme Court Decision Invalidates Affidavit Presumption of Non-Ohio Domicile

The recent Ohio Supreme Court decision in Cunningham v. Testa, Slip Opinion No. 2015-Ohio-2744, basically rendered this statutory presumption of non-Ohio domicile (where a taxpayer files the Affidavit of Non-Ohio Domicile) ineffective. In Cunningham, the Court reasoned that the Affidavit must still be supported by facts and circumstances that would withstand the common law test of domicile. So, it is no longer enough to simply file the Affidavit attesting that the taxpayer has fewer than 183 Ohio contact periods for the year and is not domiciled in Ohio. One needs to actually review the taxpayer’s relevant facts and circumstances related to determining domicile under the common law rule.

Under common law, domicile is a question of intent–whether the taxpayer intends to remain in a jurisdiction permanently, or at least indefinitely–based on all relevant facts and circumstances. A non-exhaustive list of facts and circumstances relevant to determining domicile include:

1. Filing federal income tax returns (address listed on federal returns);

2. Voter registration;

3. Automobile registration;

4. Driver’s license;

5. Location of spouse and children;

6. Mailing address/address where mail is received;

7. Various exemption/credit/etc. application filings (in Cunningham, the taxpayer’s had claimed a homestead exemption application for their Cincinnati home prior to later filing the Affidavit of Non-Ohio Domicile, which was inconsistent);

8. Courts will also look to the place where an individual was: born, raised, educated, married, resided for significant time, etc.

Effectively, following the Cunningham decision it appears that a taxpayer can still use the Affidavit, but it is important to do a self-review of factors to ensure that the total facts and circumstances support the taxpayer’s Affidavit claiming non-Ohio domicile. In other words, it seems that a taxpayer can’t simply rest on the fact that he has less than 183 contact periods in Ohio and has another residence outside Ohio during the tax year to claim no Ohio domicile (as many previously believed would suffice) – the weight of all relevant facts and circumstances must support the position as well.

Summary & Biz&TaxHax Tip

In summary, the Cunningham decision seems to provide the Ohio Department of Taxation significant authority and leverage to require taxpayers filing the Affidavit to further support domicile outside Ohio by the weight of common law factors. So, unless and until the Ohio Legislature addresses this Ohio tax domicile issue, Cunningham appears to be the controlling rule. Accordingly, it is important for former Ohioans (or those considering a move outside Ohio) to consult an experienced Ohio tax attorney or consultant to ensure proper tax domicile review and planning based on their specific facts and circumstances. An Ohio tax lawyer or Ohio tax consultant can assist you in evaluating your specific facts and circumstances to support non-Ohio domicile under common law, and filing the Affidavit to obtain the appropriate tax results.